Cannae Holdings, Inc. (CNNE) is a diversified holding company with a unique investment strategy focused on acquiring and managing a portfolio of operating businesses and investments. Founded in 2017, Cannae has established itself as a formidable player in the investment management industry, leveraging its deep expertise and active approach to drive value creation across its diverse assets.
Business Overview and History Cannae Holdings, Inc. was founded in 2017 as a result of a spin-off from Fidelity National Financial, Inc. (FNF), a leading provider of title insurance and transaction services. The spin-off involved FNF's portfolio of strategic investments, which formed the foundation of Cannae as an independent publicly-traded company. Since its inception, Cannae has adopted an active ownership approach, taking controlling stakes in various businesses across industries.
One of Cannae's earliest and most significant investments was its acquisition of a majority stake in Ceridian HCM Holding Inc., a leading provider of human capital management software. Cannae worked closely with Ceridian's management to transform the business, leading to Ceridian's successful initial public offering in 2018. This success demonstrated Cannae's ability to identify promising companies and drive substantial value creation.
Throughout its history, Cannae has continued to expand its portfolio through strategic acquisitions and investments. The company acquired majority stakes in restaurant groups such as O'Charley's and 99 Restaurants, diversifying its holdings into the food service industry. Additionally, Cannae made significant investments in the financial technology sector, including a stake in Sightline Payments.
While Cannae has experienced numerous successes, it has also faced challenges. In 2023, the company recognized significant impairment charges related to its investment in Sightline Payments, highlighting the risks associated with its investment strategy. Furthermore, Cannae underwent a management transition as William P. Foley II, the founder of Fidelity National Financial, stepped down from his role as Cannae's chairman. These events tested the company's resilience and underscored the importance of its diversified portfolio approach.
Financials and Performance Financials Cannae's financial performance has been mixed in recent years, as the company has navigated the challenges posed by the COVID-19 pandemic and the evolving macroeconomic landscape. In 2023, the company reported annual revenue of $570 million and a net loss of $324.1 million, reflecting the impact of its investments and the performance of its operating subsidiaries. Operating cash flow for 2023 was negative $87.80 million, while free cash flow stood at negative $97.80 million.
In the most recent quarter (Q3 2024), Cannae reported revenue of $113.90 million, a decrease from the prior year quarter primarily due to the closure of 35 O'Charley's restaurant locations. The company experienced a net loss of $13.60 million for the quarter, with operating cash flow of negative $40.30 million and free cash flow of negative $37.40 million. To address these challenges, Cannae is implementing cost rationalization efforts and targeted offerings to drive increased guest traffic in its restaurant segment.
Liquidity Cannae's management team has remained focused on optimizing its portfolio and positioning the company for long-term success. The company's balance sheet remains relatively strong, with $121.8 million in cash and cash equivalents as of December 31, 2023. Cannae's debt-to-equity ratio stands at 0.175, indicating a manageable level of leverage. The company has $101.00 million outstanding on its 2020 Margin Facility and $59.70 million outstanding on its FNF Note. Importantly, Cannae has $49.00 million of immediate capacity under the 2020 Margin Facility and the ability to increase the capacity to $500.00 million, providing financial flexibility for future investments or operational needs.
The company's current ratio and quick ratio both stand at 2.55, suggesting a strong ability to meet short-term obligations. This liquidity position allows Cannae to continue its strategy of returning capital to shareholders through share buybacks and a $0.12 per share quarterly dividend.
Operational Highlights and Strategic Initiatives One of Cannae's recent strategic moves was the acquisition of a majority stake in the Watkins Company, a leading producer of spices, seasonings, and extracts. This acquisition aligns with Cannae's focus on building out its portfolio of consumer-facing businesses and diversifying its revenue streams. The company expects this investment to provide cash flow through preferred dividends and equity distributions.
Cannae has continued to invest in its existing portfolio companies, such as Dun & Bradstreet (D&B) and Alight, to drive operational improvements and position them for long-term growth. D&B reported constant currency organic revenue growth of 3.4% in Q3 2024 and adjusted EBITDA growth of 5.1%. Cannae expects D&B's net leverage to be down to 3.5x by year-end 2024, demonstrating improved financial health. Alight's continuing business had revenue of $555 million in Q3 2024, down 0.4% from 2023, but saw adjusted EBITDA of $118 million, up 3.5% from 2023, indicating improved profitability.
In the restaurant segment, Cannae owns 65.4% of O'Charley's and 88.5% of 99 Restaurants. While this segment faced challenges, with total revenues of $102.1 million in Q3 2024, down 22.2% year-over-year due to restaurant closures, the company is working on improving profitability through targeted initiatives.
Cannae has also diversified into the sports industry through its 45.5% ownership in Black Knight Football, a partnership operating multiple European football clubs. This segment reported total revenues of $77.8 million for the quarter ended June 30, 2024, although it experienced a net loss of $30.8 million.
Risks and Challenges As with any diversified holding company, Cannae faces a range of risks and challenges that could impact its performance. These include the ongoing macroeconomic uncertainty, the potential for volatility in the financial markets, and the inherent risks associated with managing a portfolio of operating businesses.
The U.S. restaurant industry, in particular, has faced challenges with high inflation and labor shortages in recent years, though there are signs of recovery. This has directly impacted Cannae's Restaurant Group segment, as evidenced by the decrease in comparable store sales for both O'Charley's and 99 Restaurants in Q3 2024.
Additionally, Cannae's reliance on its investment expertise and ability to identify and execute on strategic opportunities could be a source of risk, as the company's success is heavily dependent on the skills and decision-making of its management team.
Outlook and Conclusion Despite the challenges faced by Cannae in recent years, the company remains well-positioned to capitalize on emerging opportunities and continue its growth trajectory. With a strong balance sheet, a diversified portfolio of assets across restaurants, data and analytics, professional services, and sports, and a management team with a proven track record, Cannae is poised to navigate the evolving landscape and create value for its shareholders.
The company's focus on improving the performance of its portfolio companies, such as D&B and Alight, shows promise. The expected improvement in D&B's leverage ratio and Alight's growth in adjusted EBITDA are positive indicators for Cannae's investment strategy.
As Cannae continues to refine its investment approach and optimize its portfolio, investors will be closely watching the company's ability to deliver consistent financial performance and drive long-term growth. With a focus on operational excellence, strategic acquisitions like the Watkins Company, and prudent risk management, Cannae is well-equipped to weather the challenges ahead and emerge as a leader in the investment management industry. The company's commitment to returning capital to shareholders through buybacks and dividends also provides an additional avenue for creating shareholder value in the near term.