Quick Pitch: MediaAlpha (MAX)

Potential Inflection Play – Upside TBD


This is a curious situation in the insurance space. MediaAlpha operates an online platform, which facilitates the sale and acquisition of high-intent insurance customers/leads to insurance carriers and distributors. The company was taken public in late 2020 by a prominent insurance investment holding White Mountains Insurance Group (WTM) at $19/share. Interestingly, the same controlling shareholder has now decided to buy back a significant portion of MAX’s free float. WTM has announced a third-party tender offer for around 20% free float of MAX’s class A common shares at a tender price of $10/share. This arrangement is highly unusual as parent companies typically tend to gradually reduce or divest their stake following an IPO. In this case, we see the reverse where an ex-parent, known for being a disciplined capital allocator with deep knowledge of the insurance industry and MAX’s business, has decided to materially increase the ownership instead. The tender document emphasizes that the shares are getting purchased because of the financial reasons/attractive price and not for “acquiring or influencing control of the business”.
The tender has been launched at an interesting and potentially opportunistic timing – shortly after MAX share price hit its all-time low of $5.5/share due to current business headwinds. However, the target’s management expects substantial recovery in the next few quarters and WTM’s interest in buying shares now could be interpreted as a vote of confidence in the anticipated business inflection. If MAX’s shareholders will agree with this assessment and refrain from tendering, it could act as another catalyst for the share price. Hence, this seems like a pretty interesting setup and I will be waiting to see how this tender will turn out.

MAX’s share price has been in significant decline since late 2021 due to the hardening P&C insurance market driven by high inflation and rising costs of loss claims (e.g. elevated vehicle repair costs, prices of car parts, etc.). More details on the industry headwinds can be found here and here. The situation worsened with the impact of Hurricane Ian in late 2022. Insurers are facing a substantial drop in underwriting performance and profitability, which has led to a reduction in customer acquisition spending and directly impacted MAX’s financials. In 2022, the company’s revenue and adj. EBITDA fell by 29% and 40% YoY. The performance saw some recovery in Q1 this year as one major customer had initially increased marketing spend to historical levels but the decision was rolled back again at the end of Q1 amid renewed profitability concerns. This has resulted in a very disappointing Q2 guidance, which entails a sharp revenue drop and adj. EBITDA nearing zero (vs $58m annual adj. EBITDA in 2021 and 2020).

max financials 1

All of this has contributed to the share price dropping to historical lows of $5.5/share (70% below the IPO level) shortly before the tender announcement. However, MAX’s management thinks the inflection point is approaching and projects recovery in the next few quarters (late 2023/early 2024). Management expects that once the underwriting results of its clients stabilize and improve, the return of marketing spend to historical levels will be very rapid and points to Q1’23 results as an illustration of that.

max q1 1

From Q1 investor letter:

I think based on their comments and our discussions with them, I think our best estimate is that they’ll come back into the marketplace 2 to 3 quarters from now as they get more comfortable with what their profitability looks like for the remainder of the year. And so really, I think what we’re seeing is just the magnitude of this hard market cycle and the lingering inflationary pressures that insurance carriers continue to face. And so I think overall, what that means for the P&C market recovery is that it’s very likely going to be delayed a few quarters from what our original expectations were. But I would like to remind everyone that the Q1 results that we had, right? And the growth investments that we saw from this carrier, which were immediately back to normal historical levels, right, when they felt confident about their profitability is a sign that when the carriers get comfortable with where the rates are and the stability of the underwriting environment, that these growth investments and namely investments into our marketplace to acquire new customers and policies will return quickly and can return very sharply.

Naturally, such forecasts should be taken with a grain of salt as predicting cycles in the insurance industry is notoriously challenging, and discussions around increasing marketing expenditures among public P&C insurers have been scarce so far. However, WTM’s decision to purchase shares at this time is a positive signal and indicates that the ex-parent’s expectations for the industry inflection align with MAX management’s outlook. Some major players in the space, such as Swiss RE ($29bn market cap) also see sources for optimism on the potential rebound in the P&C sector later this year/early next year. Assuming a full recovery scenario, MAX does look somewhat cheap at current levels trading at 12x 2020/2021 adj. EBITDA. Such multiple seems undemanding for this capital light/high FCF conversion business that was growing topline at 21% CAGR from 2018 to 2021.

White Mountains is an insurance investment specialist – its portfolio is comprised primarily of insurance/reinsurance companies, including Ark Insurance Group and HG Global, and insurance-related service providers. WTM has a solid track record of compounding book per share at a stable 10% CAGR for the last 20 years (page 2-4) and a history of showing care for its shareholders through large share buybacks. It’s timing with MediaAlpha has been quite good thus far. The IPO was conducted at $19/share during a favorable business up-cycle, and WTM maintained 35% economic interest. A bit later, when the 2021 tech bubble accelerated, WTM trimmed its position to the current 27% in a secondary offering at 2.5x IPO price – $46/share. In comparison, the current tender has been launched shortly after MAX hit its all-time low of $5.5/share. A bit more details on WTM and MAX spin-off can be found in this write-up by an SSI member, published shortly after the spin-off completion.

6 Comments

6 thoughts on “Quick Pitch: MediaAlpha (MAX)”

  1. DT, are you planning to tender? (if price remains below $10)
    Tender deadline June 26 midnight, no odd lot, condition of minimum of 2.5m shares tendered vs 5m total.

    Since Oct 2020 ipo at $19, rose to $50+ March 2021, down to $5+ last month, $9.50 now, wide range!
    BTW, in the same time period, WTM rose from $900 to $1440 now.

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    • I do not have a position in MAX. I am intrigued by WMT’s actions, but my understanding of MAX’s business is too limited in this instance.

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  2. Thanks for the idea DT. Any thoughts on what Prospector Partners, Kayne Anderson and Broad Bay are incented to do (avg. px purchased etc.)?

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    • While I don’t have a definitive answer here, I think it’s more likely that the shareholders you have indicated will not participate in the tender.

      The way the tender document has been worded and how it emphasizes the tender effect on the combined ownership of the Stockholder Agreement Parties (WTM, founders, and Insignia) suggests that the founders and Insignia will not tender. I based my 20% free float reference in the write-up on this assumption.

      As for the remaining major shareholders, it’s difficult to tell. Both of them have cost basis significantly above the tender price, which might suggest they will refrain from participating. Kayne Anderson owns 14% and has been holding a similar position since November 2020 when MAX shares were trading closer to $50. Broad Bay owns 6% and has been a major shareholder since May 2022, when MAX was trading at around $15/share. Obviously at the time earnings and outlook were much better. So difficult to tell.

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  3. Tendering was profitable. Since tender began, mostly traded around $9.50. 75% allocation paid at $10 tender price, 25% of shares returned when shares were traded around $9.50. Now trading about $10.

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  4. The tender ended up only slightly oversubscribed with 75% of all tendered shares accepted. The intriguing part is that WTM has chosen to increase the offer size by the maximum allowed 2%, thereby increasing its total economic stake in MAX to 36% post this tender.

    This is what I would call a follow-smart-money setup. WTM, being an insurer and having incubated MAX for a long time, is likely to have a very good understanding of the industry and MAX’s business. It clearly sees MAX as highly attractive at current prices, potentially because of the expected business inflection later this year (as communicated by MAX’s management). WTM is a prominent insurance investment holding, known for being a disciplined capital allocator.

    MAX’s share price has not declined after the tender and has now stabilized around the offer price of $10 per share. The original thesis remains intact – MAX looks fairly cheap, trading 50% below the IPO price and 13x 2020/2021 adj. EBITDA, assuming the business reverts to profitability levels in those years. Such valuation is undemanding for this capital-light/high FCF conversion business that was growing topline at 21% CAGR from 2018 to 2021. The expected business inflection (if it arrives) would likely lead to a significant rerating in shares.

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