This media and internet company is considering a major spin-off, with the remaining company being the most attractive investment.
IAC/InterActiveCorp (IAC)
From The Stock Spin-off Investing Newsletter
On October 11th, 2019, IAC announced in an SEC filing that the company has brought a proposal to the board of Match Group to separate IAC’s ~80% equity interest in the company. Since discussions appear to be at a preliminary stage, there is not yet a timetable for the transaction to be completed. In the filing, IAC made it clear that the transaction would be tax-free for both IAC and MTCH shareholders.
In an interview with Forbes a few weeks ago, Chairman and Senior Executive of IAC Barry Diller spoke at length about his desire to spin-off Match (and ANGI) in order to “start inventing again”. Essentially, he boils it down to a reduction in size while maintaining a massive pile of cash in order to make new investments. As noted by other analysts, this move is very similar to what he has done with IAC in the past when he has spun-off other notable companies like Ticketmaster and Expedia. Additionally, this spin-off is a chance to reward IAC shareholders, as the SEC filing states that, immediately upon the closing of the transaction, MTCH will be mandated to access the debt capital markets to borrow a not yet specified amount in order to pay a special dividend to IAC shareholders. Finally, there is a provision in the filing that would allow IAC to sell shares in the New Match prior to the spin-off, allowing the company to extract cash out of this investment, presumably to invest in new companies.
Match Group owns and operates a number of different online dating products and services, including Tinder, Match, Plenty of Fish, okCupid, Hinge, and more. Although there is not a large market capitalization discrepancy between MTCH and IAC, there could be the potential for indiscriminate buying or selling based upon potential inclusion in various indices after the transaction.
Since the remainder of MTCH equity is already publicly-traded prior to the spinning off of IAC’s interest in the business, the market is doing our valuation work for us. MTCH is ascribed high valuation multiples given its strong historic revenue growth, high margins, and high returns on capital.
The more interesting opportunity relates to IAC. IAC stub (value excluding the company’s ownership of ANGI and MTCH) is negative. However, IAC has significant value besides its stakes in MTCH and ANGI. Let’s call the collection of businesses (excluding MTCH and ANGI) that IAC owns “StubCo”. These businesses extend across sectors, with IAC either wholly owning or having partial stakes in the companies.
On the publishing side, most of these companies focus on the digital publishing space. The key asset in this group is Dotdash, a company that IAC actually reports as its own segment in their financials. Dotdash (formerly About.com) is an American digital media company that publishes articles and videos about various subjects across categories including health, home, food, finance, tech, beauty, lifestyle, travel and education. Its revenues, like all of the publishing companies IAC owns, are derived from advertising on their articles.
When looking at the applications segment, the company is bifurcated into essentially two businesses. First, its legacy business—desktop applications. This is a declining business that spits off free cash flow as it requires no incremental spend and generates revenues through getting a cut whenever a user’s search queries submitted through the application are directed to Google’s paid listings. On the other hand, the applications segment has a collection of mobile apps and games. Most of these are subscription based, allowing for a solid recurring revenue base.
Most of the video segment revenue comes from Vimeo, the company’s key asset in the space. Vimeo is a video platform for more niche content, focused on businesses and individual content creators. I personally use Vimeo to post my live call replay’s and believe the product has good potential. On its platform, Vimeo charges a monthly subscription to creators at a low price point, with retention over 80%.
Finally, IAC has a collection of VC investments and real estate. Historically, IAC has done a great job investing in early stage companies and seeing them through to an exit, with past ventures including Ticketmaster, Expedia, TripAdvisor, and Match.com. Currently, the company’s portfolio includes impressive investments in Pinterest, Refinery29, and Stripe, among others. Its real estate includes its Manhattan headquarters, which it owns, and a few other properties as well.
Essentially, the market is valuing the collection of these businesses at negative ~$1.9bn, when in reality, their value is much higher than that. In this conservative case, we estimate the value of the collection of stub businesses at ~$1.9BN, a significantly higher value than the negative ~$2BN that the market assigns to the value of these businesses.
The discount has historically varied from $5BN to $2BN but has recently started to close. The following trade looks interesting.
Buy IAC and short MTCH and ANGI enabling you to profit from the continued shrinking of the discount.
For every 100 shares of IAC that you buy, you will want to short 288 shares of MTCH and 536 shares of ANGI.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, www.stockspinoffinvesting.com, 617-750-7454, October 15, 2019