TheStreet: The Plan Is Coming Into Focus

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About: TheStreet, Inc. (TST)
by: Dan Stringer
Summary

TheStreet divested the Deal/Boardex B2B business for $87.3m on December 6, 2018.

With the proceeds of this divestiture, TheStreet is now trading at a pro-forma discount to its cash of 28.6%, making it a true net-net.

Management has committed to moving forward with its B2C business, but its action indicate it may be pursuing an alternative path to maximize shareholder value.

TheStreet (TST) shares jumped $0.54 to $2.06 on December 6, 2018 on news that the company sold the rest of its B2B business, the Deal & Boardex, for $87.3m. This comes on the heels of its divestiture of its RateWatch business in June 2018. I had originally posited in my Top Idea article that the company has beginning a pivot of its business to focus more on the B2C market, headlined by its eponymous site. This transaction seems to continue this trend, though it may also be leading the company to a more tangible realization of value for its shareholders. This article seeks to unpack what this means for shareholders of the company.

The Deal/Boardex Sale

TheStreet has done a good job of improving the Deal/Boardex business over the last year, with revenues increasing to $23.8m in fiscal 2017 from $22.1m in fiscal 2016, operating income to ($1.1m) from ($5.0m) and EbITDA to +$1.8m from ($2.0m). This clearly gained the attention of suitors for the business as the company was able to get an acquirer to pay 3.7x Sales or 48.5x EbITDA for the property. I had originally applied a valuation of 4.3x sales in my analysis but consider the growth rate for the Deal/Boardex was well below that of RateWatch, this should be considered quite positive for shareholders.

Interestingly, this monetization of its business was not fully rewarded by the market. With 49.6m shares outstanding, this transaction gained the company just $26.8m in market cap compared to the $87.3m in value for the transaction. More shockingly, if you combine this windfall of $87.3m with the $43.2m in cash & marketable securities on hand at September 30, 2018 per the 10-Q, TheStreet will have $130.5m in cash on hand compared to its current market cap of $102.2m, a 27.6% premium to its current market value.

This assigns no value to the B2C business, which has done $20.3m in business over the last 9 months which is down YOY from $23.3m in 2017 though largely driven by the transition away from an advertising based business model and more towards a premium-based subscription model. This bears out it its segmented reporting:

Source: Company Q3 2018 10-Q

Even if we add back depreciation of $1.35m for 2018 YTD, the business is still losing money with an EbITDA of ($1.8m). It is somewhat difficult to forecast how this business will do going forward. It seems like it would be a very scalable business with its intellectual property being easy to scale as they bring in more premium subscribers. This does appear to be taking place as both subscription revenue and deferred revenue increased in Q3 2018 for the first time in several years. This should start to see its bottom line improve along as its gross margins increase on the top-line.

Another Path Forward

The company reiterated its commitment to the B2C business in its press release for the deal. It was done at the same time that it announced that CEO David Callaway would resign at the end of the Deal/Boardex transaction process. Mr. Callaway came to the street in 2016 after serving as Editor-In-Chief at USA Today. This background seems like he would have been a very good fit for growing the B2C content and monetizing it. The company CFO Eric Lundberg will assume the CEO title as well with Margaret de Luna, the current head of the B2C unit, becoming COO.

This strikes me as an odd fit for continuing the business as a going concern as Mr. Callaway seem like he would be a good leader to turn around that business. The company is intending to reduce its operating and admin costs so this would fit with that mandate but it is incongruous with continuing the business for a long period of time. This seems more like a company that is grooming itself for sale or some other means to monetize its business.

The company indicated that it intends to pay out a majority of the proceeds of the Deal/Boardex to shareholders. This is another sign that the company isn’t intending to do a material acquisition with its cash on hand as it would seem better to have more available cheap financing on hand than not.

The company also has $173m of NOLs on hand expiring between 2019 and 2037 which would have value if TheStreet entity were sold to a company that intends to continue operating in a same or similar business as TheStreet does. With the business now stripped down to be only a B2C business, this should make it much easier to sell with the acquiring company needing to operate only for a two-year period to ensure the NOLs aren’t reduced.

The company did recommit to the B2C business in its press release today but I don’t feel that the company is taking the steps to continue it. It appears more like they are preparing the company to be acquired, either by a larger entity or by a company looking to go public via a lower cost reverse-takeover transaction. I had proposed earlier that a company like Seeking Alpha (SKNG) would be a good fit should its ownership decide to monetize its investment, though I would stress this is pure speculation on my part.

Valuation

I generally avoid sum of parts valuation as it often requires splitting a company up in ways that management has no desire to do. In TheStreet’s case, I believe this is appropriate as the company has been breaking itself up into parts through fiscal 2018. At this point, the company basically has three sources of value: its cash on hand, its B2C business and its NOLs.

Cash. Post-deal, TheStreet will have $130.5m cash on hand which is well in excess of its market cap as I noted earlier.

B2C. TheStreet’s revenue in its most recent quarter was $6.7m for its B2C unit. Taking the last year’s revenue is not a great indicator as the company has reduced its revenue base by eliminating its low margin advertising business. It has also shown some growth in the businesses it is intending to continue forward with subscription revenue up 12% YoY. If we annualize Q3’s revenue, we get an annual run rate of $26.8m.

TheStreet was able to monetize its other media properties at 4.3x for RateWatch and 3.7x for the Deal/Boardex sale. Both of these were profitable enterprises though. If we assign a multiple of 2x at half the mean of these two, this is likely a fair value, which would give this business a value of $53.6m

NOLs. I would not have included this before as there was more risk in being able to achieve the monetization of these; they are still unlikely as it requires a complementary business. If we assume the NOLs expire equally over the next 19 years with a tax rate of 40% and discounted at 12% for a hurdle rate, the NOLs would add an approximate value of $26.8m in an acquisition scenario.

Pulling this altogether, we have a potential range of value for TheStreet:

Worst Case

Best Case

Cash on Hand

$130.5m

$130.5m

B2C

$53.6m

$53.6m

NOLs

$0.0m

$26.8m

Total Value

$184.1m

$210.4m

Value Per Share

$3.71

$4.24m

The Takeaway

I believe this recent divestiture by TheStreet is clearing the path for the company to be acquired as it has simplified its structure substantially for an acquirer while maximizing its inherent value for current shareholders such that its current cash exceeds its market cap by almost 30%. With management committing to return a substantial amount of the proceeds of the Deal/Boardex to shareholders, a large special dividend or substantial share buyback can expect to be announced in the near future after this deal closes. The signs management has been giving point to an eventual monetization of the entire company but should it continue as a B2C business, the current share price represents a substantial discount to its inherent value which has become more concrete with its recent divestitures.

If you see something in this article that you agree with, or even better disagree with, please take the time to comment below. This makes all of us better investors. I predominantly focus my investing in the small- and micro-cap company space but reserve the right to deviate from time to time, including short thesis. If you like what I'm doing, you can follow me by hitting the "Follow" button at the top of this article. Plus, you can follow me in real time by selecting that option. I am also active on Twitter @Danstringer74.

Disclosure: I am/we are long TST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.