B. RILEY FINANCIAL INC RILY
August 30, 2017 - 1:01pm EST by
Norris
2017 2018
Price: 15.93 EPS 0 0
Shares Out. (in M): 27 P/E 0 0
Market Cap (in $M): 436 P/FCF 0 0
Net Debt (in $M): -60 EBIT 0 0
TEV ($): 376 TEV/EBIT 0 0

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Description

For a better formatted version of this write-up, please follow this link:  https://www.dropbox.com/s/lf4bvhy8t4kvtvm/RILY%20VIC%20Write-up%20v1.pdf?dl=0

 

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Situation Overview

B. Riley Financial (ticker:  RILY) is an uncovered, unfollowed mini-conglomerate, led by a sharp capital allocator who owns 21% of the Company and has been buying sizeable amounts of stock in the open market as recently as June, paying a 5% dividend and trading at a steep discount to intrinsic value.  The Company is an amalgamation of several different businesses reported in three segments, including the namesake small-cap broker-dealer, an appraiser and liquidator of retail inventory, and the recently acquired assets of United Online.  Though unrelated, the businesses are complementary in that they provide offsetting cyclicality to one another and serve as funding sources for opportunistic M&A.  With intrinsic value between $23 and $30 compared to a current share price of $15.93, RILY offers compelling upside, with limited downside, providing investors with a compelling risk/reward on the core business and free optionality on the retail liquidation business.

Business Description

  • B. Riley & Co. (reported as Capital Markets):  As a broker-dealer and investment bank, B. Riley & Co., the namesake business within the publicly-traded holding company, provides equity research, sales & trading, capital markets, advisory, and other services to companies and clients focused on the small-cap space.  While traditional broker-dealer businesses broadly have been challenged by the shift of investible assets into passive ETFs and shrinking commission rates, we believe B. Riley & Co. is positioned for growth despite those and other secular headwinds.  On June 1st, RILY completed the acquisition of FBR & Co. (ticker:  FBRC), a regional broker/dealer best known for its Financial Services, Real Estate, and Energy practices, and on July 5th the Company closed on the purchase of Wunderlich Securities, another provider of investment banking, capital markets, and sales & trading services, that brings with it a solid wealth management platform as well.  These acquisitions will broaden the reach and scale of RILY’s business at a time when other small-cap broker-dealers are retrenching, creating an opportunity for RILY to consolidate market share and become the go-to partner for institutional and buyside clients alike.  RILY paid $160m in cash and stock for the two businesses, or 7.4x LTM Adj. EBITDA, adjusted for $15m in expected cost synergies as of the time of the Wunderlich announcement.  In reality, that figure drastically understates the opportunity to rationalize costs, as evidenced by comments made by CEO Bryant Riley on the recent earnings call – the first since the FBR deal closed – in which he announced that RILY had already cut $28m in compensation costs, reducing FBR’s breakeven revenue level from ~$120m to $92m per year.  With that figure in mind, RILY paid a combined 4.6x EBITDA for the two businesses.

 

Beyond the traditional broker-dealer side of the business, this segment also includes GA Capital Partners, a direct lending business created to provide senior secured loans to middle market public companies in an effort to leverage RILY’s expertise in inventory valuation (discussed below).  RILY closed its first fund with $155m in commitments, including an anchor investment by Corporate Capital Trust, a KKR Credit Advisors-managed BDC, in April 2015, and has since delivered 13%+ annualized returns.  The Company is now beginning to raise a second fund with as much as $500m in capital.  I estimate the current fund generates $1.6m in management fees and double that in performance fees.  If fully subscribed, the second fund would generate an incremental $7.5m in fees.  Additionally, following the close of the Wunderlich deal, RILY now has a wealth management platform with close to $11bn under management which earns $71m a year in revenue.  Together, these businesses provide RILY with a growing base of recurring fee revenue to balance out the more cyclical market-facing elements of its financial services platform.

 

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  • Great American Group:  Though RILY now goes by the B. Riley name, the public entity came into existence as Great American, and remained as such until its 2014 acquisition of B. Riley Financial, which resulted in Bryant Riley running the combined company.  However, despite the change in name, Great America remained the largest piece of the business prior to the recent acquisitions.  The subsidiary has several lines of business, reported in two segments:

 

  • Valuation & Appraisal:  In its Valuation & Appraisal business, RILY provides various types of financial institutions and lenders with estimates of liquidation value for a variety of assets, including retail and commercial inventory, real estate, and intangible assets, on a periodic basis.  This is a fee-based business with stable, recurring revenue that has grown at a high single-digit CAGR since 2007 and has EBITDA margins around 28%.  More importantly, the analysis done for clients, which spans 1,200+ appraisals each year, is leveraged by the Company to inform its Auction & Liquidation and Direct Lending businesses, which depend on knowing the valuation floors of the assets in question.

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  • Auction & Liquidation:  When a retailer chooses to close stores, be it a small group of unprofitable stores or an entire chain being liquidated in bankruptcy, it is left with a significant amount of inventory that needs to be cleared out at the best price possible.  Great American is one of the few providers with the capability to step in and handle that process, which often includes taking over the management of the stores themselves.  Most of the time, the Company will evaluate the inventory in question and submit a bid with a minimum recovery rate stipulated; RILY then captures any upside value.  In other situations it will collect a fee for service while bearing no primary risk.  This business pairs very well with the Valuation & Appraisal business, which routinely conducts valuations of retailer inventory, as the two inform one another’s appraisal values and bidding parameters.  Because of the minimum guarantees involved, RILY must at times put up large amounts of capital to back its bids.  There are only a small handful of other players in this market, and on very large projects, they will often partner with one another to spread the capital required.  Revenue and profitability in this business are subject to large swings – when big retailers go out of business, RILY sees large surges in profits – but the business has rarely lost money (a $6.3m loss in 2014 was the only down year in the last 10) owing to the small (fewer than 10) team of full-time employees; when RILY wins a big piece of business, it adds temporary labor to supplement the core team.  Following a strong $30m profit in 2016, there are plenty of reasons to believe this business will continue to grow as numerous headwinds pressure retailers big and small, leading to round after round of store closings or outright bankruptcies.

    RILY also operates a much smaller industrial auction business in which it disposes of a wide variety of industrial assets including construction, transportation, and manufacturing equipment via live or online auction processes.  This business is 50% owned by RILY and is de minimis in size.

 

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  • United Online:  In July of 2016, RILY completed the acquisition of United Online (ticker:  UNTD) for $71m in cash and stock.  Historically United Online had been a compilation of a number of assets, however, at the time of the acquisition, the only remaining business was a consumer facing dial-up Internet access business operating under the NetZero and Juno brand names.  Why might RILY, a company that already owned two disparate businesses acquire an unrelated dial-up business in terminal decline?  The answer is simple:  CEO Bryant Riley saw an orphaned asset he could opportunistically buy at a steep discount to intrinsic value.  Though declining, United Online throws off $30m+ a year in EBITDA with few reinvestment needs.  This value had long been masked by UNTD’s other businesses and steep corporate cost structure.  By acquiring just the Communications segment and cutting out the excess corporate expense, RILY was able to add a stable cash flow-generating asset to its portfolio for roughly 2x EBITDA, which it can now utilize to fund the more strategic deals it is doing in the financial services space.  The Company has made clear that to the extent it finds similar opportunities, it won’t hesitate to pursue additional such “principal investments.”

 

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Thesis

With no sell-side research coverage, four disparate businesses – one of which is subject to large revenue swings and the other of which is in decline – it’s easy to see why investors might be overlooking the Company’s value.  But when one takes the time to understand the various pieces, we think a compelling opportunity becomes apparent.  As we see it, RILY is an undervalued Company with a financial services platform that is becoming increasingly dominant in its space and has a significant opportunity to cut costs and cross-sell as it integrates the recent acquisitions; a stable and growing Valuation & Appraisal business; an Auction and Liquidation business that might be the single biggest beneficiary of the much-talked-about restructuring of the retail landscape; and a strong cash-flow generating asset, acquired for next to nothing, that provides management with the capital to invest in organic and M&A-fueled growth, all of which is led by a founder/owner who controls 21% of the stock and has been buying more at prices above today’s as recently as June.

In the table below, we lay out the LTM earnings of the Company, fully adjusted for the acquisitions of FBR (LTM figures include just one month) and Wunderlich (LTM figures include no data), as well as the $28m of annualized cost savings already realized.  There are two key takeaways here:  1) Pro forma Adj. EBITDA is well north of LTM reported Adj. EBITDA; and 2) You’ve got to do a bit of work to understand the earnings power.  This isn’t hard work – RILY has released pro forma figures for FBR in an 8K and has given some insight into Wunderlich – but investors do need to take more than a casual glance at the stock to understand the opportunity.  And with no sellside analysts drumming up interest in the stock, few buyside investors have yet chosen to do so.

 

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We value the business using the sum-of-the-parts analysis shown below.  One note, for the purposes of the analysis we include stock-based compensation and other add-backs directly into the Corporate EBITDA figure.

 

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Looking at the components of the business, Capital Markets is the biggest driver in light of the recent acquisitions.  We ascribe a multiple of 8x to 10x pro forma Capital Markets EBITDA, which includes the $28m of realized synergies, for a total value of $390m to $487m, or $14.25 to $17.80 per share.  We think these multiples are reasonably conservative given the earnings profile of the business, increasing scale within its market, growing base of recurring fee-based revenue, and opportunities for revenue synergies across its many verticals.  As a reference point, comps such as Raymond James and Stifel Financial trade for 14x to 15.5x earnings, which correspond to our 8x to 10x EBITDA multiples).  Our Downside valuation of $272m applies 8x to the legacy B. Riley Capital Markets business and adds to it the $160m paid for FBR and Wunderlich, ignoring any synergies.

It is difficult to pinpoint normalized earnings for the Auction and Liquidation segment given the large swings in Liquidation revenue, so we take an average of profitability going back to 2007 and exclude the banner 2016 year, which gives us an average of just over $11m per year of EBITDA.  Note:  actual LTM Adj. EBITDA was $36.3m.  Given the strong pipeline and deteriorating retail landscape, RILY should earn supernormal profits in this business for at least the next year or two, if not much longer; we could very easily see as much as $30m+ a year in Adj. EBITDA in each of 2017 and 2018, if not more.  However, rather than capitalize these supernormal earnings, we instead value the business by applying a 4x to 6x multiple to the $11m of “Normalized” Adj. EBITDA, for a total value of $55m to $96m ($2.00 to $3.50 per share).  We then make a separate adjustment in our Upside case which adds in the incremental value from two years’ in which we assume RILY earns $25m each in excess of the “normalized” earnings power of the business, taxed at 35% and discounted at 10%.

Valuation and Appraisal is a very predictable, growing business.  We apply a multiple of 10x to 13x, a haircut to the multiples ascribed by the market to Moody’s and S&P, two businesses with similarly steady cash flow characteristics.  The total value for this piece is $90m to $120m, or $3.35 to $4.35 per share.

United Online is a declining business but will generate significant free cash flow over the coming years.  We believe 3x to 4x LTM Adj. EBITDA, for a total value of $88m to $117m ($3.23 to $4.30 per share) is a reasonable multiple for such a business.  For our Downside case, we assume a value of $71m, the same figure RILY paid to acquire the business.  We view this figure as conservative given that in the year it has owned the business, RILY has grown EBITDA from $26.7m at the end of 2015 to $29.4m at June 30, 2017.

Putting it all together, we believe shares of RILY have a very favorable risk/reward, and should trade somewhere between $23 and $30 per share, offering upside of 45% and 90%, with very minimal downside.  Most importantly, our valuation isn’t based on projections from two years out that assume growth across the business and magical margin improvement; instead it is predicated on LTM numbers, adjusted to reflect the recent acquisitions and cost-cuts already realized, and reasonable valuation multiples.  With both the FBR and Wunderlich deals now officially closed, it is just a matter of time before their contributions (and those of the synergies) start to work their way into reported results and give investors a clear picture of the true earnings power of the business.  When this happens, we expect shares to re-rate accordingly.

Risks

  • Disruption to Capital Markets:  The acquisitions of FBR and Wunderlich are clearly a bet by the Company that 1) they can operate the assets more efficiently than their prior owners (which already seems to be the case), and 2) that the small-cap investment banking and broker/dealer business can be a vibrant one going forward.  As investors focused solely on the small-cap space, we readily see the value in the platform RILY is putting together.  But regardless of the merits of the strategy, the business would still be negatively affected by a major sell-off, economic recession, or any event that makes it more challenging for small-cap companies to raise capital.  And because of the modest size of the business, a half dozen deals a year can have a material effect on profitability.

  • Increasing complexity:  In most of the situations we invest in, we are looking for companies that are becoming increasingly simple, usually by exiting non-core businesses or otherwise streamlining operations.  RILY is the opposite, as evidenced most clearly by the acquisition last year of United Online.  Even the purchase of Wunderlich, which has meaningful overlap with the existing Capital Markets segment brings with it several new businesses, including a material wealth management platform.  The cobbling together of disparate business is often a red flag for investors, but in this case, we are comfortable with the strategy, largely because of our confidence in Bryant Riley as a capital allocator.  We’d much prefer to have as a steward of our capital someone who, when faced with a compelling investment opportunity, pursues it to our benefit rather than passes it over simply because it doesn’t fit some pre-determined set of arbitrary parameters.

  • Accelerated revenue declines at United Online:  Revenue at United Online has been declining in the neighborhood of 25% year-over-year for the last few years.  RILY has managed to grow profits despite this headwind by keeping fixed costs low and matching variable expenses to revenue declines.  Our discussions with management give us confidence that this business should continue to generate profits for many years to come, but at some point the business will reach a level at which profitability starts to decline.  

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The obvious catalyst is the recent closure of RILY's recent acquisitions.  Once these flow into the financial statements the undervaluation should be more apparent to anyone paying attention.

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    Description

    For a better formatted version of this write-up, please follow this link:  https://www.dropbox.com/s/lf4bvhy8t4kvtvm/RILY%20VIC%20Write-up%20v1.pdf?dl=0

     

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    Situation Overview

    B. Riley Financial (ticker:  RILY) is an uncovered, unfollowed mini-conglomerate, led by a sharp capital allocator who owns 21% of the Company and has been buying sizeable amounts of stock in the open market as recently as June, paying a 5% dividend and trading at a steep discount to intrinsic value.  The Company is an amalgamation of several different businesses reported in three segments, including the namesake small-cap broker-dealer, an appraiser and liquidator of retail inventory, and the recently acquired assets of United Online.  Though unrelated, the businesses are complementary in that they provide offsetting cyclicality to one another and serve as funding sources for opportunistic M&A.  With intrinsic value between $23 and $30 compared to a current share price of $15.93, RILY offers compelling upside, with limited downside, providing investors with a compelling risk/reward on the core business and free optionality on the retail liquidation business.

    Business Description

     

    Beyond the traditional broker-dealer side of the business, this segment also includes GA Capital Partners, a direct lending business created to provide senior secured loans to middle market public companies in an effort to leverage RILY’s expertise in inventory valuation (discussed below).  RILY closed its first fund with $155m in commitments, including an anchor investment by Corporate Capital Trust, a KKR Credit Advisors-managed BDC, in April 2015, and has since delivered 13%+ annualized returns.  The Company is now beginning to raise a second fund with as much as $500m in capital.  I estimate the current fund generates $1.6m in management fees and double that in performance fees.  If fully subscribed, the second fund would generate an incremental $7.5m in fees.  Additionally, following the close of the Wunderlich deal, RILY now has a wealth management platform with close to $11bn under management which earns $71m a year in revenue.  Together, these businesses provide RILY with a growing base of recurring fee revenue to balance out the more cyclical market-facing elements of its financial services platform.

     

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    Thesis

    With no sell-side research coverage, four disparate businesses – one of which is subject to large revenue swings and the other of which is in decline – it’s easy to see why investors might be overlooking the Company’s value.  But when one takes the time to understand the various pieces, we think a compelling opportunity becomes apparent.  As we see it, RILY is an undervalued Company with a financial services platform that is becoming increasingly dominant in its space and has a significant opportunity to cut costs and cross-sell as it integrates the recent acquisitions; a stable and growing Valuation & Appraisal business; an Auction and Liquidation business that might be the single biggest beneficiary of the much-talked-about restructuring of the retail landscape; and a strong cash-flow generating asset, acquired for next to nothing, that provides management with the capital to invest in organic and M&A-fueled growth, all of which is led by a founder/owner who controls 21% of the stock and has been buying more at prices above today’s as recently as June.

    In the table below, we lay out the LTM earnings of the Company, fully adjusted for the acquisitions of FBR (LTM figures include just one month) and Wunderlich (LTM figures include no data), as well as the $28m of annualized cost savings already realized.  There are two key takeaways here:  1) Pro forma Adj. EBITDA is well north of LTM reported Adj. EBITDA; and 2) You’ve got to do a bit of work to understand the earnings power.  This isn’t hard work – RILY has released pro forma figures for FBR in an 8K and has given some insight into Wunderlich – but investors do need to take more than a casual glance at the stock to understand the opportunity.  And with no sellside analysts drumming up interest in the stock, few buyside investors have yet chosen to do so.

     

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    We value the business using the sum-of-the-parts analysis shown below.  One note, for the purposes of the analysis we include stock-based compensation and other add-backs directly into the Corporate EBITDA figure.

     

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    Looking at the components of the business, Capital Markets is the biggest driver in light of the recent acquisitions.  We ascribe a multiple of 8x to 10x pro forma Capital Markets EBITDA, which includes the $28m of realized synergies, for a total value of $390m to $487m, or $14.25 to $17.80 per share.  We think these multiples are reasonably conservative given the earnings profile of the business, increasing scale within its market, growing base of recurring fee-based revenue, and opportunities for revenue synergies across its many verticals.  As a reference point, comps such as Raymond James and Stifel Financial trade for 14x to 15.5x earnings, which correspond to our 8x to 10x EBITDA multiples).  Our Downside valuation of $272m applies 8x to the legacy B. Riley Capital Markets business and adds to it the $160m paid for FBR and Wunderlich, ignoring any synergies.

    It is difficult to pinpoint normalized earnings for the Auction and Liquidation segment given the large swings in Liquidation revenue, so we take an average of profitability going back to 2007 and exclude the banner 2016 year, which gives us an average of just over $11m per year of EBITDA.  Note:  actual LTM Adj. EBITDA was $36.3m.  Given the strong pipeline and deteriorating retail landscape, RILY should earn supernormal profits in this business for at least the next year or two, if not much longer; we could very easily see as much as $30m+ a year in Adj. EBITDA in each of 2017 and 2018, if not more.  However, rather than capitalize these supernormal earnings, we instead value the business by applying a 4x to 6x multiple to the $11m of “Normalized” Adj. EBITDA, for a total value of $55m to $96m ($2.00 to $3.50 per share).  We then make a separate adjustment in our Upside case which adds in the incremental value from two years’ in which we assume RILY earns $25m each in excess of the “normalized” earnings power of the business, taxed at 35% and discounted at 10%.

    Valuation and Appraisal is a very predictable, growing business.  We apply a multiple of 10x to 13x, a haircut to the multiples ascribed by the market to Moody’s and S&P, two businesses with similarly steady cash flow characteristics.  The total value for this piece is $90m to $120m, or $3.35 to $4.35 per share.

    United Online is a declining business but will generate significant free cash flow over the coming years.  We believe 3x to 4x LTM Adj. EBITDA, for a total value of $88m to $117m ($3.23 to $4.30 per share) is a reasonable multiple for such a business.  For our Downside case, we assume a value of $71m, the same figure RILY paid to acquire the business.  We view this figure as conservative given that in the year it has owned the business, RILY has grown EBITDA from $26.7m at the end of 2015 to $29.4m at June 30, 2017.

    Putting it all together, we believe shares of RILY have a very favorable risk/reward, and should trade somewhere between $23 and $30 per share, offering upside of 45% and 90%, with very minimal downside.  Most importantly, our valuation isn’t based on projections from two years out that assume growth across the business and magical margin improvement; instead it is predicated on LTM numbers, adjusted to reflect the recent acquisitions and cost-cuts already realized, and reasonable valuation multiples.  With both the FBR and Wunderlich deals now officially closed, it is just a matter of time before their contributions (and those of the synergies) start to work their way into reported results and give investors a clear picture of the true earnings power of the business.  When this happens, we expect shares to re-rate accordingly.

    Risks

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    The obvious catalyst is the recent closure of RILY's recent acquisitions.  Once these flow into the financial statements the undervaluation should be more apparent to anyone paying attention.

    Messages


    SubjectSlight Correction
    Entry08/30/2017 01:53 PM
    MemberNorris

    The debt figure should read as $117.4m (vs. $126m in the original posting) and includes the ABL Term loan, sr notes, amounts due to related parties, the Mandatorily Redeemable Noncontrolling Interests, and the Non-controlling Interests.


    SubjectRe: Slight Correction
    Entry08/30/2017 03:01 PM
    MemberWinBrun

    Thank you for the write-up. Can go into a little more detail on why the B. Riley capital markets business is positioned for growth with the addition of FBR and Wunderlich. What advantages do the business get from scale and how do you get comfortable that they are not building scale in a shrinking industry with deteriorating fundamentals (i.e. lower commissions; shift to passsive etc; fewer publicly traded companies). Also--how come FBR was not profitable as a stand-alone business. Thanks. 

     


    SubjectRe: Re: Slight Correction
    Entry08/31/2017 11:32 AM
    MemberNorris

    Hi WinBrun.  Thanks for the questions.

    To your first question, regarding the benefits of the deals, the strategic rationale boils down to scope, scale, and cost savings.  If you've spent any time investing in the small-cap space, you'll be very familiar with the fact that many of the broker-dealers cover a relatively small set of industry verticals and companies.  To leverage a small number of analysts, they tend to stick to a few core areas of competancy that they can then leverage on the capital markets and investment banking side of their businesss.  As a result, an investor like me needs to spread my commission dollars around to various firms to get access to the research I need.  The two deals will help RILY keep a bigger share of my (and other investors') wallet.  There's some good detail on this in the investor decks RILY published at the time each deal was announced, but the simple stats are as follows:  B. Riley had 20 analysts covering 210 companies on the equity research team.  FBR added 25 analysts and 398 companies, with only 3% overlap.  Wunderlich adds another 12 analysts and 222 companies with just 9% overlap.  There has been some natural and forced attrition, so pro forma, the business will have approximately 49 analysts covering 712 names.  That's a significant improvement in the scope of RILY's coverage and makes it far and away one of the dominant players in the small-cap market (Craig-Hallum, a large competitor, by contrast has just 16 analysts and 273 names under coverage).  It's hard to quantify the economics of this distinction, but at the very least, I would imagine RILY will get a bigger share of wallet from existing customers and add some meaningful number of new customers.  This broader coverage and growing base of trading clients also has important consequences for the capital markets side of RILY's business.  With a bigger mix of trading clients, RILY is better positioned to distribute the capital markets deals it lands.  This, over time, should help it to attract more business across a range of offerings, including IPOs, secondaries, private placements, etc. and get better economics on the deals it does.  Ultimately, this should also help on the traditional investment banking side of its business.

    Scale is another benefit of the deals.  Ignoring some of the new businesses acquired via the deals (e.g. Wealth Management and Insitutional fixed income), RILY's capital markets and investment banking business is growing from $51m in revenue to $183m.  This is a business where you've got essentially two types of cost:  compensation expense and non-compensation expense.  The former is farily variable; the latter, which consists of IT, accounting, HR, rent, and a variety of other similar expenses, is mostly fixed and should be leveraged by a higher base of revenue and revenue generating employees.  FBR disclosed better detail on costs than did RILY.  As a result, we know that 31% ($38m) of their opex consisted of non-compensation fixed costs.  

    Cost cuts are the last element here, and certainly tie into the benefits of scale.  But there's more to it.  In answering this we can also examine your last question regarding FBR's lack of profitabilty.  From 2010 to 2016, FBR's revenue declined from $232m to $98m, so it was clearly facing headwinds in its business, but the bigger issue was their inability to rightsize its cost structure in light of the revenue declines.  Part of this was a reflection of FBR's compensation practices:  they structured comp packages to more greatly weight salaries than bonuses.  Fixed compensation costs at FBR were roughly 73% of total comp.  RILY's comp philosophy is simply different:  they prefer to run a very low fixed cost base and incentive people when their is outperformance in the business.  We don't have as granular data to inform our comparison, but RILY has said that it's incremental margins are around 50% vs. 73% for FBR.  (Normally we prefer to see higher incremental margins than lower, but not when it comes at the expense of an unnecessarily high fixed cost structure).  Beyond compensation, RILY as a firm prides itself on being lean and mean.  FBR, by contrast, saw itself as a premier broker-dealer rather than the struggling regional player that it was.  You can bet that RILY went into this transaction with clear eyes about the cultural and cost changes needed to be made, and they've clearly wasted no time in rationalizing the bloat.

    Lastly, to your concern about the broader headwinds facing the small-cap space - lower commissions, the shift to passive, fewer public companies, etc. - I agree that these are risks to the thesis, but they are not terminal ones.  Yes there are fewer public companies in existence today than a decade or two ago, but there are still some 3,000+ names in the small-cap space (defined as $100m in MC to $3bn), large swaths of this group have little or no sellside coverage, and they are generally speaking, underbanked.  So there is a real need for the role that RILY is positioning itself to fill in the market.  

    Hope this helps.

     


    SubjectRe: Re: Re: Slight Correction
    Entry08/31/2017 11:39 AM
    MemberWinBrun

    very helpful. thank you

     


    SubjectLTM EBITDA and TEV
    Entry08/31/2017 04:46 PM
    MemberSaltaire

    Hi Norris,

    Thanks for the write up, really interesting situation. A few questions.

    I’m having trouble getting to your LTM EBITDA numbers on a segment level, can you detail the buildup you are using on a quarter by quarter basis?

    Also can you detail further the logic behind adding back the $41m advances against customer contracts? Seems similar to adding back accounts receivable which is aggressive in a TEV calc. 

     Thanks!

     


    SubjectRe: LTM EBITDA and TEV
    Entry08/31/2017 10:31 PM
    MemberNorris

    Hi Saltaire,

    For your first question, see the table here:  https://www.dropbox.com/s/c6smpmhqr5w3sol/RILY%20LTM%20Calculation.pdf?dl=0

    Most of the figures should be pretty self-explanatory.  I'm just taking the figures from RILY's reported segment breakout and adjusting for any non-recurring figures.  The only quirk calc is the EBITDA figures for Auction and Appraisal.  For those, I take the reported figure and reduce it by the "Income Attributable to Noncontrolling Interests" as reported on the income statement.  The reason I do this is that for any large liquation where RILY partners with another liquidator, that liquidator's piece of profits tend to get captured as a noncontrolling interest.  So for the LTM period, I'm taking $46.2m of reported Auction and Liquidation Adj. EBITDA and subtracting $10.0m in Income Attributable to Noncontrolling Interests.  Hopefully this helps you tie your numbers to mine.

     

    As to the logic of adding back the $41m in Advances against customer contracts, you raise a good question.  I agree that it would be inappropriate to add-back accounts receivable in a TEV calculation without offsetting it with the accounts payable.  In the case of RILY, is draws on its credit facility to fund the advances to customers.  So as of the last balance sheet, it has a $20.2m balance on its Asset Based Credit Facility specifically related to the advances for liquidations.  So by including the Advances Against Customer Contracts, we are correcting what would otherwise have been a mismatch.  Viewed differently, if you were to liquidate the business today, you would get the Advances Against Customer Contracts, use them to pay down the balance on the revolver, and have a net $21m of cash.  But if you still disagree with my assessment, you'd simply subtract ~$1.50 off the intrinsic value calculation, and this would still make for a very compelling opportunity, in my opinion.

     

     


    SubjectRe: Nice write-up
    Entry12/21/2017 10:56 AM
    MemberNorris

    Hi Fenkell,

    Thanks for the questions.  Let me take a crack at them.

    1)  The original public entity here was Great American, which went public in 2009.  In 2014, Bryant Riley, who was a director of Great American, and one of its investment bankers, agreed to merge B. Riley into Great American in exchange for a ~20% ownership interest in the pro forma company and the CEO job.  Elliott has been a shareholder in the company since at least Aug. 2009, when it filed a 13D disclosing a 3.4% stake in the business.  Elliott has remained a shareholder ever since, adding to its investment at the time of the B. Riley merger.  They have no board representation and, to my knowledge, haven't made any explicit demands of the company.

    2)  In his former life Bryant Riley was a small-cap focused activist investor.  I think his view is that, given he sees a lot of idea flow via the research side of the business and has the benefit of a well-capitalized public entity, when he sees obvious opportunities for value creation he's going to pursue them.  UNTD and CALL are both companies that most value-oriented investors would look at and say, given how cheap the stocks were, there was value to be had but they required some form of activism or PE invovlement to realize the value.  Bryant is simply assuming that role.  That you've raised the question is a reminder of how usual this startegy is among public companies where managers typically only want to buy businesses that can grow well into the future.  But many a PE investor has made a fortune buying exactly these types of businesess, rationalizing the costs and running them for cash.  To the extent Riley continues to find similar opportunities, I suspect he'll continue to pursue them.  

    3)  This is a tough one.  We'd all like to be able to externally track KPIs for each of our investments, but that simply isn't the case here, at least not for the most part.  We can track announced deal flow for private placements, equity raises, and M&A (Select Interior Concepts is a big one in the current quarter, for instance) on the Capital Markets side, but we'll never be able to track sales and trading volume.  On the Auction & Liquidation side of the business, large deals tend to be announced.  Tracking general store closure announcements broadly is also helpful given there are only a couple of players in the space.  The other businesses - Valuation and Appraisals, United Online, and soon magicJack, are more traditional operating businesses, but RILY doesn't disclose much in the way of KPIs for them.  But you can at least use historical trends and an awareness for how the businesses are evolving to make educated predictions about the future.

    4)  No.

    5)  In addition to smallcap and underfollowed, I would add messy.  It's a small company to have 4 or 5 different businesses within, particularly ones that seem to have such little in common.  These are also businesses that don't have great comps to look to, so investors need to really need to put on their thinking caps. 

    Hope this helps.

     


    SubjectRily vs Jmp
    Entry12/25/2017 05:42 AM
    Memberscrooge833

     nice write-up. At today’s prices, which one do you prefer between RILY and JMP?


    SubjectIf only there were a stock that benefits from the Toys R Us liquidation...
    Entry03/15/2018 05:14 PM
    MemberNorris

    Oh wait, there is...

    Last night, Toys R Us officially filed paperwork to begin the liquidation of all of its 740 remaining U.S. stores, marking the death of the once-great category-killer retailer.  While much of the news coverage today has centered around the impact of the liquidation on Toys R Us employees, landlords, and nostalgic former customers, exactly zero attention has been paid to whom might profit greatly from this event.  I present as Exhibit 1, B. Riley Financial (RILY).

    As I described in my original write-up, RILY is one of the few stocks in the market that benefits from the distress in the retail world.  Specifically, RILY's Great American business is one of only a few national liquidators who are hired to run the actual closure of stores for large retailers.

    We were pleased to find out a few months back that Great American had been hired as part of a consortium to assist with the closure of the initial 180 stores Toys R Us had decided to close, but today's new is far more positive.  For starters, the number of stores is significantly larger - Toys R Us had 881 domestic stores at 10/31/17.  Assuming the initial 180 announced closures have been completed, that leaves 700 more stores that need liquidating.  

    Secondly, and this is where things get good, is that the fee structure of the remaining stores is much more favorable than for the original batch.  For the original group of stores, Great America received 1.10% of the gross proceeds from the liquidation.  For the remaining stores, it will receive between 1.8% and 3.5%, depending on the amount of value Great American is able to get for the merchandise relative to its original sale price.  Per the court filing, the liquidation is expected to be completed by July 31st, so revenues should hit RILY's P&L in either the 2nd or 3rd quarter.

    Toys R Us is just the most priminent of the recent bankruptcy/store closure announcements to hit the retail space.  In recent months, Bon-ton, Winn-Dixie, and Tops Friendly Markets have all filed for bankruptcy and are likely to close a substantial number of stores, providing great opportunity pipeline for RILY.  Add to this the closure of 80 Sears Canada stores that will hit RILY's P&L in 1Q and it's easy to understand why CEO Bryant Riley explicitly stated last week that "this could be as active a year as we have ever had" in the liquidation business.  

    While its very difficult to model the impact of any particular piece of liquidation business, if we take management's comments as a guide and assume 2018 matches the record-setting 2016, Liquidations could contribute $41m of EBITDA.  That compares to just $11.2m of EBITDA in 2017, and $0.1m in 4Q17, both of which saw few large deals.

    Adding this to the balance of RILY's businsses - a newly consolidated and streamlined broker/dealer with a growing base of recurring fees and expanding deal flow, a highly recurring appraisal business, and an expanding group of cash flow generative principal investments - presents investors with a very compelling risk/reward at today's prices.


    SubjectRe: Re: If only there were a stock that benefits from the Toys R Us liquidation...
    Entry03/16/2018 09:56 AM
    MemberNorris

    I think the BEBE deal is interesting.  It's a bit too early to know exactly how it will play out, but RILY has planted the seeds to have a captive acquisition vehicle that generates a modest amount of cash and has $340m+ in NOLs, providing the company a more efficient structure for acquiring things like United Online or magicJack.

    One of the compelling parts of this situation is the way in which it came about, which illustrates some of the benefits of the multifaceted platform RILY has created.  BEBE was a client of the Appraisal side of RILY's business.  When it got into financial trouble, it hired B. Riley Financial as its restructuring adviser.  As part of its work, it ended up helping the company to source a $35m bridge loan from Great American Capital Partners, the direct lending platform RILY set up (with KKR as a major backer) to invest in distressed retail situations.  While most of the loan came from the direct lending fund, RILY committed some of its own capital to the transaction, getting a note backed by BEBE's real estate.  As BEBE liquidated its assets, the direct lending fund's note was repaid, but RILY's remained, and RILY struct a deal to convert the note into equity at a $6.00/shr price (shares now trade at $6.93).  RILY also put up $3m in new capital to purchase shares from BEBE's founder/CEO Manny Mashouf and from the company itself.  Ultimately, RILY walked away owning 29% of the stock for total consideration of $20m, and has the right to increase its ownership over time in a way that won't trigger section 382 limitation issues with the NOLs.  

    Given it liquidated its stores, the only remaining assets at BEBE are 1) its 50% ownership in a JV that licenses the BEBE trademark.  This business should do EBITDA of ~$11.5m.  and 2) BEBE's LA-based designed studio which, had previously been under contract for $32m. 

    So if you put it all together, at the $6.00 conversion price, backing out existing cash and the $30m piece of real estate, RILY was able to buy BEBE's licensing cash flow for 4.5x and got the $340m NOLs for free!  It's a pretty outstanding deal, and one that only came about because of the sourcing pipeline that comes with having an active direct dialogue with distressed companies.  So to respond to your second comment, yes, someone at RILY definitely knows what they are doing.  The only question now is what RILY will acquire to put into the BEBE shell to monetize the NOLs.

     

     


    SubjectRe: Re: Re: If only there were a stock that benefits from the Toys R Us liquidation...
    Entry03/16/2018 10:05 AM
    MemberNorris

    And, for what it's worth, CEO Bryant Riley bought another 7,200 shares yesterday, adding to his 16%+ ownership of the stock.


    SubjectRe: Re: Re: Re: If only there were a stock that benefits from the Toys R Us liquidation...
    Entry03/16/2018 01:37 PM
    Memberrepetek827

    Outstanding write-up and follow up. I havent yet gone through the filings in full but think that what you laid out is very interesting and its way below the radar. I like the Toys r Us catalyst too. Do you have any updated valuation thoughts now that the capital mkt division is integrated and its 7 months after your original writeup? 


    SubjectToys R Us liquidation starts 3/22
    Entry03/21/2018 05:25 PM
    MemberOsoNegro

    FYI - Details out on the TRU liquidation; set to start Thurs (3/22) and be completed by the end of June. 

    https://www.usatoday.com/story/money/business/2018/03/20/discounts-heres-when-toys-r-us-liquidation-sale-starts/443056002/

    "One adviser for Toys R Us, Joseph Malfitano of liquidation specialists Malfitano Partners, described the Toys R Us sell-off as "probably the largest retail liquidation in the country's history."


    SubjectThoughts on recent shelf?
    Entry03/22/2018 09:17 PM
    Membermaggie1002

    Norris, thanks for the posting and follow up.  What do you think of the 250M shelf they just filed?  On the recent call, they communicated having a requisite magnitude of liquidity to pursue their near term objectives and be opportunistic so does the registration surprise/concern you?  

    Separately, it is worth noting from my research that their capital markets business has seized upon several well-connected sales traders from the bulge bracket firms.  My understanding is there has been a reduction of compensation at selected firms and B Riley picked off a few sales traders who have meaningful relationships across the buyside including a HF with over 50B of AUM where my friend runs trading and communicated this to me so although anecdotal, I thought it was worth sharing.  His point is that trades are often driven by relationships and his firm and others he knows are now doing more business with RILY based on the move of selected sales traders from bigger firms where those individuals are no longer deemed as critical to commission dollars.  At RILY, they apparently are highly aligned to the trading activity being driven by these relationships.  I don't know how RILY determines the magnitude of trades being driven by the research analyst versus the sales trader but when a 50B plus fund is doing more business than ever with RILY, it could yield to a trajectory of growth and especially in this more volatile environment.


    SubjectGreat American (RILY) wins Bon-Ton store liquidation
    Entry04/18/2018 01:14 PM
    MemberOsoNegro

    Looks like RILY is doing another big liquidation. Reports saying that Great American Group and Tiger Capital Group were the winning bidders, with a bid est. to be ~$776M. Details in the articles below. 

    https://www.biztimes.com/2018/industries/banking-finance/report-winning-bid-worth-775-million-selected-for-bon-ton/

    Liquidators to wind down U.S. department store chain Bon-Ton


    SubjectRe: Great American (RILY) wins Bon-Ton store liquidation
    Entry04/18/2018 09:16 PM
    MemberNorris

    Hi OsoNegro - thanks for posting.  You beat me to it!  This is a material positive for RILY, likely moreso than the Toys R Us win.  Apart from the fact that this business is being split just two ways rather than four, the structure of this deal is better.  The Toys R Us business is fee based, meaning RILY earns a percentage of the value of the merchandise it liquidated, in that case around 2% to 3%.  Bon-Ton on the other hand is a "bought" deal, which means that RILY and it's co-bidder Tiger will earn any excess value over what they paid for the assets.  It's obviously impossible to say at this point what they are going to be able to liquidate those assets for relative to what they paid for them, but that is the nature of this business.  They salivate for juicy situations like this one.  Now its a matter of execution, which they have a very strong track record of.


    SubjectGreat call - updated thoughts on valuation?
    Entry06/28/2018 09:48 AM
    Memberrepetek827

    Any updated thoghts on valuation given today's surprise pre-release of better 2Q18 #'s? Do you think they raise the dividend or do a special here as well? And it's obviously so hard to top the liquidation of Toys-R-Us and BonTon in the 2Q18..but what's on the horizon? Thanks. 

    https://finance.yahoo.com/news/b-riley-financial-provides-updated-123000172.html

     

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