Ingenious Buddy
The Update:
Tiptree Inc. (NASDAQ:TIPT) filed an 8K this morning (January 29th) to commence the roadshow for The Fortegra Group, Inc. (TFG) IPO. Goldman Sachs (GS) and JPMorgan (JPM) are the lead underwriters.
The 8K lays out 18 million shares to be offered at a range of $15-18/share. There is a greenshoe for another 2.7 million shares. Without the greenshoe, there would be about 84.5 million shares outstanding post the deal. Therefore, the proposed market cap is between $1.267 and $1.521 billion.
The company provided flash Q4 and full-year numbers for Fortegra. Q4 Adjusted Net Income was $32.6 million, 36% above last year’s Q4. That brought full-year Adjusted N.I. to $115 million, 38% above last year.
That earnings translates to the deal coming at 11 to 13.2x, 2023 Adjusted Net Income. That range is below the 13-19x I speculated the business was worth in November based on comps such as W. R. Berkley Corporation (WRB) and Skyward Specialty Insurance Group, Inc. (SKWD), which trade around 16x.
Given the Q4 combined ratio was 89.8% and 90.3% for the year and Adjusted ROAE (return on average equity) was 30.9% and 29.2% for the year, with nothing showing growth slowing down, there is no reason for such a discount except that GS is pricing this deal to perform. While you always want to see a company getting as much for selling a stake as possible, you also want the deal to perform well. If IPO’ing at a discount is the price to pay, so be it. TIPT is not selling any of its shares into the deal, so it will participate in the stock’s upside if it trades well post the offering, which I believe it should.
Impact to Tiptree:
TIPT owns a little over 48.5 million shares, putting their stake at between $727 and $873 million, or about $19.30 and $23 per share. Again, that is below the value I speculated in November and below the multiple that Warburg invested at two years ago. If Fortegra can command 16x trailing multiple or ~$22 share, TIPT’s stake in Fortegra would approach the $30/share, I hoped for. While this initial valuation is bit disappointing, even the bottom end of the range represents the current value of TIPT at its Friday closing pricing ($19.14). That means you get the rest of the biz for free.
Risk:
The main risk right now is the market falling apart before the deal goes through. There is a Fed meeting on Weds. If they disappoint on the direction of interest rates, the market could unravel and that would shelve this deal. That’s hard to handicap. If the deal goes through and prices anywhere in this proposed range, I think there is little downside risk to either Fortegra or Tiptree.
The main risk to Tiptree post deal is a holdco discount. It’s impossible to handicap that right now. I’d expect it to be around 20% or so of the sum of the parts of the stake in the public Fortegra and the other parts of the business. Using Fortegra at the bottom of the range and around $6 for the rest of the business gets you $25. A 20% discount gets you $20 for Tiptree.
Conclusion:
This IPO is a long time coming since the abandoned first attempt in 2021. The good news is that the company is much larger and has a clearer track record of stellar performance. The IPO will be larger (midpoint of $300 million), meaning a more liquid stock that institutional investors will be able to invest in. I think this deal is priced to perform and I will be playing the IPO. If the new stock works out well as I believe it should, it should also translate to upside for Tiptree Inc.
