TheStreet: Keeping Their Options Open

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

TheStreet recently announced a distribution of $1.77 per share to shareholders, the majority of the proceeds of its B2B business divestitures.

The B2C business is near profitable but would provide a very lucrative addition to a larger organization, considering the market valuation assigned to it post-distribution.

I believe the company is preparing to sell this business but the company has hedged itself by retaining a significant (for a smaller company) cash balance post-distribution.

This gives the company many levers to pull in order maximize value for shareholders.

After disposing of its Business to Business (B2B) properties, TheStreet (TST) finally informed the market of its plans for its massive cash hoard. On April 3, 2019, the company announced a distribution of $1.77 per share or an estimated $94.3m. The company left open the possibility of a further $0.08 per share later in 2019. This distribution is payable to shareholders of record as of April 15, 2019. The company announced a change in the company’s year end to March 31, which allowed them to declare this as a partial liquidation and as a non-dividend distribution, which is important for tax purposes to those receiving the payment. The company also announced a 10-for-1 stock consolidation. This article looks to unpack the reasons behind these actions and what it means for shareholders of TheStreet post-distribution.

B2C Business

TheStreet’s move to capitalize on its B2B properties through divestiture looks to be a good “sell high” move by management. As I detailed in earlier articles, they sold these business for sales multiples between 3.7 and 4.3x sales, to the point that the B2C business was essentially for free. As was summarized in a recent article by Seeking Alpha's Alon Zieve, TheStreet breaks out its B2C business in its 10-K:

2018

2017

Revenues

$27.5m

$31.0m

Less: Opex

($13.3m)

($16.2m)

Gross Margin

$14.2m

$14.8m

Less: Sales & Marketing

($7.8m)

($6.7m)

Less: G&A

($7.9m)

($6.8m)

Less: D&A

($1.8m)

($1.2m)

Net Income (Loss)

($3.3m)

+$0.1m

EbITDA

($1.5m)

+$1.3m

Source: Company 2018 10-K

The company indicated that the year over year revenue drop was due to the elimination of its advertising business which was a lower margin business. This makes sense, though we did see a drop in absolute Gross margin which would indicate that there was some positive benefit to maintaining these relationships. The company also had higher expenses in 2018 below the gross margin line in 2018 compared to 2017, mostly tied to higher salaries and employee comp. Some of these increases are non-cash, tied to stock options as TheStreet’s share price increased substantially over the course of the year after starting the year at just $1.27/share. These are costs to the business, but aren’t recurring cash cost. More encouragingly, the quarterly revenue from B2C has trended up largely over the year, from $6.6m in Q1 to $6.9m in Q2, $6.7m in Q3 and peaking at $7.2m in Q4, in a tough investing environment.

There is also a chance that some of the costs allocated to the B2C group may be shared between the B2B and B2C business; with the sale of the B2B businesses these may no longer be in place for either division. The company indicated they expected the headcount of the overall company to drop from 556 pre-deal to approximately 95 once the Deal/Boardex sale was finalized back in February. This would seem to be a dramatic drop in costs compared to the allocation between the two business lines. The divestiture process gives the company a chance to further restructure its remaining operations, though some costs will remain as long as the company remains a standalone entity.

I believe theStreet is preparing to sell the B2C business as well. The Company has secured Jim Cramer’s rights into 2021, but Mr. Cramer is now 64 years of age, as Mr. Zieve points out in his article, so his on-going involvement is certainly not secure beyond that time period. His compensation is also likely more limited with a smaller sized company going forward. He has had a very successful relationship with CNBC for many years, which is owned by Comcast (CMCSA), a much larger, more diversified content provider. His presence on theStreet’s website remains prominent but not as overtly as in years past with the site’s more stream lined appearance. The reduction of the advertising business makes theStreet a blank slate for acquirers who will not have any legacy advertising contracts to contend with in the event of an acquisition.

TheStreet has seen a jump in its deferred revenue levels from $19.2m in 2017 to $21.2m in 2018; these are indicators that its shift to the subscription based model are gaining traction and with the reduced size of the company will have an outsized impact on its cash generation if it is able to continue to grow subscriptions. This ties well with the increase in quarterly revenue the company showed over 2018.

Post-Distribution

TheStreet expects to carry $18.5m to $21.5m in cash on its books even after the $1.77 per share distribution; costs associated with the transition are already factored out of this based on the company’s disclosures in the April 3 press release. With shares currently sitting at $2.39 per share, after the distribution of $1.77 and assuming an efficient market (always dangerous), the stub B2C business would have a value of 53.3m shares x $0.62 = $33.05m in market cap. Removing a median cash number of $20m, this would put a valuation on its B2C business of just $13.05m. This is an EV to sales of just 0.47x; Mr. Zieve showed how cheap theStreet’s valuation compared to other larger online content providers.

The attractive part of theStreet are its margins. The S&M and admin costs are very high for what will be a much smaller company post distribution; for an acquirer, it would be very easy to bolt on theStreet’s business to an existing infrastructure while eliminating large amounts of the sales and marketing costs. These functions would likely be absorbed by an acquirer’s existing infrastructure. Similarly, most of the admin would be eliminated as a lot of infrastructure needed to operate a standalone company would not be needed. This type of Acquirer’s Multiple means there is a lot of hidden value to an acquirer in a basically break-even business; this was evident in the B2B transaction multiples. There is a clear trend towards content consolidation. Disney’s acquisition most recently of some of Fox’s properties best illustrates how to leverage new properties onto an existing infrastructure.

Although I think an acquisition by a competitor is most likely, I believe theStreet retained a relatively high cash balance in order to keep its options open. If an acquirer is not found, the company could start to roll up smaller properties using the same logic I noted above, bolting them on to their existing infrastructure. The large cash balance also gives the company sufficient runway in the case of a downturn in the markets.

TheStreet has largely weaned itself off of advertising, making it less reliant on the good times. It has also survived the macro trend towards passive investing; fewer retail investors are searching out investment advice to do it themselves and are more reliant on index investing. I think there has been a trend by some smaller hedge/investment funds to outsourcing their research through subscriptions. Hedge funds don’t need to make a permanent headcount investment and can acquire research for substantially smaller investment and risk and change quickly and relatively cheaply if need be. TheStreet’s subscription services have positioned itself to benefit from these trends. The fact that theStreet was able to grow deferred revenues in Q4 2018 even as the market was suffering a severe sell-off is a sign that there may be some counter-trends at work, though a sustained sell off may prove more adverse to the company. In this case, they would not be alone in absorbing negative impacts.

TheStreet’s business similarities to Seeking Alpha’s cannot be underestimated, as a more specific target or acquirer. Both have reduced their ad reliance and switched to a small freemium funnel with a higher focus on premium content, making them very compatible partners with some clear synergies that could be had on both the front and back end.

The share consolidation makes the company easier to acquire as it will reduce the shareholder base substantially, with the potential for odd lots and small stub positions to weed out some shareholders. The consolidation may serve as a short term drag to the stock as holders not interested in the stub B2C business or with too small a position liquidate. The consolidation was likely a requirement to ensure the company retains its public listing since the stub would have traded well below the $1 NASDAQ minimum price.

The offset to this short term price risk is a reduced share count gives the potential to magnify impacts to the business. A recent trend in public companies has been to have very small public offerings of shares which can lend themselves to large run ups, often driven by promotion, both legitimate and otherwise. Companies like Tilray (TLRY), Phunware (PHUN), and LongFin (OTCPK:LFIN) saw massive share run-ups, largely driven by the market dynamics of a large demand for a very small amount of shares. TheStreet’s business is nothing like these companies in that it is both revenue generating and near profitable but its share structure could lend itself to a run up should their be a triggering event. An acquisition of theStreet would not cause this run up as the price would be fixed but if theStreet were able to acquire a good bolt on acquisition at a private company multiple, it could boost the companies profile substantially. The retention of the cash balance leaves this in play.

The Takeaway

TheStreet’s transformation is still on-going per the company’s own words in its April 3, 2019 press release (bolding by author):

"This distribution allows us to return significant value to our stockholders at this time while also maintaining the flexibility and capital needed to effectively run the B2C business as we continue to explore strategic opportunities," commented Eric Lundberg, Chief Executive Officer and Chief Financial Officer of TheStreet. "We will also continue to evaluate our cash position and operating performance with an eye towards making an additional cash distribution of up to $0.08 later this year and we look forward to updating the market on our progress over the coming months."

I believe the macro trend to consolidation of content was widely anticipated by theStreet over the last several years as it was able to monetize its B2B properties. I believe this process is almost complete as the company looks to market its B2C business to a larger player; the remaining cash balance allows the company to hedge in the case that it cannot find a suitor and chooses to instead become a suitor for another property. This cash provides a floor to the stub business in the short term while the company pursues its strategy. The distribution takes a lot of risk off the table for investors while the stub appears to be very under-valued whether it is looking to add a property to its existing stable of media properties like theStreet or RealMoney or if it is marketing itself to large competitors. I favor the latter scenario but the company has kept its options open by retaining a not insignificant sum of cash on its balance sheet.

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.