| 2007 | 2008 | ||||||
| Price: | 9.20 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 298 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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MDC Partners is a fast growing advertising agency holding company whose stock price should appreciate 50% to 85% in the next two years based on continued organic growth and a harvesting of cash flow after years of assimilating acquisitions and adding debt to pay for it. Organic growth (ex-acquisitions) was 17% in 2006 and is 23% ytd. Assuming only 15% ebitda growth in ’08 and ‘09 and applying an 8x ev/ebitda should enable the stock to meet the low to mid end of my target. Twenty percent ebitda growth drives my high end valuation.
According to Ad Age, MDC is the 11th largest advertising agency with $423M in 2006 revenue. The largest agencies are Omnicom and WPP with ~$11B in revenue apiece. MDC seeks out creative, up and coming agencies and buys 50% to 70% of the company and retains calls to eventually buy in the minority interest. MDC typically pays 5x to 6x ebitda for 50%+ of an agency. Payments are made 80% cash, 20% stock. Buyer has calls and seller has puts to eventually yield MDC the entire agency. MDC was written up on VIC in 2003 by gary9. His write up provides insight into some of the earlier history of the company and its efforts to get to the streamlined and much more understandable version of itself that it is today.
MDC agencies operate independently, but overtime generate synergies with other holdings, particularly those that provide niche services (such as market research). The idea is to take a hot advertising shop and allow them to do the creative and client work that they enjoy and which is their core competency, while letting MDC handle the financial side of the business. Agency founders are incentivized to succeed due to their minority interest.
MDC likes to point out that their agencies are on the cutting edge of digital media and I suspect that on some level they are. However, I do not see that as any kind of moat that Omnicom, WPP and the like can’t create, too. More interesting and defendable, I believe, is that MDC agencies (at least some of them) are seen as homes where creative talent is permitted to be creative without the mother ship of corporate sanding off the rough edges.
The crown jewels of the budding empire are Crispin Porter + Bogusky (CPB) and Kirshenbaum Bond (KB). High profile wins include Burger King, Volkswagen, Nike and Domino’s Pizza. (I personally am a fan of the latest BK ad in which the moms in a minivan try to run over the King because their kids prefer BK sandwiches to theirs.) CPB and KB results are reported in the Strategic Market Services (SMS) segment. The company’s remaining two segments are Customer Relationship Management (CRM) and Specialized Communication Services (SCS).
SMS consists of marketing communications and advertising agencies that focus on advertising strategy and creative. (Neither SMS or any other MDC segments performs media buying services.) SCS includes niche marketing services such as direct marketing, media relations, PR, branding, etc. CRM includes customer relationship management including data management and analytics. Sprint is a 77% of revenue customer in CRM though the unit has hired management to grow the segment beyond Sprint.
Segment breakout is as follows:
REVENUE 2004 2005 2006 9 mos 2007
SMS 111 204 241 228
CRM 60 67 85 79
SCS 76 92 97 87
TOTAL 247 363 423 394
EBITDA to MDC (after subtracting minority interests)
EBITDA 2004 2005 2006 9 mos 2007*
SMS 16 34 39 26
CRM 7 5 7 7
SCS 7 9 8 4
Corporate (16) (22) (19) (15)
TOTAL 11 26 36 21*
*see addbacks
2007 add backs: 1.9 for CFO change, 2.9 for discn’t unit, 2.7 retention payments
TOTAL adjusted for add backs 29
Coming out of Q3’07 management is projecting 2007 EBITDA to MDC (after minority interests) of $46M This includes add-backs for one times amounting to $7.5M. With the addition of the recent purchases of CPB and KB management guides to a 2007 ebitda exit run-rate of $56,000.
The capital structure at the end of 2007 should look approximately as follows:
Share count:
Class A at 10/31 26.2M
Class B 2.5
Options, other 3.7
Total shares 32.4
Market Cap: 298M
Cash: 17 (but depends on A/R collections at year end, biz is Q4 weighted)
Debt:
Revolver, term loans 140M
Convertible 45 (convert at stock price of C$14, not included in share count)
Total Debt 185
Company should have about $40M availability remaining on revolver/term loans. However, it should be moot as they should be a cash generator in ’08.
Enterprise Value 298 cap + 185 debt - 17 cash = 466M
Rather than try to estimate revenue I’m simply going to project out growth in EBITDA:
EBITDA ($M) 2007e 2007exit 2008e 2009e
adjusted run rate
15% growth 08/09 46 56 64.4 70.1
20% growth 08/09 46 56 67.2 80.6
EV/EBITDA 15% growth 8.3 6 .7 5.3
EV/EBITDA 20% growth 8.3 6.4 4.8
Stock price at 8x and 15% g $11.75 $15.35
Stock price at 8x and 20% g $12.50 $17.30
High amortization costs due to acquisitions keep MDC from printing meaningful GAAP earnings.
FREE CASH FLOW
Acquisition put payments represent payments to buy additional portions of agencies already partially owned; payments are low in the next two years. Company not likely a meaningful tax payer in ’08 and ’09. However, I am waiting for some clarification from the company on this. The company has NOLs totaling $61M as of end of ’06 but some are U.S. and some are Canadian.
2008e 2009e
EBITDA 15% growth 64.4 70.1
Less: interest (14.3) (14.3)
Less: capex (15.0) (15.0)
Less: taxes - -
Acquisition puts (2.4) (4.2)
FCF to equity 32.7 40.5
EBITDA 20% growth 67.2 80.6
Less: interest (14.3) (14.3)
Less: capex (15.0) (15.0)
Acquisition puts (2.4) (4.2)
FCF to equity 35.5 47.1
Risks:
Client losses are the biggest risk to the story just as client wins are the biggest upside. A slowdown in ad spending.
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