We have been getting lots of push back about our ValueVision Media (VVTV) acquisition thesis with some stating that we are being sensational; see that write-up here. [Our other analysis on the company was never questioned.] Thus, we decided to expand on our thinking. So here goes, and note that our thesis is based purely on mosaic theory.
Reasons why we believe VVTV is a take-out candidate:
1. Management guidance that the business will double. Management believes that revenues can double to $1 billion in five years and EBITDA margins can reach upwards of 12% from near 1% today, matching that of the second largest TV shopping company in the industry. This is textbook and we have seen this before. Not to suggest that management is being disingenuous; in fact, we believe that the management team is very strong, with a 10% ownership stake to boot, but most companies dressing themselves up for an acquisition tend to provide “bold longer-term” guidance rather than short-term guidance. It is anyone’s guess what happens to the world in five years, but management must see something in their business trajectory that leads them to believe that their business can double. Nonetheless, for them to come forth with this guidance they must want the company to look good to potential acquirers.
2. The number 1 and 2 players in the industry could merge. There are three major TV Shopping companies in the U.S. (a few smaller category niche channels exists) and the no.1 and no. 2 companies have indicated that they could merge in the future, after the spin-off is completed. VVTV knows that they will need a stronger partner to compete effectively when those companies merge and could be open to an acquisition.
3. Word is that VVTV management won’t oppose the merger on anti-trust grounds. Why that confused us at first even though an opposition won’t pass muster is because TV Shopping is not a broadly defined sector, but falls under general retail. Nevertheless, an opposition can force the government to impose concessions that could benefit VVTV. Hence, the fact that management won’t oppose must mean that they see themselves as part of another bigger retail platform like Amazon.com (NASDAQ:AMZN) in the future and decided it is not worth the effort.
4. They have been down this road before. 39 companies looked at VVTV’s books during the height of the recession but walked away. VVTV was on the verge of bankruptcy and its stock price at 20 cents reflected that scenario. We believe they walked away primarily due to the economic climate at that time. In fact, we cannot recall an acquisition taking place in media and tech during 2008. Now that the economy has improved and VVTV has regained its mojo, we think several of those companies, including Amazon.com, will return to take another look at VVTV’s books.
A note on valuation. On 2013 consensus numbers, VVTV is trading at 5.1x EBITDA vs. HSNI trading at 5.5x and LINTA trading at 5.8x. So the stock is trading at a discount to its peers and continues to do so more meaningfully for the following years. We chose 2013 because at that point VVTV should fully realize the fruits of its turnaround strategy from a margin perspective.
Near-term catalysts to watch:
1. Approval of the Comcast (NASDAQ:CMCSA) - NBCU merger - in about two weeks according to the Wall Street Journal.
2. Results from HSNI and LINTA - within the next few weeks.