Marchex (MCHX) – Tender Offer – 6% Upside

Current Price: $1.72

Offer Price: $1.96

Upside: 14%

Expiration Date: expected early October 2020

Press Release

 

On the 10th of August Marchex and the largest shareholder/activist (Edenbrook Capital, owns 19.5%) announced intention to launch a joint and equal tender offer for a maximum of 10m of MCHX shares. The tender price depends on shareholder participation:

- if less than 6m shares are tendered, then these will be accepted at $1.80/share (4% upside);

- if more than 6m shares are tendered, then the consideration will stand at $1.96/share (14% upside).

Two activists are involved in MCHX and both have acquired shares (and continue to buy) at higher levels than where the company is trading currently.

More than 50% of the market cap is in cash and on top of that company intends to sell businesses that currently generate 50%+ revenues.

The offer document is not out yet and aside from the initial press release, limited additional information is available.

Directors own 7.7% and so far it's not clear whether they plan to participate in the offer. Other major shareholders:

  • Edenbrook Capital - 19.5%
  • Renaissance Technologies - 6.5%;
  • Harbert Discovery Fund - 5.8% (likely will not participate in the offer) ;
  • Blackrock - 2.4%.

 

Marchex

Marchex sells analytics software services for the analysis of calls/texts between the business and clients as well as solutions to improve these interactions in order to drive sales. The revenue is generated by charging fees for each analyzed call/text data element (volume-based). Other products are Call Marketplace (ad placements across mobile and online media sources) and Local Leads (the network of leads for local resellers).

In recent years MCHX has been expanding into the text analytics segment, primarily through M&A. In 2018 it acquired SITA Laboratories ($35m) and Telmetrics ($13.1m), while in Dec'19 the company bought Sonar Technologies for $13m. Despite that, Marchex struggles with profitability and on average had about $1m net loss/quarter in '19.

The COVID outbreak and disruption of client businesses had impacted the company's business (revenues down 2% and 6% in Q2 and Q1 respectively, even with the Sonar acquisition in Dec). The analyzed volume started to decline in March and, while certain recovery has been made in May and June, the "volumes remain down meaningfully".

Currently, MCHX sits on a $46m cash, while its market cap stands at $82m, which indicates that the operating business is being valued at $30m only.

 

Activists

MCHX also faced pressure from the activist shareholders:

  • Edenbrook Capital is a small hedge fund with MCHX as their 4th top holding. It became a major shareholder (5%) in 2016 and since then it bumped the stake by several percent each year and currently is the largest shareholder with 19.5% ownership, the majority of which was acquired at a considerable premium to current prices - mid $2s-$4/share. At the end of 2018 Edenbrook wrote a letter to MCHX expressing support for the management initiatives made in 2018 (two mergers, share repurchases, special dividends, business turnaround), however, stated that MCHX shares are undervalued and should be worth $6.25/share.
  • Harbert Discovery Fund has become a major shareholder (5.2%) in 2018 - acquired the stake at the price level of high $2s, then ceased to be a major shareholder in 2019 and then again increased the stake to the current 5.8% (acquired at mid $2s - high $3s per share). So Harbert Discovery is currently sitting at a considerable loss as well and in March'20 started engaging with the company regarding a number of issues including the poor share price and operational performance of the company. The activist has also stated that MCHX shares should be worth somewhere around $5.75/share (of course this was pre-COVID impact).

This pressure from the activists is likely the reason for the strategic shift announced recently in the Q2 report - MCHX is now selling 90% of its interest in Call Marketplace and Local Leads assets (54% of combined revenue) and will refocus on the call analytics software only.

Overall, it is clear that major shareholders believe in a considerably higher valuation for MCHX and are increasing their share ownership (after the tender Edenbrook will increase their stake from 13.63% at the beginning of the year to 32%). Moreover, the involvement of activists minimizes the risk of further value destruction here, which might incentivize other shareholders to refrain from cashing out in the current tender offer.

3 COMMENTS

  1. g4734g

    MCHX seems pinned to the1.79-1.82 range…..foregone conclusion over 6 million not going to happen?

  2. MarkB

    It does seem like it will not be in the 6M range. In addition to the large institutions you mention above, Vanguard also owns 1.45M shares (probably index and not participating), RenTech seems unlikely to tender unless some bot confirms they should. The large institutions obviously aren’t. Insiders likely aren’t either given recent insider purchases.
    Long-term though the company has some intrigue to it.

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