Description

This investment is a classic Joel Greenblatt special situation. The investment is predicated on the planned re-listing / IPO of CTM Media Holdings (CTMMB, CTMMA) as IDW Media on a major exchange. And, this may be particularly interesting for those of you who follow(ed) IDT Corporation (IDT). At the time, IDT was trading for roughly ~$3.00 a share and had $10.00 a share of cash and marketable securities, $10.00 of tax-loss carry forwards, real estate, shale assets, and a plethora of other intellectual property it acquired over the years. If you held all of the pieces/dividends we estimate that IDT has created over $60.00 in shareholder value.

 The Company (IDT) was started in the early ’90s by a serial entrepreneur named Howard Jonas. As a college student at Harvard, Howard was selling Venus fly traps through the mail out of his dorm room. And when he wasn’t doing that, he was driving a station wagon to deliver travel brochures to stands that he owned and serviced at different tourist destinations. As an adult Howard quickly built his new company, IDT, into a large media/telecommunications business with successful sales of assets he built from scratch to the likes of ATT and John Malone. Howard deployed some of this cash into additional intellectual property / venture ideas but also grew the business into an “Amazon style” incubator where development and G&A costs far exceeded revenues. The goal was to internally generate/nurture great businesses and have those one-time gains subsidize the annual losses at the Company. At the same time, Howard took a step back from the CEO role and gave the reigns to long time lieutenants while he observed as Chairman of the board.

As you can imagine, this sequence of decisions/events had incredibly adverse results for the Company. The 2008 financial crisis came and with IDT’s venture financed mounting losses and investor impatience, the shares declined almost 95 percent. With the help of his son, Shmuel, Howard came back to the business as CEO and immediately cleaned house, shrinking personnel and selling many non-core assets. The Company quickly went from losing almost 200 mm a year to making 70mm a year – or almost $2.00 a share of free-cash flow.

The market’s disbelief in Howard’s desire to run the Company for a profit and its general skepticism following one of the largest eviscerations of wealth in the modern era allowed investors to purchase shares at below cash and cash was growing!

Investment Summary/Company:

In Howard’s quest to unlock the latent value at IDT, which included buying back 20-25 percent of the Company, he decided to spin off a sub-scale holding company on the “pink-sheets” called CTM Media Holdings, Inc. (CTMMB, CTMMA) --- OUR INVESTMENT. Again, this Company when spun off was trading below cash -- to which Howard quickly responded, “OK, I’ll tender for shares at cash.” This got my attention. I analyzed the two unrelated businesses and found that one of them was actually the same travel brochure business Howard started when he was in college.

While I didn’t view the business (CTM) as a high octane growth business, I thought it was a necessary one with pricing power that occupied real estate in places (Statue of Liberty, Staten Island Ferry, Amish Country, etc.) where people needed print brochures/maps on demand while retaining a decent moat against technology – like a billboard. The other business was a comic book business (IDW) that along with its own intellectual property was doing licensing work for Hasbro, Star Trek, GI Joe and others. Again, comic books had a pretty big moat as far as print went but also had a huge funnel of original content that could be distributed through other mediums –TV shows, movies, board games, video games, etc. We thought that there could be a lot of upside to profitability if the Company began focusing on these initiatives.

Over the last four plus years, the Company has executed a plan in a fashion in line with what we had expected. The Company grew its brochure business thoughtfully through organic growth of new locations and pricing, while opportunistically purchasing other small assets. But on the comic book side, the Company far exceeded our expectations. While CTM Holdings retained the majority share of IDW, the Company’s founder – Ted Adams retained a minority interest close to 20 percent of the Company. Ted for being a comic book/media guy is quite the economic animal. In addition to acquiring new monetizable original content, Ted has built a nice recurring cash flow to start growing its own entertainment division which will produce and distribute TV shows, movies, video games, etc. Today we believe that these verticals could drive exponential growth at IDW over the next few years and build a comic book / media business that as a close third to DC and Marvel could yield a potential $1billion valuation.

When we invested four years ago, the two companies (IDW and CTM) did about 2.5mm of EBITDA between them. Today, the Company produces almost 10 mm of “run-rate” EBITDA with the lion share being contributed from IDW and includes elevated spend to bring its new media initiatives online. We think that one could easily make the argument that a fast growing content business like this could easily trade at a 200-300 mm valuation TODAY – which would yield share prices in the range of $475.00 - $700.00 for shares that trade around $200.00 a share on the pink sheets. Another added benefit of being on a major exchange is that the Company will have a currency to continue to acquire sub-scale travel brochure assets and comic book media assets. These assets in the private markets trade between 4x and 8x EBITDA pre-synergies -- offering some pretty mouth-watering accretion if the Company gets the valuation we suspect it will when re-listed on the NASDAQ with research coverage. 

Platform/Rollup Opportunity:

At the most recent Ira Sohn conference, Bill Ackman talked about the power of platforms, public/private arbitrage, and excellent management teams with strong insider ownership.

 We believe that CTM/IDW NEWCO has all of those things. Howard Jonas is a proven value creator and will remain as chairman of the Company with a titanic sized ownership position. Ted Adams has built the company from scratch and commands tremendous respect throughout the industry and will also retain a very large portion of the pro-forma entity. Ackman glibly also mentioned in his talk, “we don’t have to go activist on owners….we partner with them”.

The last concept I will leave you with is why I think this rollup/platform is differentiated from most others. We can all agree that interest rates are low and that through cost cutting, purchasing synergies, etc. many larger Companies can arbitrage their cost of capital (debt and equity) and create economic value for shareholders through acquisition.

What differentiates purely a financial rollup and one that creates lasting economic value beyond just cost saving in our mind are REAL revenue synergies. IDW recently purchased a small content company called Top Shelf. Top Shelf has a plethora of owned content and real revenues that will come to IDW. In addition to leveraging IDW’s better distribution channels both in bricks and mortar and digital, I suspect there will be real revenue synergies. We also suspect there will be site consolidation and substantial non-editorial G&A savings (traditional cost cuts/savings). What makes these deals particularly interesting to us is that IDW will be acquiring pro forma cash flows today but also is in-housing a team of professionals who are continuously making more and new content. As that team gets in-housed with other teams/brands it creates many more opportunities for cross pollination of content or for the content to interact with one another. The example we like to use is Dick Wolff’s “Law and Order SVU”. Law and Order has built a stalwart audience after over a decade of super high ratings. Recently, Dick has introduced new series “Chicago Fire” and “Chicago PD”. While these shows have been slower on the “uptick”, Dick has already taken advantage of two three part series where one plot story line carries through all three shows in a 3 hour continuation. What Wolff and we find is that stalwart SVU watchers now find themselves watching the other shows to learn what happens on SVU. Perhaps that SVU watcher now engages with the other content and now watches that independently? Data suggests that this happens and we think this is the real revenue synergy and value creation opportunity.

Conclusion/Summary:

In summary, we find that this opportunity presents a Martin Franklin style rollup with an existing track record of organic growth and acquisitions at 5x Forward EBIT(DA). We suspect the Company along with its up-list will also formally IPO and perhaps raise primary proceeds. Our knowledge of management's track records lead us to believe that given the Company’s cash balance and ongoing FCF no primary capital will be raised at valuations that are not commensurate with the growth opportunity the Company has on its own. 

We believe investing today on the pink-sheets is akin to investing in Facebook on second market ahead of the IPO….except this trades at VIC multiples with overcapitalized balance sheet!

Catalyst

IPO later this year. The Company was an SEC filer before so won't take as long we suspect. Once this process is completed we expect the Company to file an S1 and list on the NASDAQ.

In connection with the uplist, we suspect the Company will do some combination of a secondary share sale / primary raise to increase liquidity but again at prices multiples of where we are.