IAC (IAC) – NAV Discount Elimination – 30% Upside

Current Price: $191

Net Asset Value: $246

Upside: 30%

Expiration Date: Late Q2 2020

Presentation

This idea was shared by Knight142.

 

This is a stub trade, based on thesis that Match Group (MTCH) split-off will close the valuation gap between IAC NAV and its share price. MTCH makes up 75% of IAC assets. Closing is expected in Q2 and management confirmed on the 6th of April that the transaction is still on track significantly de-risking the whole situation. However, the spread narrowed only slightly.

There are a number of ways to look at this trade.

After the split-off intentions were initially communicated (Aug-19), IAC traded at 4%-6% discount to its two listed subsidiaries (and an even larger discount to total NAV). However, due to the recent market panic the spread has widened. It is likely that as the split-off date approaches the discount will get eliminated completely, so short term upside is 10%.

The second way is to aim a bit higher expecting that the market will finally start recognizing the value of other assets on IAC balance sheet. Approach of MTCH split-off date should act as a catalyst for that as well. Total sum-of-the-parts value of IAC stands at $246/share (30% upside).

Finally, at current IAC prices, the new IAC stub (post split-off) appears to be trading at ridiculous discount to its remaining assets - 30 cents on a dollar (more details below). Divestment of another publicly listed asset - ANGI shares - was also in the cards back in Aug'19 and if the discount does not close, management will likely proceed with further divestments.

This trade can be done without hedging, however then the investor would be left exposed to the MTCH/ANGI post/pre split-off prices. Hedged play involves going long 1 IAC and short 2.74 MTCH + 4.95 ANGI. MTCH borrow fee is 17% annually, so if the rate remains unchanged, hedging will consume 4% of the upside. ANGI borrow is cheap and plentiful.

The main risk is that the transaction gets delayed, cancelled or the terms get amended. However, recent assurance from the company suggests this is very unlikely. The strategic rationale for the split-off is strong as the transaction will allow IAC to refocus on incubating its smaller assets, while MTCH will benefit from inclusion in indices under its post-spin single class structure. The April 6th update also reassured that both companies are still committed to close the split-off on schedule.

Expensive borrow of MTCH is also a risk - any delays or increases in borrow fees could erode significant part of the upside.

 

Discount to listed subsidiaries

IAC largest assets are majority ownership in publicly listed MTCH and ANGI. On top these IAC also has further $4.5bn of net assets and cash (details in the next section). However, with IAC trading below to its two publicly listed subs (MTCH and ANGI), the implied value of IAC stub is negative $1.7bn.

Aug'19 announcement that IAC was considering splitting off its listed subs caused IAC stub discount to narrow. MTCH split-off off agreement was signed in Dec'19. And then over the last month due to overall market turbulence this valuation gap has widened again.

MTCH split-off should at the very least eliminate this negative IAC stub valuation (upside of 10%), and most likely force markets to recognize (and properly value) other assets on IAC balance sheet, bringing IAC share price closer to its NAV.

Tables below illustrates valuation misalignment relative to publicly listed subsidiaries:

IAC discount to subs

And here historical perspective on the implied IAC stub value discount relative to publicly listed subs:

IAC historical

 

Discount to NAV

Table below outlines current IAC NAV calculation assuming all non-public assets get taxed at 27% - which is way too conservative, as some of these are valued at cost. But let's say these taxes also account for some corporate overheads on managing IAC stub over the coming years.

IAC SOTP UPD

 

IAC post split-off

On the 6th of April management presented a very clear case for arbitrage. New IAC will be debt free and currently is trading at an implied valuation of only $2.2bn while having $1.9bn stake in ANGI, $2.3bn in cash and $3bn-$4bn in other unlisted investments (chart made using the 3rd of April prices). In other words one is paying 30 cents on a dollar.

This is a ridiculous valuation misalignment and it is unlikely to hold post split-off.

 

IAC arbitrage

Note: 'New IAC' is slightly different from 'IAC stub' showed in previous tables - mainly because c. 15% of MTCH ownership will be forfeited in exchange for debt transfer from IAC to MTCH as well as additional cash inflow $3 per MTCH share. The same reason why number of MTCH shares to be received in split-off differs current IAC ownership.

In management's words:

"At IAC’s current stock price, our market capitalization is $14.5 billion – that’s about $30 million higher than the value of our 80% interest in MTCH leaving aside the rest of our businesses and cash. In the separation, we currently expect that an IAC shareholder would receive 2.37 shares of MTCH (worth $144 per IAC share at today’s prices); subtracting that amount from the current IAC stock price would imply that the “stub” is worth $25 per share. At this price, backing out our anticipated cash balance and the value of our ANGI stake at current prices, the remaining assets of New IAC would be trading at an implied negative $2 billion value. We expect that will work itself out over time."

 

Split-off Terms

Full details are outlined well in this presentation. The key point are:

  • Match shareholders will receive 1 new MTCH + $3/share in cash (or equivalent in MTCH shares, subject to election). The cash consideration will be funded by Match.
  • IAC shareholders will receive 1 new IAC + 2.37 MTCH + $3/share in cash + up to additional $162m ($1.86/share) if minority MTCH shareholders choose the stock option over $3/share in cash.
  • IAC is spinning only ~85% of its stake in MTCH, while the remaining  (29m shares) will be forfeited - deleted from the outstanding share balance of MTCH. In exchange for those 29m erased shares, Match will assume all of the remaining IAC debt (notes and warrants) + hedging instruments.
  • Regulatory blessing for this type of the transaction should not be a problem, while the approval of MTCH and IAC shareholder shouldn't be a hurdle as well given the potential benefits of the transaction.

These terms might change slightly depending on the share prices of IAC and MTCH at the time of the transaction.

 

InterActive Corp

IAC is a conglomerate with a business model of acquiring and developing marketplace and media companies before spinning them off tax efficiently. Past spin-offs have all been tax free and include Ticketmaster, Lending Tree, Interval Leisure Group and Home Shopping Network.

Current assets of IAC include two listed companies - online dating network Match (Match.com, Tinder) and digital home services marketplace ANGI. IAC also owns stakes in multiple non-public firms like Vimeo (video platform), Dotdash (digital media), Care.com (social care services marketplace) and others.

 

14 COMMENTS

    1. Knight142

      IAC NOSH: ~85m; MTCH NOSH: 283m
      IAC has 80.7% of MTCH = 228m shares
      228/85: ~2.7 shares

      1. Dunkincoffee

        Given that the pro forma share count for New MTCH will be roughly 199mn shares, assuming one wants to hedge the trade, why should one short 2.7 shares of MTCH per IAC rather than ~2.37? If i’m mistaken here, when do you propose to cover the other, roughly, .33 shares of MTCH per IAC that one is short as the distribution of New MTCH will not automatically close out that side of the trade? Appreciate the idea.

  1. Ilja

    Proxy statement is out and shareholders’ meeting date has been set for the 25th of June, while closing is expected shortly after that. Apparently, COVID-19 has strongly impacted the company’s business and so far forced IAC to make $300m impairments on its assets. Overall it seems that the transaction is still ongoing, however MTCH borrow fee has increased and currently stands at 24%/year, which already cuts the upside by 4% assuming closing in two months. Current upside public assets NAV stands at 5.5%, so further increases in borrow fee (or closing delays) might eliminate it completely. Upside for a hedged SOTP trade stands at 21%.

  2. Ilja

    Q1 report showed continuing revenue growth of most IAC assets, although due to COVID-19 it took a hit in March (8% YoY growth vs 16% YoY growth in Feb’20). Overall revenue growth is the same as last years 11%. Net cash position now stands at $419m.

    Upside to public assets now stands at 7%, while MTCH borrow fee decreased to 15% and now will cut the upside by less than 2% (assuming closing shortly after the meeting). Upside to SOTP value is 25%.

    https://www.sec.gov/ix?doc=/Archives/edgar/data/891103/000089110320000008/iac-2020331x10q.htm

    1. Ilja

      By the way, the timeline for split-off has not changed. The meeting is still planned for the 25th of June and closing is expected shortly after.

  3. Ilja

    Discount to listed subs is 9% and to 21% to SOTP. MTCH borrow remains at 15% (will consume just above 1% of upside assuming closing shortly after the meeting).

  4. g4734g

    Couple of questions: I have read thru the presentation several times and do not see a mention of the ANGI spinoff….in fact it seems to be retained in the POST transaction chart (page one in the appendix)……was this announced at a later date? Secondly there was some discussion in the above messages of the exact ratio of MTCH to short as a hedge….wasn’t sure if that question was fully resolved? thank you

  5. Paul

    ANGI will not be spun off. The ANGI hedge is to purify the bet on nonpublic subsidiaries.

    The ratio of MTCH currently owned is different from the ratio each IAC shareholder will receive. Some MTCH shares will be exchanged for debt cancellation prior to spinoff.

  6. Ilja

    So apparently IAC is selling 17m new MTCH shares to some third party firms for $85/share ($1.4bn in total).

    This will decrease the amount of MTCH shares held by IAC from 80.4% to 74.4% or from 2.74 MTCH shares per each IAC share to 2.49. Short position sizing has to be adjusted accordingly now.

    This will also cut the consideration ratio from 2.35 new MTCH/IAC to 2.14 new MTCH/IAC. However, this change will be offset by the $1.4bn cash received from the equity sale.

    Shareholder meeting will take place on the 25th of June. MTCH borrow stands at 24%.

  7. dt

    Closing this one out as MTCH separation has been completed and IAC stub (excluding ANGI stake and additional cash received for MTCH shares) no longer trades at a negative valuation.

    Unhedged trade was a homerun with +70% return in 3 months; however, the majority of the gain is attributed to the overall recovery in the markets from the covid crisis lows rather than elimination of the discount.

    Hedging only MTCH (the part that was spun-off) exposure resulted in +30% (after borrow costs).

    Heding both MTCH and ANGI delivered a much more modest 5% return mainly due to 4x increase in ANGI share price.

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