SOHN Investment Idea Contest: Interactive Corp. (IAC) Analysis & Recommendation
Interactive Corp. (IAC) is identified as a compelling investment opportunity with significant upside potential. The analysis suggests going long on IAC and short on Match Group, Inc. (MTCH) to maximize returns. The presentation highlights IAC's undervaluation, strong asset portfolio, and growth prospects, emphasizing low capital loss risk. Juniper Peak Capital provides insights and recommendations for potential investors.
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SOHN INVESTMENT IDEA CONTEST INTERACTIVE CORP. (IAC) Current share price: 12-month target: $46.84 $90.00 (but that s missing the point) Optional Long IAC and short Match Group, Inc. (MTCH) to isolate IAC ex-MTCH. May provide substantially greater upside potential in that the ex-MTCH IAC assets trade at significant discounts. PRESENTED BY MIKE SEELEY, CPA - JUNIPER PEAK CAPITAL LLC CONTRIBUTIONS BY ROBERT STEWART, CPA - JUNIPER PEAK CAPITAL LLC
DISCLAIMER THE ANALYSES AND CONCLUSIONS OF JUNIPER PEAK CAPITAL LLC ( JUNIPER PEAK ), A DELAWARE LIMITED LIABILITY COMPANY, CONTAINED IN THIS PRESENTATION ARE BASED ON PUBLICLY AVAILABLE INFORMATION. THIS PRESENTATION AND THE INFORMATION CONTAINED HEREIN IS NOT A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITIES. THESE MATERIALS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN ANY FUND MANAGED BY JUNIPER PEAK OR ANY OF ITS AFFILIATES (COLLECTIVELY JUNIPER PEAK ). SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR. THE INFORMATION CONTAINED HEREIN REFLECTS THE OPINIONS AND PROJECTIONS OF JUNIPER PEAK AND ITS AFFILIATES (COLLECTIVELY JUNIPER PEAK ) AS OF THE DATE OF PUBLICATION, WHICH IS SUBJECT TO CHANGE WITHOUT NOTICE AT ANY TIME SUBSEQUENT TO THE DATE OF ISSUE, AND SERVES AS A LIMITED SUPPLEMENT TO A VERBAL PRESENTATION. JUNIPER PEAK DOES NOT REPRESENT THAT ANY OPINION OR PROJECTION WILL BE REALIZED. NO REPRESENTATION OR WARRANTY IS MADE CONCERNING THE ACCURACY OF ANY DATA OR OPINION PRESENTED. ALL INFORMATION PROVIDED IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS INVESTMENT ADVICE OR A RECOMMENDATION TO PURCHASE OR SELL ANY SPECIFIC SECURITY. JUNIPER PEAK HAS AN ECONOMIC INTEREST IN THE PRICE MOVEMENT OF THE SECURITIES DISCUSSED IN THIS PRESENTATION, BUT JUNIPER PEAK S ECONOMIC INTEREST IS SUBJECT TO CHANGE WITHOUT NOTICE. THE ANALYSES PROVIDED HEREIN MAY INCLUDE CERTAIN STATEMENTS, ESTIMATES AND PROJECTIONS PREPARED WITH RESPECT TO, AMONG OTHER THINGS, THE HISTORICAL AND ANTICIPATED OPERATING PERFORMANCE OF THE COMPANY, ACCESS TO CAPITAL MARKETS AND THE VALUES OF ASSETS AND LIABILITIES. SUCH STATEMENTS, ESTIMATES, AND PROJECTIONS REFLECT VARIOUS ASSUMPTIONS BY JUNIPER PEAK CONCERNING ANTICIPATED RESULTS THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT ECONOMIC, COMPETITIVE, AND OTHER UNCERTAINTIES AND CONTINGENCIES THAT HAVE BEEN INCLUDED SOLELY FOR ILLUSTRATIVE PURPOSES. NO REPRESENTATIONS, EXPRESS OR IMPLIED, ARE MADE AS TO THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS, ESTIMATES OR PROJECTED RESULTS CONTAINED HEREIN. ACCORDINGLY, NO PARTY SHOULD PURCHASE OR SELL SECURITIES ON THE BASIS OF THE INFORMATION CONTAINED IN THIS PRESENTATION. JUNIPER PEAK EXPRESSLY DISCLAIMS LIABILITY ON ACCOUNT OF ANY PARTY S RELIANCE ON THE INFORMATION CONTAINED HEREIN WITH RESPECT TO ANY SUCH PURCHASES OR SALES.
INTERACTIVE CORP. (IAC) EVEN MORE COMPELLING NOW Interactive Corp. (IAC) Currently presents a compelling, asymmetrical risk/reward opportunity. IAC is exceptionally managed, significantly undervalued, opportunistically positioned; with all major segments poised for subsequent growth following anticipated 1H 2016 lows. (1) The market is significantly undervaluing the IAC brands and assets, particularly on an ex-Match basis. In fact, the market is assigning little to no value to the remaining segments. (2) HOMEADVISOR is a dominant player in a massive, growing, unsaturated market, with little to no value assigned to it, or to the additional segments, ex-Match. (3) The risk of permanent loss of capital is exceptionally low. Significant downside protection exists in the current enterprise value, capital structure, balance sheet, and management experience and expertise. Any further declines in share price will serve as opportunities for additional investment, share repurchases, and sensible acquisitions; all of which will drive financial and share growth in the long-term.
COMPANY OVERVIEW SEGMENTS 2015 EBITDA 2015 REVENUE THE MATCH GROUP The Match Group 278,667 1,020,431 Nov. 2015 IPO of 15.4% stake HomeAdvisor 18,529 361,201 HOMEADVISOR Publishing (fka Search) 87,788 691,686 Applications 184,258 760,748 Rejected offer for Angi Video (38,384) 213,317 PUBLISHING (FKA SEARCH) Other 10,621 184,095 4-yr extension of Google contract Elims (55,689) (545) Total 485,790 3,230,933 APPLICATIONS VIDEO No current attempt at monetization OTHER In addition, IAC management announced suspension of dividend in favor of delivering share buybacks, opportunistic acquisitions, and incremental investments.
TRACK RECORD OF MANAGEMENT AND CAPITAL ALLOCATION $3B in stock buy-backs since 2009 Avg. price of $29.86 / share Nearly $400M in dividends since 2011 Opportunistic, sensibly valued acquisitions An investor who put $1 into IAC s predecessor company, Silver King, in 1995 would today have nearly $12.50, versus $3.50 for $1 invested for the same period in the S&P 500. Loading up on the spinoffs, post-spin, yielded significantly better results. Track record of highly lucrative, stand alone spinoffs: EXPE/TRIP, HSNI, IILG, TREE, and TKTM (subsequently acquired by LYV) Barry Diller
(1) IAC (EX-MTCH) Current EV of IAC ex-MTCH The market is significantly undervaluing the IAC brands and assets; particularly when excluding Match Group, Inc. (MTCH) IAC The Market is assigning an enterprise value to IAC, ex-MTCH, of roughly 1x Adjusted-EBITDA (using roughly $200M EBITDA) APRIL 2016 IAC MTCH (EX-MTCH) Market Cap 3,802,715 2,725,925 1,076,790 Cash (1,520,647) (99,795) (1,420,852) Debt 1,788,213 1,233,481 554,732 This valuation is on the significantly low side of reasonable, particularly given the quality of the Company s management, brands, revenue, cash position ($866M), and adjusted-EBITDA Enterprise Value 4,070,281 3,859,611 210,670
Valuation of IAC ex-Match We needn't get too aggressive with a SOTP valuation to highlight the opportunity. IAC ex-Match is trading at such a significant discount to intrinsic value, due to the focus on MTCH, that HomeAdvisor and other assets are available virtually for free If purchasing the IAC assets ex-MTCH at roughly 1x Adjusted-EBITDA, the value of the assets needn t appreciate much in order to result in an exceptional return IAC EX-MTCH CURRENT BULL BASE BEAR ENTERPRISE VALUE 200,000 2,000,000 1,000,000 400,000 AGGREGATE RETURN* 900% 400% 100% *Potential returns when not diluted by the MTCH assets (which currently reflect nearly all of the value in IAC)
HomeAdvisor continued its incredible run of accelerating domestic revenue growth in the 4th quarter, reminiscent of the stretch we saw at the online travel businesses in the early 2000 s. For the full year, the core domestic business grew revenue 43% while the overall business grew revenue 27%. - Joey Levin, CEO (Q4 Prepared Remarks)
(2) HOMEADVISOR: THINK BIG HOMEADVISOR IS A DOMINANT PLAYER IN A MASSIVE, LARGELY UNSATURATED MARKET. IT IS RAPIDLY GROWING, WITH MARGIN HOMEADVISOR 2015 2016* 2017* 2018* Adjusted-EBITDA 18,529 37,058 64,852 97,277 HomeAdvisor cleaned up its International Revenues via a significant one-time contraction/normalization in 2015, which significantly diluted its domestic growth Multiple 25 25 20 20 Implied Value 463,225 926,450 1,297,030 1,945,545 HomeAdvisor expects similar revenue growth rates in 2016 that it enjoyed in 2015, but it anticipates it can double its Adjusted-EBITDA Revenue 361,201 469,561 610,430 793,559 Multiple 2.00 2.00 1.75 1.50 Although a recently rejected offer for Angie s List, Inc. (ANGI) would have added synergies to the segment, ANGI is not an obstacle to incremental market share given how unsaturated the market currently is, as evidenced by Home Advisor s revenue and earnings growth on incremental advertising spend in fiscal 2015, as well as its sheer number and quality of service professionals Implied Value 722,402 939,123 1,068,252 1,190,338 *Assumes 100%, 75%, and 50% Adjusted-EBITDA growth in 2016, 2017, and 2018, respectively and 30% revenue growth over 3 years.
(2) HOMEADVISOR: COMPARABLES HOMEADVISOR COMPARES FAVORABLY WITH ITS NEAREST COMPETITORS ANGI 2015 EBITDA 2015 Revenue 344,120 Angi s List (ANGI), a company with similar revenue and earnings, but with revenue growth of only 7% YOY, has an EV of $475.46M Angie s List* Multiple EV 19,660 24.18 475,460 1.38 475,460 HomeAdvisor is expected to deliver growth in 2016 commensurate with growth in 2015, while potentially doubling EBITDA. Thus, a higher multiple is justified for an asset with superior earnings and revenue growth rate, and yet HomeAdvisor is available virtually for free when investing in IAC ex-MTCH * Angi s list grew revenue 7% YOY compared to HomeAdvisor s 27% revenue growth YOY. YELP YELP provides a similarly favorable benchmark, given comparable YOY revenue growth, though without any margin to speak of. With vastly superior earnings, HomeAdvisor should attract similarly favorable multiples 2015 EBITDA 2015 Revenue 549,710 Yelp* Multiple EV 80 13,875.00 1,110,000 2.02 1,110,000 * YELP grew revenue 39% YOY without significant margin.
MATCH GROUP, INC. (MTCH) We met through mutual friends. - The lie told by my now-wife, when asked by her older sister how she and I originally met. (We met online.) Much has been written elsewhere about the value of the Match Group (MTCH). We will add that we have found material non-financial intrinsic value in online dating The partial Spinoff of MTCH, via the November 19, 2016 IPO, of roughly 15.4% of its common stock, has resulted in IAC trading in tandem with MTCH shares As has been detailed elsewhere, we do not accept the current market value of MTCH as sufficient. The existing capital structure of MTCH obfuscates the full intrinsic value due both to the minority float and the nearly non- voting class of stock that is independently traded The myopic focus on the MTCH share price and market capitalization and the historic declines in the Search & Applications segments, have combined to present a more compelling opportunity in the other IAC segments
(3) MARGIN OF SAFETY Current Share Prices VS. Intrinsic Value $200M EV for IAC assets ex-MTCH, with aggregate revenues of $2B and forward normalized earnings of roughly $200M and growing It is unlikely that the combination of HomeAdvisor, Publishing, Applications, Video, and Other will decline to zero EV permanently Significant downside protections are available for short-term market fluctuations, providing opportunities for further long-term value
DOWNSIDE PROTECTION Recession (< 12 months) IAC COMPLETES THE SPINOFF OF MTCH VIA A TAX-FREE DISTRIBUTION Management utilizes the IAC Balance Sheet to: If pursuing the Long (IAC)/Short (MTCH) investment, any rapid increase in MTCH values will largely wash with the benefit to the IAC shares Opportunistically acquire premium bolt-on or future core brands at sensible valuations Repurchase shares (IAC and/or MTCH) View the spinoff as an opportunity to load up on an undiluted, pure play investment in MTCH. Complete IAC spinoffs have an impressive track record Investors may extend their investment horizon to allow share prices to rebound and purchase additional shares PUBLISHING OR APPLICATIONS CONTINUES TO DETERIORATE MTCH shares decline in value Management utilizes cash and existing repurchase authorization to buy back shares (MTCH and/or IAC). For owners of IAC stock, this is likely to be beneficial in the long-run Consumer Publishing and Applications segments are expected to grow from here Most of the declines have been in the Business-to- Business (B2B) / Partnerships, which will become a less significant portion of revenue and EBITDA over time Management uses cash, chasing excessively expensive acquisitions, makes unwise investments in existing businesses, or makes large dividend payments; weakening the balance sheet Management views the segment to be in a trough in Q2- Q3, and the new 4-year extension of the Google contract provides short-to-mid-term transparency Frankly, we wouldn t consider an investment in IAC if there was a history of this, but Management s track record of accretive acquisitions and capital allocation discipline indicates the exact opposite Sufficient margin of safety exists in the current share price to absorb unexpected future declines Recently unsuccessful offer for Angie s List (ANGI) again demonstrates unwillingness to overpay
CONCLUSION With MTCH representing roughly 95% of IAC Enterprise Value, 72% of IAC Market Cap, 57% IAC adjusted-EBITDA, and 32% of IAC Revenue; initiating a long-only investment in IAC requires both an understanding of the intrinsic value of MTCH, as well as the risk/reward involved with the consolidated group. Looked at ex-MTCH, the value proposition in IAC is simple and compelling. Therefore, we raise two investment propositions for consideration: Buy IAC, Short MTCH (to isolate the value of IAC ex-MTCH) MTCH is unlikely to decline significantly from these levels, as IAC would likely repurchase the minority float. Thus, the Short is purely a means to remove MTCH from the equation, to invest solely in the non-MTCH segments currently presenting the greatest value proposition Note, long-dated put options in MTCH are not presently available, and with a small float, shares to borrow may be scarce BUY IAC (if taking a long-term view of 1-5 years) Note, we view this as the best way to profit from the future upside in MTCH, while accessing the comparative safety of IAC s balance sheet. However, we prefer this investment when undertaking a time horizon greater than 12-months To be clear, we do not view a straight purchase in the shares of MTCH to be attractive. In our view, the value of MTCH shares can not be fully unlocked under the existing capital structure. We do view the prospect for bargain share repurchases by IAC to serve as something of a floor in the MTCH shares, but given the relatively small value of IAC ex- MTCH and the near total control of the Company by IAC, purchasing IAC shares is likely to be a more profitable means of investing in MTCH than is a direct investment in MTCH
