TheStreet (TST) – Expected Special Dividend / Tender – 25% Upside

Current price: $2.14

Expected Price: $2.75+

Upside: 25%

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.

38 COMMENTS

  1. Writser

    Interesting idea. Having a very quick look here, but there are ~3.8m options, ~3m RSU’s and ~4m stock-based awards outstanding according to the Q3 filing? Did you take the potential dilution into account?

    1. dt

      I used information from the latest conference call:

      Kara Anderson

      Just looking for some color on your expectations for the fully diluted shares outstanding now that all of the vesting of RSUs and options have declared and now that we stand at March 12, just trying to get an idea?

      Eric Lundberg

      Cool. So, not all of the options have been exercised. All the options have accelerated, but they have not all been exercised. All of the RSUs accelerated and have been exercised. Most of those were done via a cashless exercise, not all. So, if you were to look at our total outstanding shares are roughly 50 million. If you were to assume that all of our shares were exercised via a cashless mechanism, we would have roughly speaking 52.5 million to 53 million shares out.

      https://seekingalpha.com/article/4248091-street-com-tst-ceo-eric-lundberg-q4-2018-results-earnings-call-transcript?part=single

      I am not sure whether the above figure includes all options and all RSUs. Looking at the latest 10Q, I arrive at total diluted shares of c. 54m (also cashless exercise of options), so it does not change the picture much.

  2. work 22

    What are the tax implications of the distribution? What kind of dividend would it be? Regular taxable, or return of capital etc? That may be why its trading low?

    1. Writser

      No tax expert here, but the pro forma balance sheet has an accumulated deficit of $100m. I would expect they can distribute a large amount tax-free. Also, a tender offer would be tax-free in my jurisdiction anyway. I don’t think that explains the market price. More likely that market is skeptical about the amount of money being returned and / or the prospects of the remaining business and the cash that will be pumped into it. Or maybe the market is a bit inefficient!

      1. dt

        From the proxy statement (also table on page 70):

        “The Company estimates the taxable income of $64.6 million with respect to the gain on sale of certain assets and liabilities of the B2B Business to be fully offset by federal net operating losses. The Company has approximately $173 million of federal net operating losses as of December 31, 2017. The Company estimates that after utilizing state and local net operating losses they will incur state and local income, capital and minimum taxes of approximately $1.7 million.”

        https://www.sec.gov/Archives/edgar/data/1080056/000114036119000752/s002605x2_defm14a.htm

        Regarding any taxes on distributions my expectation is that this will be special dividend (return of capital) or tender offer. Insiders own significant amount of stock so interest on tax efficiency are aligned.

          1. dt

            He later corrected himself to $110m-$115m range, which is what I used in the calculations. Also this is the total available cash balance rather than the amount they are actually intending to distribute.

        1. work 22

          thanks, i’d want to see that in writing for sure on the non-taxable nature of the return of capital/special dividend. thanks

          1. fishwithwings

            Couldn’t you just buy the shares in a retirement account thus negating this risk?

  3. charlie47

    It’s also possible due the small size of the business + the fact that this cash doesn’t show up on stock screen, it creates this opportunity.

    1. dt

      10Q has operating profit/loss breakdown by segment.
      Even if it was a melting ice cube (which does not seem to be the case from premium subscription perspective), the value should still be greater than zero. And now investors are paying only for cash and getting the whole B2C business for free.

  4. Vincent

    Hi dt, I am trying to reproduce the $2.2/share net cash value you mentioned. What I don’t understand is, why are you not subtracting the $30 million total liabilities from the available cash for distribution? Otherwise it can’t be considered a ‘net cash’ position right?

    1. dt

      Those liabilities are mostly deferred revenue – cash received from subscriptions but not yet recognized in the income statement. It’s just an accounting entry rather than a real liability. And regarding the others – part of them will be gone together with B2B and the rest are working capital which kind of cancels out with current assets. Hope this clarifies it.

  5. dt

    From the conference call and 10K:
    – Cash on the balance sheet after the sale $110m-$115m
    – Long term marketable securities $1.8m
    – Shares outstanding 52.5m-53m

    Total cash works out to $2.11 – $2.23 per share.

  6. giangduong13

    Hi dt, I am pretty new and have a question: what type of trigger are we waiting for for the underlying value to be appreciated and how long should we expect it to happen?

    Many thanks.

    1. dt

      At the moment I am expecting some kind of announcement on the distribution of funds currently sitting idle on the TST balance sheet.

      The announcement itself will likely push share price closer to my valuation and a a later point the distribution itself (or rather remaining listing after the distribution) will also act as a catalyst.

      Obviously all of this assumes that significant portion of cash balance will be distributed to shareholders instead of being used for something else.

  7. slow

    NEW YORK, April 3, 2019 /PRNewswire/ — TheStreet, Inc. (TST) a leading financial news and information company, today announced that its Board of Directors has declared a special cash distribution in the amount of approximately $94.3 million or $1.77 per share. In connection with the distribution, the Board of Directors has approved a 1-for-10 reverse stock split of TheStreet’s common stock.

  8. Vincent

    So the distribution will be $1.77 with another one later for up to $0.08 per share. The total of first distribution is only $94.3m. A little disappointing compare to $110-115 as announced during the earning call. Not sure what changed. After the distribution, they’ll have $18.5-21.5m cash left. Depend on how much is still in the escort account, it seems they burn quite some cash during Q1.

    1. dt

      ‘only $94.3m’?
      Management never promised $110m-$115m distribution – this was cash balance at the time of the call. I am actually positively surprised they are distributing 80% of cash to shareholders.

    2. Writser

      They mentioned in the conference call that they’d have $110m – $115m and that some of that would be invested in the business (transcript is a bit fuzzy). Assuming they like round numbers and reserve ~$10m to invest in RemainCo they’d have $100m to distribute or ~$1.89 per fully diluted share – pretty close to the announced $1.85. I didn’t think the amount was very disappointing.

      Solid idea, managed to pick up a few shares, thanks. Buying on the day you posted this was a relatively easy proposition – i.e. it looked too cheap, who cares about the exact upside. Now comes the difficult part. What’s the value of the stub?

  9. value_investor

    Highlights of today’s announcement from TheStreet :

    Special distribution amount : $ 1,77
    Record date : April 15th
    Payment date : April 22nd
    Ex-Dividend date : April 23rd ( please hold your shares till then )
    Reverse split date : April 26 th ( 10 for 1. Any partial shares are paid in cash based on closing price on Apr
    25th )
    Tax implications : The special distribution is treated as partial liquidation and non-dividend distribution ..
    Essentially a very tax favoured payment .. but please look into details.

    1. aglondon

      Does anybody know if there would be withholding tax on these distributions for non US residents?

  10. dt

    I think such a large distribution is a sign that management aims to sell the remaining business shortly and liquidate the company. One of the risks was that substantial portion of cash will be used to acquire additional B2C operations in order to have higher scale, but with 80% of the cash balance to be distributed to shareholders, management clearly does not consider acquisitions to be a way forward.

  11. value_investor

    @DT .. this is a great call !!

    Surprisingly, the stock is trading DOWN from it’s close yesterday … However, since you mentioned that there is a chance the remaining business might be sold shortly and the company liquidated, could you estimate what the remaining business is worth ?

  12. Terence

    Muted response on this news, price is even down. Any theories?

    1. value_investor

      My 2 cents …

      The reverse stock split might be a factor … however, per my calculations, the stock should be around $ 5.00 AFTER the reverse split ( considering the return of cash as special dividend, we only include remaining cash + value of B2C business ) …

      But, to keep things simple, if by some weird dynamics, the stocks scoops down to 1.8 – 1.9 range, then, I guess it should be a significant value with heavy downside protection …

      Awaiting @DT ‘s thoughts / comments to this and my earlier post !! He is the bigger / saner voice.

  13. dt

    I have outlined my valuation thoughts for the remaining business in the write-up. It’s money loosing currently and depending which revenue multiple is used (1x-2x) it might be worth $0.5-$1 in takeover scenario (B2B businesses were sold in range of 3.5x-4.5x revenues). I am not aware of any comparables to be able to add any further color on this.

    That the B2C operations will be sold is just speculation on my side judging from far larger than expected cash distribution – they hardly have any cash left (only $20m) to try to bring this business to scale through acquisitions.

    One additional thing I noticed – TST changed tax year dates so that remaining operations have a clean start from the 1st of April. For me that looks like prepping company for sale so that financials are not complicated by partial quarter of B2B operations – but maybe I am reading too much into this.

    1. Writser

      Thanks for your view. I have some doubts about a sale: thestreet.com seems basically a one man show to me (granted, I’m not an expert on the site – content looks horrible to me at first glance). The 10K confirms this: “Key content contributors, particularly James J. Cramer, are important to our premium subscription offerings.”. So how interested will Jim Cramer be in providing content after he sold his position? And how interesting is thestreet.com for potential buyers without Jim Cramer?

      I’m not sure buyers will line up. Perhaps Jim Cramer will try to take the company private with a consortium? That would sort of make sense.

      1. dt

        Good point on Cramer’s value here. Thanks.

        However, I think the business is still quite transferable.Likely, it is mostly his employees/analysts who are writing the articles in his name (obviously with Cramer’s blessing, I would be surprised if he provides that much content himself personally). If that is the case then the whole enterprise could be transferred under some other name to achieve higher scale and Cramer could continue to direct/vet some of the articles, calling these his own content.

    2. value_investor

      Thanks a bunch. This helps !!

      After the special dividend is paid out, the cash balance itself should be about 35 cents per share. After the reverse split on 26th April, that will equate to $ 3.50 per share. PLUS the value of the B2C ( @ 50 cents per share now … the lower limit of the range of valuations suggested ) segment should be ( after reverse split ), $ 5 per share.

      So, post the reverse split, we are looking at $ 8.50 per share. If it goes substantially below this, then there is a good value IF they decide to sell B2C. If not, there is still value but it may take time to realize.

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