Description

This is an intriguing setup with a significant discount to the sum-of-the-parts valuation. The company is in discussions to sell one of its three divisions and plans to list another one in the US. I expect these developments to catalyze a substantial re-rating in Ascential shares over the coming months. The downside risk appears limited at current prices.

Ascential is a £970m market cap company with three very distinct operating subsidiaries:

• Product Design / WSGN - subscription to market research reports and data.

• Digital Commerce - e-commerce-related services and software.

• Events - owns/runs several events, including Cannes Lions.

Back in Apr’22, Ascential initiated a strategic review to assess the merits of separation of certain assets of the Group and in turn to maximize shareholder value. This review was concluded in Jan’23 with plans to divest Product Design / WSGN business and to list Digital Commerce operations in the U.S., leaving the Events segment as an independent UK-listed business. There was no specific timeline and no identified buyers, but management noted that:

“Potential sale proceeds are earmarked for both near-term returns to shareholders and fortifying stand-alone Events and Digital Commerce listed companies in the UK and US, respectively.”

Then last month, ASCL finally announced exclusive talks to sell the Product Design business to Apax Partners. Apax Partners, one of the largest private equity players in Europe with over $65 billion in AUM, is a highly credible suitor with a longstanding history with Ascential. The private equity firm had previously acquired a controlling stake in the company back in 2008 before listing the business in 2016.

During the recent conference call, Ascential’s management confirmed that the sale/listing processes are “well advanced” and an update is expected by the end of the year.

The break-up of the holding company into separate businesses seems to have a strong rationale. On top of the expected capital return from the sale proceeds, the move would simplify ASCL’s operational structure and allow the market to properly value different parts of the company. A separate listing for Digital Commerce would provide the subsidiary with its own currency for growth through M&A. From Jan’23 conference call:

"So look, I think the -- what I would say to you is the most consistent feedback that we have received as an organization through our comprehensive shareholder study that we did and through the exercise last year, is that shareholders in main really do see that the combination of assets really does not allow them to make the best choices and that we aren't receiving and will not receive the best value for our company as the elements stay together. And that was seen in as much as the business and operating model of WGSN, which is a pure-play subscriptions business compared to say, the Events businesses versus the DC businesses where our shareholders have consistently fed back that they really do see those as 3 very separate business models and want the choice and feel that the assets would achieve much greater values as standalone organizations."

I would expect the planned sale/listing transactions to lead to a substantial re-rating of ASCL. The sale proceeds from the disposal of Product Design are likely to be above £500m, which is nearly half of ASCL's current EV. Meanwhile, the to-be-listed Digital Commerce business is likely worth an additional £300m. This would leave the remaining high-margin Events subsidiary at an undemanding 6x TTM EBITDA valuation (including full corporate overheads). I see an upside of over 50% if ASCL shares were to close the discount to the SOTP value.

Even if the sale of WSGN or listing of Digital Commerce business does not materialize, the downside would likely be limited. ASCL shares have gradually drifted lower since the break-up plans were announced in Jan’23 and currently sit only 5% above unaffected share price levels. Since then, the company has reported solid H1 2023 results, with revenues and EBITDA up across the board. Below I provide more background on Ascential’s segments and their expected valuations.

Financial performance of Ascential at HoldCo level:

Product Design / WSGN

Ascential's Product Design business primarily includes its trend forecasting and analytics subsidiary, WGSN. WGSN provides corporate customers with access to market research reports, data, and forecasts focused on consumer preferences and fashion/style trends. For example, it predicts the popularity of items like women's running sneakers in the UK. The majority of Product Design's revenues are recurring (90%), consisting of subscriptions paid by clients to access WGSN database. It is a capital-light business, with adjusted EBITDA margins consistently in the 43-46% range. While the subsidiary has historically focused on the fashion end-market (i.e., apparel producers such as Fila, Adidas, and Levi's), the share of revenues from non-fashion end-markets (including food and drink, beauty, and consumer tech) has grown rapidly over the last few years and now accounts for 46% of WGSN's total. The segment's revenues and EBITDA have grown at 8% and 16% CAGRs respectively from 2017 to 2022, driven primarily by expansion into non-fashion end-markets.

With the conclusion of the strategic review in Jan’23, ASCL's management announced plans to sell the Product Design segment. Since then there have been some rumors/media reports concerning the ongoing discussions:

• In Apr’23, rumors emerged that the segment had attracted acquisition interest from several private equity firms, including Apax Partners, BC Partners, Providence Equity, and Carlyle. The rumored acquisition price was £800m.

• In Jul’23, it was reported that three major bidders (Apax Partners, BC Partners, and Hearst Communications) withdrew from the acquisition process. The suitors walked away apparently because 'the asking price was too high'. ASCL's management was reportedly seeking to receive £700m for the segment.

• In Sep’23, Sky News reported that ASCL had entered into exclusive negotiations with Apax Partners for the sale of the segment. In turn, ASCL promptly confirmed media speculations. Sky News reported that the potential offer price would be "substantially below" the previously contemplated £700m.

So what the ‘substantially below £700m’ could potentially mean? Several somewhat comparable public peers trade at mid-teen EBITDA multiples:

• GlobalData (DATA.L), an AIM-listed provider of industry/market research reports through subscriptions, is currently valued at 13.9x TTM adjusted EBITDA. While DATA is focused on a wider variety of verticals than WGSN, it appears to be the closest peer based on its comparable size ($1.4bn EV), topline growth rate (15% CAGR from 2017 to 2022), and adjusted EBITDA margins (35% after corporate overheads). DATA's subscription renewal rates stood at 101% in 2022, compared to "over 95%" for ASCL's Product Design business.

• Gartner (IT), another provider of subscription-based market research reports, is valued at 19x TTM adjusted EBITDA. The peer deserves a valuation premium over WGSN due to its size ($28 billion EV), diversification across end markets, faster topline growth, and higher customer retention rate (>100%). Gartner's adjusted EBITDA margins stood at 27% in 2022 (after corporate overheads).

At below peer 11.5x TTM EBITDA, the Product Design business would fetch £600m in a sale scenario (or £480m in net proceeds if taxed at 20%). Given high margins and a sticky recurring revenue base, this multiple seems reasonable, if not overly conservative.

The interest from Apax Partners in acquiring WGSN is not surprising given that the subsidiary appears to have grown primarily under the PE firm’s ownership. Ascential's predecessor, Emap, acquired WGSN for £140m back in 2005. At the time, WGSN was a tiny asset, with revenues of £15m and pre-tax profits of £4m. Apax built a controlling stake in Ascential in 2008, and the growth has accelerated since. The expansion was partially driven by the merger with WGSN’s primary/biggest competitor, Stylesight, in 2013, as well as a joint venture with China's Textile Information Center in 2016. 

Digital Commerce

The company intends to separate its Digital Commerce business by listing it in the U.S. either through a public offering or a spin-off. Although management has not provided any specific details on the progress, it was hinted during the latest conference call that the process is in advanced stages, with an update expected by the end of the year.

Digital Commerce segment offers e-commerce-related software and services, including setting up/managing paid advertising campaigns and SEO on major retail platforms such as Amazon and Walmart (75% of revenues). The remaining 25% of sales come from customer/market data and analytics. Revenues are generated through subscriptions and as a share of advertising spend by clients. 95% of revenues are recurring.

Since 2020, the topline has grown by an impressive 138% driven by a combination of organic and inorganic expansion. Adjusted EBITDA margins, however, have declined from 21-22% in 2020-2021 to 8% on a TTM basis due to the fading Covid-driven e-commerce boom and losses from the newly acquired businesses. While it is uncertain whether the segment can return to the 2020-2021 profitability levels, management expects margins to increase to mid-teen levels in 2024 as the integrations of the recent acquisitions are completed. Most of the revenues come from US clients and most of the employees are in North America.

Although there are no directly comparable peers, there are a couple of reference points that can help estimate stand-alone value of the business:

• In 2022, ChannelAdvisor was acquired at a 15x 2021 adjusted EBITDA. Its offerings allowed e-commerce sellers to manage and automate product listings, inventories, and pricing across multiple marketplaces on a single platform. While ChannelAdvisor's products and services differ from ASCL's Digital Commerce business, they both focus on major online marketplaces like Amazon and Walmart. ChannelAdvisor also displayed comparable organic topline growth and had adjusted EBITDA margins in line with Digital Commerce business.

• BIGC, a $700m market cap provider of design, product/order management, and SEO services to online stores, is currently trading at 1.2x TTM run-rate recurring revenues. The peer is unprofitable on an adjusted EBITDA level. BIGC’s topline has grown at a comparable pace to Digital Commerce.

Valuing the segment in line with peers at 15x TTM EBITDA and 1.2x EV/ARR results in £285m valuation.

Events

Note: Events segment revenues for 2017-2018 also included ASCL's Digital Commerce business, so on like-for-like basis the growth from 2018 is higher than might seem from the table above.

The key components of the Events business are Cannes Lions and Money 20/20. Cannes Lions Festival (organized since 1973 and acquired by Ascential in 2004) is the largest advertising and creative award show worldwide, while Money 20/20 Europe is the largest fintech event in Europe has started branching out into US and Asia.

Both key assets have demonstrated steady and solid organic growth since Ascential's IPO in 2016. Cannes Lions sales grew at a 7-18% rate during 2015-2019 (with the exception of 2018) and Money 20/20 expanded its topline organically at 19-60% during 2015-2018. The businesses were understandably impacted by the pandemic, with a 60% drop in sales. However, the recovery was fast - management indicated that both Canes Lions and Money 20/20 have already significantly exceeded 2019 revenue levels (by 40% and 55%, respectively). Management anticipates further growth from the launch of the Money 20/20 event in Asia (the event is currently limited to the US and Europe).  

Publicly listed event companies EEX and INF.L are currently trading at 12.8x and 12.9x 2023E adjusted EBITDA multiples. While these peers are in a similar line of business INF.L is significantly larger (£11bn EV) and boasts a more diversified events portfolio, whereas EEX focuses exclusively on B2B trade shows in the U.S. market. Recent similar-size acquisitions of events businesses Tarsus Group and Hyve Group were completed at 9.9x and 11.6x 2024E EBITDA multiples.

Given that Cannes Lions and Money 20/20 are among the largest and oldest events within their verticals and command strong pricing power (as indicated by mostly steady organic revenue growth pre-COVID), valuing the Events business in line with peers at 13x TTM EBITDA seems reasonable. This results in a £988m valuation for the segment.

Risks

• One of the key near-term risks is whether the WGSN / Product Design business can be sold and what price it might fetch. The fact that Apax and several other suitors walked away from acquisition talks due to ASCL's price expectations is somewhat alarming. However, now Apax is back at the negotiations table, so it seems that ASCL's management has agreed to lower its asking price. Not clear how much.

• Uncertainty on how the sale proceeds will be allocated between reinvestment and return to shareholders.

• Listing of the Digital Commerce business in the U.S. might prove to be more difficult or take much longer than management anticipates.

• ASCL's management owns only 1% of outstanding shares. However, the company seems to be taking the right steps to maximize shareholder value and slowly progresses through the decisions made during the strategic review. So I do not think limited ownership would hurt the process.

Catalyst

Sale of Product Design / WSGN business

Listing of Digital Commerce business