Current price: $2.14
Expected Price: $2.75+
Expiration Date: TBD (expected in coming weeks)
TheStreet has recently sold B2B business to Euromoney and currently is a net-net with c. $110m-$115m or $2.2/share cash on hand. Company promised to distributed substantial portion of this cash to shareholders. From the Q4 conference call:
We expect to distribute a substantial portion of the net proceeds from the B2B sale, along with a portion of our current cash on hand. While we will not be announcing the details of the distribution on this call, we want to provide a brief update on the Board’s efforts and timing. We have been working around the clock with our legal and tax advisors to analyze and agree upon the form, timing and amount of distribution and we will publicly communicate all of this to you in the coming weeks. We appreciate your patience.
TheStreet has retained B2C operations, which in my opinion are worth at least another $0.5-$1.0/share.
So my trade here is to acquire TST below cash balance and wait for the distribution announcement. I would expect either special dividend of >$1/share or tender offer for half of the outstanding shares above cash value ($2.2+/share). Any of these will likely lift the share price upwards - if not before then after the substantial distribution.
Downside is well protected by the balance sheet.
Insiders control 33% of the company. Jim Cramer from Mad Money is founder of the company and one of the directors with 9% stake. Stock ownership is very concentrated with top 11 shareholders owning 75% of the common. Cannell Capital (largest outside shareholder) invested additional $1.3m in TST after B2B business sale announcement at $2.0-$2.1/share prices. This should ensure that any capital allocation decisions will focus on shareholders' interests. With 2 out of 3 business segments already disposed, empire building does not seem to be a risk here and full company sale seems to be on the horizon.
Valuation of remaining TST Operations
TheStreet has sold all of B2B properties but retained business-to-consumer (B2C) assets, the main one being TheStreet.com website and subscription services related to it. Company generates revenues from premium financial content subscriptions (75%) as well as advertising (25%) on its sites. Advertising has been on decline over the last year, but subscription part started growing in both volume and price over the last two quarters. Going forward management expects advertising to stabilize and subscriptions to continue growing.
We have seen year-over-year growth each quarter in bookings as well as full year growth for the year. Bookings were up almost 7% for the year, our conversion rates have grown from 48% in 2017 to 62% in December of ‘18. Our renewal rates have also grown 72% in December of ‘18 compared to 67% in 2017. We will continue to build on the momentum in 2019.
We are also seeing some great trends in subscriber count. Total premium subscriber count has grown each of the last seven months of the year on a sequential basis and our average paid count grew year-over-year for each quarter in 2018. For the full year, our paid count grew by 3,702 subscriptions or almost 7%. From a deferred revenue perspective, bookings in paid count drove premium deferred revenues up $1.1 million or 12% at year end.
We feel very confident that our advertising has not only bottomed out, we should actually start to see some growth. In Q4 of last year, our average story count had dropped to 700 stories per month. In January and February, we’re over 1000 stories each month. February would have been higher, but we have 3 less days in the month of February. So, we’re certainly driving that goal higher than 1000, but we went from 700 in December to 1000 in January, we will be going up. The other thing that’s driving it up is SEO. The company didn’t have a focus on SEO until about a year ago, and we’ve hired a fantastic person, [indiscernible] to oversee our SEO efforts.
2018 annual revenues of the remaining operations are $27.5m and company likely made around $4m of losses within this segment (more details should be published with 10-K). Trends described above definitely sound positive, but due to lower scale it might be difficult to achieve profitability. However, given management's focus on B2C only going forward as well as continued growth in subscription based revenues, business improvement can be expected.
While so far management has not indicated any intentions to sell B2C business, such outcome is quite likely if profitability improves.
Company sold RateWatch at 4.3x revenues and Deal/BoardEx at 3.4x revenues. Both of these were subscription based, as are 75% of the remaining revenues. However, the disposed assets were growing and profitable and also targeted at institutional clients vs retail consumers - therefore these businesses clearly deserve higher multiple than the B2C operations.
Nevertheless, even using a very conservative 1x-2x revenue multiple results in $27m - $55m valuation for the B2C assets, which is $0.5 - $1.0/share of value on top of the existing cash balance ($2.2/share). Even if one deducts few million due to expected cash burn over the coming year(s), there still seems to be far too much value left unrecognized by the market.
Market will be forced to value B2C assets more appropriately if majority of cash is distributed to shareholders.
Couple more points
- CEO, CMO and General Councel resigned after the sale of B2B assets. The company is now led by its previous CFO (Eric Lundberg) who has assumed dual CEO/CFO role. This will be Mr. Lundberg's first time in running the company (all previous roles since 1995 were for CFO). Such an appointment seems to be geared towards quick sale of B2C assets (or maybe Mr. Lundberg really wanted a new type of challenge).
- I am still struggling to understand why market is valuing TheStreet below cash, especially with substantial cash distributions coming. Current B2C cash burn does not seem to justify SOTP discount. So any insights on this are more than welcome.