Description

MDC Corporation (MDCA on Nasdaq; MDZ/A on Toronto); $13.10 per share; 19.6 MM shares outstanding; $256 MM market cap (All dollar figures are Canadian.)

MDCA is a Toronto based conglomerate that is in the 5th inning of a corporate makeover. From 2000 to 2002 the Company was a poster child for destroying shareholder value: 1) it was a serial acquirer, buying companies ranging from advertising agencies to custom check production, stamp production, ticketing, smart cards and many other businesses, accumulating over $800 MM in debt along the way; 2) created two classes of stock; 3) provided management with over $18 MM of loans. The stock slumped from a high of $24 in early 2000 to a low of $2 in late 2001. There is no sell-side analyst coverage.

With the Company having almost gone under, CEO, Miles Nadal, has finally gotten religion. [Nadal and family own 21% of the company and were buying early this year.] He has spent the last two years cleaning up both management and the company’s acts and, as a result, has positioned the company as a pure play advertising agency business (operating under a platform called Maxxcom) with enormous underlying value.

Specifically, the company has accomplished the following:
(1) Sold off $550 MM of non core assets;
(2) Raised $246 MM gross proceeds by selling 80% of Custom Direct (customized bank check business) through an IPO into an income trust structure and subsequent secondary offering; the remaining 20% interest will be monetized in early 2004;
(3) Substantially delevered balance sheet;
(4) Recently completed the buyout of all minority interests in Maxxcom;
(5) Announced intention to liquefy three remaining non-core business over the next 12 to 18 months (and already retained a banker for one of them) with expected net proceeds of $80 MM, or 5x EBITDA, and we believe there are several strategic buyers for each:
*Metaca (#1 provider of smart card services in Canada) - estimated 2004 revenue and EBITDA of $48 MM and $4.1 MM, respectively;
*Mercury (sports ticket printer) – estimated 2004 revenue and EBITDA of $35 MM and $3.9 MM, respectively;
*Ashton Potter (postage stamp printer) – estimated 2004 revenue and EBITDA of $31 MM and $8.0 MM, respectively. Ashton-Potter was recently awarded a large contract with the U.S. Postal Service which will ramp up in 2004-05.
(6) Substantially reduced management loans outstanding with a repayment plan to completely eliminate them; no new loans have been made in the last 5 years;
(7) Informally expressed its intention to collapse the two share classes into one in 2004;
(8) Commenced a 10% share repurchase and has indicated its intention to re-load another 10% as soon as the first buyback is completed (Canadian securities law prohibits buying back more than 10% at a time).

So, what are we left with?

By the end of 2003, the company should have$125 MM cash offset by $90 million of Maxxcom debt, leaving $35 MM of net cash. Sale of the remaining 20% of Custom Direct in early 2004 should bring roughly $45 MM; sale of Metaca, Mercury and Ashton Potter are expected to yield approximately $80 MM (there are no tax implications due to substantial tax loss carryforwards). Add in $20 MM of expected FCF from operations over the next 12 to 18 months and you are left with roughly $180 MM in net cash or $9.20 per share; PLUS, you own a pure play advertising agency, Maxxcom.

With the stock trading in the $13 range, you are paying less than $4 net (of cash) per share (or approximately $75 million) for Maxxcom. Today, Maxxcom is the 17th largest ad agency (by gross billings) in the world with over 500 clients. It owns many well regarded agencies including Crispin, Porter and Bogusky which recently was awarded Agency of the Year by Creativity Magazine. Maxxcom is expected to generate $32 MM of EBITDA in 2003 and is on a run rate to generate $40 MM in 2004. With comps trading at 10X to 11X EBITDA, you are creating Maxxcom for 1/5th the comps’ valuation. The company has received plenty of indications of interest in buying Maxxcom by the majors and therefore our view is that it is simply a matter of time before the company is sold. The ad business is a good place to be today: coming out of a recession ad spending is expected grow 6% annually for next five years fueled in 2004 by the Election and the Summer Olympics.

What is the stock worth today? If you value Maxxcom at 10X EBITDA (thus assuming no takeover premium) and you add in the cash, it is not hard to get to a value of $25 to $30 per share over the next 6 to 12 months.

Catalysts? Sale of Metaca, Mercury and Ashton Potter; sale of the remaining interest in Custom Direct; collapse of two share classes; stock buyback; ultimate sale of the company.

Catalyst

Transformation into pure-play advertising company. Sale of Metaca, Mercury and Ashton Potter; sale of the remaining interest in Custom Direct; collapse of two share classes; stock buyback; ultimate sale of the company.