I promise this writeup is not just about a stock with a 50% FCF Yield. It helps, of course, but that’s not the beauty in M&F Worldwide. Instead, the really interesting investment opportunity comes from the method by which the company has been financed, which I believe gives investors today an enormous margin of safety. Essentially, you can think of M&F worldwide as a holding company for two separately-financed subsidiaries, licorice and check printing. The beauty here is that the equity value of stable licorice subsidiary is now approximately equally to the market cap of the entire company, effectively making the equity in the check-printing business a free call option.

For more information on the structure of the two businesses, business fundamentals, and the corporate history, I suggest that you refer to any of the prior write-ups.

You can see the two separate businesses by looking at the financial statements for both M & F Worldwide and Harland Clarke. By subtracting out the Harland Clarke financial statements from the consolidated M & F Worldwide financial statements, it is possible to isolate the licorice business as well as the portion of the corporate expenses that are allocated directly to the licorice business. Doing so gives us:

Unleveraged Pre-Tax FCF - 9-Months Ended 9/30/2008
			Harland Clarke	Harland Corp	Licorice	Licorice Corporate	Pre-Corporate	M&F Corporate	Consolidated
Operating Income			201.7	(11.7)	29.2	(8.8)	230.9	(20.5)	222.1
Restructuring Expenses			6.7	-	-	-	6.7	-	6.7
Depreciation & Amortization			124.0	0.1	7.6	-	131.6	0.1	131.6
Capex			(38.1)	-	(0.9)	-	(39.0)	-	(39.0)
Unleveraged Pre-Tax FCF			294.3	(11.6)	35.9	(8.8)	330.2	(20.4)	321.4
Plus Pro-Forma Merger Op Income			8.1
Plus Pro-Forma Merger D&A			1.7
Normalized 9-Month Pre-Tax FCF			304.1
Annualization Factor			1.3		1.3	1.3			1.3
Annual Unleveraged Pre-Tax FCF			405.5		47.9	(11.7)			428.5

We can now break out and separately value the licorice business, as is appropriate for a separately-financed business with non-recourse loans. I value the business at 8x EBITDA-Capex, which seems like a conservative multiple for a dominant, steady business where profits are understated due to abnormally high corporate costs (note that corporate costs were typically $5-6mm when the company was a licorice-only company earlier this decade). Doing so, results in the share price incorporating virtually nothing for the check printing operations:

			EBITDA-Capex	Multiple	Value
Licorice Operations			47.9	8.0	382.9
Allocated Corporate			(11.7)	8.0	(93.9)
Enterprise Value					289.1
Net Debt					(19.6)
NAV					269.5
Shares					19.3
Value per Share					13.96

 

At this point, I suppose that it’s debatable whether or not the check-printing operations are worth anything. The Harland Clarke business is leveraged 5x debt/EBITDA (roughly the EV/EBITDA for Deluxe) and the bonds trade at $0.44 on the dollar. From that perspective, the equity could be seen as worthless. From an alternative perspective, there are no covenant issues, the business remains steady and in a duopoly structure, and there is prodigious FCF. By my estimation, there is nearly $10/share of FCF from the check-printing operations:

Harland Clarke FCF
Annualized Operating Income					264
Plus Synergies to Realize					30
Pro Forma Operating Income					294
Interest Expense					180
Pre-Tax Profit					114
Taxes					45
Net Income					70
Depreciation & Amortization					168
Capex					(51)
Free Cash Flow					187
Shares Outstanding					19.3
FCF / Share					9.66

While I don’t hope to answer the question of what Harland Clarke is worth, I do think that the business is, at a minimum, an interesting option. Now that you’re paying nothing for that option, I see M & F Worldwide as an attractive investment.