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.

84 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?

        2. Vincent

          Dividend paid, but on my activity statement it shows IB fully taxed the dividend at 15%.

  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?

      1. WH

        Does anybody have insights on this question? I got conflicting answers from my two brokers and TheStreet’s IR did not answer to my email…

  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.

  14. Vinn

    According to an Interactive Brokers representative through chat, all US holders with IB got taxed 30% on the distribution. Anyone here also got tax withholding at the same or different brokers? I am told I will get a more detailed reply with extra explanation through the mail/message.

    1. Writser

      IB: “The company has not provided specific details regarding the tax classification. We do not yet know which portion is a return of capital or a partial liquidation. As soon as that information becomes available to us, we will adjust the withholding accordingly.”

      1. Vinn

        I got a reply now from IB:

        “We have adjusted the distribution as shown below. Please allow a couple of days for the adjustment to reflect on the statement.
        FRACTION DESCRIPTION
        0.8249 Cash Liquidation
        0.1751 Return of Capital”

        Since it doesn’t mention any dividend I’m wondering whether the whole amount or only the liquidation part (82.49%) will be tax-free. Good news either way though!

  15. Kevin Chang

    This worked out great so far. +18% after the dividend payout. You guys planning on holding till the split?

  16. dt

    I am looking into tax situation on the distribution, will post how IB clarifies this.

    Press release clearly stated that this will be not taxable distribution.

    “As a result, a portion of the distribution will be treated as a partial liquidation for federal income tax purposes with the remaining portion treated as a non-dividend distribution for US tax purposes.”

  17. W51W52

    I just checked my IB statements (both taxable and IRA). Full $1.77 received, no tax withholdings.

  18. value_investor

    Congratulations to all the fellow investors in this group that scored good on the TheStreet transaction and to @DT for bringing this to our attention.

    To my knowledge, the tax implication on the 1.77 ( plus the 8 cents in near future ) should be minimal … because a substantial portion of the company has been sold.

    Now, looking forward, it is interesting to see how far below the $ 8.50 ( as approximated be me in one of my posts above ) price threshold the stock lingers ( post reverse split ) … personally, I think it if hovers about $ 6 or less, it is a very good value situation.

  19. work 22

    Tax withholdings may vary from broker to broker, but my guess is the IRS will be the final arbiter of what must be paid. So i wouldn’t count the chickens just yet…

  20. dt

    TST Q1 results are out.
    – Cash as of 3rd May stands at $24.2m or $4.6/share.
    – Continuing operations appear to be operating around break-even if $5.8m of restructuring and non-cash compensation expenses are excluded. Apparently for Q1 there was even a $1.0m of net profit.
    – Churn somewhat improved and subscription revenue remains stable (+6% due to pricing changes).

    Investors are currently paying $11.5m for the continuing TST operations which generated $27.5m of revenues during 2018 – so valuation at less than 0.5x revenues.

    As long as the remaining business does not burn cash – which seems to be the case from Q1 earning release – I do not see much downside in TST stock from the current prices. The upside is questionable (easy money on this stock have already been made), but might materialize quickly if management finds the buyer for these assets.

    Earnings commentary suggests sale of the remaining businesses is still under consideration:

    “We continue to evaluate the remaining business for cost efficiencies and explore strategic alternatives while executing on our business plan to deliver data and key operating metric driven premium subscription products and content to a loyal and attractive audience”

    https://www.sec.gov/Archives/edgar/data/1080056/000175392619000064/g081790_ex99-1.htm

  21. dt

    I am moving TST to inactive ideas – currently, this is more of a valuation case than a special situation as there is no clear catalyst in sight. Investors will simply have to wait for the B2C business to be sold or for clear turnaround in profitability of the operations. I am still long TST.

    Counting in $1.77 special dividend and the stub price after the distribution ($0.7), this case resulted in 15% return in 1.5 months.

  22. nuggy5

    Do you know why in their 10-QT: shares outstanding as of 5/13/19 were 6,407,273 but shares outstanding in the balance sheet itself (3/31/19) were 5,230,384? I’m not sure I’m able to figure out where the additional 1mm+ shares came from

        1. Writser

          I guess so. Sloppy and strange. What do you see on page six? You mean 6.2m shares and 0.97m treasury shares? That still leaves 200k shares – I guess 200k options were exercised and/or other shares were issued?

          1. nuggy5

            I sent an email to IR. It’s very odd to see treasury shares in that share count on page 1 of a 10Q

            1. Writser

              I mailed them one or two times but never got a reply. Haven’t bothered to call them as I don’t think shares are particularly interesting at this point anyway. Please share if you hear anything.

              1. nuggy5

                With the stock falling and trading at a fraction of remaining revenues I thought it was getting pretty interesting (+/- cash flow neutral as well as management that seems focused on shareholders). I’ll let you know if I hear anything.

    1. dt

      Definitely a disappointing outcome on the final leg of this special situation – B2C business was sold at a very low multiple.

      I have closed my position fully as the remaining upside to $6.19-$6.47 (part of which is driven by CVRs on escrow releases) is not as enticing.

      1. nuggy5

        I bought a little this morning as you’ll be made whole (and a little more) in 2-3 months plus (small) upside on CVR.

        1. Writser

          That seems a bit optimistic to me. $3.09 distribution in September (I doubt it will close in August – there isn’t even a preliminary proxy yet) and a $2.44 – $2.61 distribution for ~$5.62 average. At current prices you pay around $0.44 for a CVR estimated to pay out ~$0.60 in a few months and an another ~$0.10 next year. IRR is 18% which is decent but there is no additional upside in the CVR. Just downside.

            1. AV

              Of course. If the payout would be 100% certain they wouldn’t need to use a CVR. As the name implies it’s contingent on certain things happening, and those things might not happen. So it’s certainly possible they will be worth zero in the end.

            2. Writser

              In theory: yes. Cash burn could be worse than anticipated and buyers could claim full amounts in escrow. In practice: unlikely.

              1. nuggy5

                Did you have a source for those distribution numbers you gave above (I know the timing is an estimate)?

  23. Vincent

    Sold the rest of business for $16.5, 0.6X revenue. Total payout about $6.19-6.47/share. Have to say it’s a little disappointing.

  24. WH

    According to this weeks press release, I was expecting to receive 6.34$ in cash (3.25$ special cash distribution + 3.09 merger consideration) + 1 CVR per TST-share.

    http://investor-relations.thestreet.com/news-releases/news-release-details/stockholders-thestreet-approve-merger-maven-and-final-special

    Instead I got my TST shares swapped to MVEN shares 1:1 on Wednesday and I’m having a dividend notice in my account for 5.05$ per TST-share, payable next week. What am I missing? Already contacted my broker without response.

    1. nostradamus

      you’re right, except the special dividend is $ 3.35, not $ 3.25.

      no clue where those MVEN shares in your account supposed to be coming from. sounds like a broker error.

      some weird stuff going on these last few weeks btw. first, the street puts out an estimated distribution range, then revises the estimate downwards by quite a bit about a week ago, only to then agressively increase it again this week. made no sense.

  25. Terence

    $3.35 special cash distribution, total of $6.44 in cash + CVR estimated at $0.09 after January. Thus, the stock mostly traded around $6.47 on its last trading day on August 7.

    The MVEN share and 5.05 must just be a mistake, but I don’t have any information aside from the news.

    1. Writser

      At IB I did receive the $3.09 merger consideration and two escrow receivables but I haven’t received the $3.35 special distribution yet even though it had a payable date of August, 12. I guess it should hit our account shortly as payment for one of the escrow accounts. Still a bit strange and if the money isn’t there in a few days I’ll open a ticket.

    2. AV

      I’m still missing the dividend, but guess that will show up in my account soon.

      1. nostradamus

        Dividend came in, but with 15% tax witheld. Isn’t this one supposed to be tax-free?

        1. Writser

          Got it too. It was also my expectation after reading the proxy (and looking at the balance sheet) that this would be considered a return of capital but IB withheld 15% here as well. Might open a ticket about it.

          1. W51W52

            Got the dividend, but haven’t received the $3.09 in merger considerations yet at IB

            1. nostradamus

              You sure? It came in on Monday and should be listed in your report under “Corporate Actions”, not under “Dividends”

              1. nuggy5

                Fidelity USA taxable account and I got both distributions without a withholding

              2. W51W52

                Ah yes, buried under corporate actions. Got it, thanks!

  26. Writser

    IB response:

    The Street Inc. is expected to file a Form 8937 within the next 45 days that will explain the tax consequence of this action. Currently, we do not have a definitive guidance on how this corporate action should be treated. Once we receive this information, we will adjust the withholding tax accordingly.

    I guess we have to be patient.

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