Description

Quick Summary

·         NLSN is a company that has been facing headwinds in its Buy business and the fear of headwinds in its Watch segment, combined with 4x leverage. In addition, NLSN has produced disappointing results in 8 of the last 11 quarters (based on stock price reaction). As a result, the stock is down 53% from its 3Q16 high and at a 5-year low. We believe things are on the cusp of changing, and that NLSN stands a good chance of regaining the luster of a “great / very good business.” The Buy headwinds are being mitigated; and our diligence of the feared headwinds in Watch suggests that they (i) are balanced by very high entry barriers for competition and (ii) even if true, are unlikely to manifest themselves anytime soon. Expectations are low, but leverage is manageable given high free cash flow.

·         Valuation of 9.6x 2018 EBITDA vs. information/data peers at 16x with similar profiles of growth and capital intensity. Viewed differently, the valuation implies 12x for Watch with Buy coming for free. The ~$26 stock is worth $45-50 in the next couple of years

·         NLSN recently announced a review of strategic alternatives, which could include a sale/spin of the Buy segment or a sale of the whole company. Notably, IRI is rumored to be selling for $2bn to Partners and DNB is being acquired with 8x leverage – i.e. an LBO seems achievable.

·         The risks are: (i) it’s hard to completely dismiss the overhang of fear that NLSN loses its supremacy in a rapidly changing media world, or that there isn’t another round of CPG cost cutting down the road; (ii) if we are wrong in our projections leverage could become a bigger issue.

Company Overview

·         NLSN is a consolidator and operator of consumer measurement and marketing analysis companies that operates two distinct segments with limited overlap: Watch and Buy

o   Watch: NLSN is the dominant provider to the media industry of independent data measuring consumers’ TV, radio and digital media consumption. NLSN’s estimates are drawn from a variety of data sources as well as a panel of 55k households. The business is split approximately as follows:

§  National TV (51% of Watch revenue). NLSN has a monopoly position measuring consumers’ viewing habits. The customer base here includes content owners like Viacom and Disney as well as cable companies like Comcast.

§  Local TV (15%). NLSN is the dominant measurement provider of local TV viewing. In this market, NLSN competes with Rentrak. In Q2, Rentrak’s revenue grew 16% and our diligence on SCOR indicated that Rentrak would take share in this market; however, more recently, calls have suggested that NLSN has made great strides catching up with Rentrak’s technology through STB data. The customer base here includes content owners like NBC and CBS as well as broadcasters.

§  Radio (15%). NLSN has a monopoly measuring radio consumption habits. This segment is expected to have flat growth for the foreseeable future as price increases offset declining ad spending. The customer base in this segment is primarily radio broadcasters.

§  Marketing Effectiveness (12%). NLSN provides the media industry with consulting work, special projects and data analysis that study the returns and effectiveness of marketing, including marketing mix modeling.

§  Digital (7%). NLSN competes with SCOR in the measurement of digital content and likely has 30% market share. Recent calls have suggested that NLSN is gaining share from SCOR as the digital currency. Within this segment, the measurement of SVOD services is approximately $130mm of revenue.

o   Buy: NLSN provides CPG customers with data showing where, how, when and why it’s products are sold.

§  NLSN’s data are collected through scanner data and a panel (both of which it shares with IRI) and through online purchasing data (where we believe the panel includes 9mm people).

§  NLSN primarily serves large CPG companies, which are more people-intensive in their needs versus IRI which serves smaller clients and is more technology-driven.

§  Spending on core data vs. discretionary services is split approximately 70/30%

§  NLSN revenue comes from companies in developed markets (60% of revenue) and emerging (40%).

Long Thesis

·         Unique, High-quality Business with High Barriers

o   Watch: NLSN has held a monopoly on TV measurement in the US for decades. During this time, numerous start-ups have attempted to develop new technology and methods to compete with NLSN, but none have succeeded. Numerous industry calls suggest that the process of accurately measuring consumer behavior is much harder than it seems and NLSN, despite its high prices, represents the “best of what we could hope for as an industry.” Among the more notable competitive failures have been Symphony, SCOR (which is losing share to NLSN in Digital) and Moat (which we understand is flailing after absorption into ORCL). In addition to these companies, calls have noted examples of movie studios, cable companies and other players attempting to develop competing solutions with no success.

o   Buy: NLSN also participates in a duopoly with IRI in measuring consumer retail purchasing behavior, primarily for CPG and grocery items. NLSN’s network advantage lies in the ability to source data from all retailers and sell to all CPG companies (i.e. to replicate this network, a competitor would have to negotiate contracts with thousands of retailers and CPG companies simultaneously). Unlike start-up data and analysis providers, NLSN is able to combine raw data with insights into customers’ products – e.g. helping a customer understand why customers switched brands, or bought on promotion on Wednesday but not Saturday. NLSN’s advice and data together are a critical part of CPG companies’ internal decision making.

·         Turnaround of Buy Segment: In developed markets, revenue has been declining since 2016 as CPG customers cut costs as part of a zero-based budgeting strategy and in response to competitive pressure at their retailer customers. In addition, EBITDA margins have contracted from 19% in 2015 to an estimated 13% in 2018. The turnaround of this segment is well underway; should begin to produce results in 2019; and is driven by several factors: 

o   Increased Customer Spending: After curtailing NLSN expenses in 2017 and 2018, customers may be returning. We conducted a broad survey of numerous Buy customers, which showed that next year, 35% of respondents expected to increase spending on NLSN vs. 10% expected to decrease.

o   Cost Savings: NLSN is currently pursuing a $650mm cost savings plan, the largest portion of which comes from the Buy segment and includes automation and facility consolidation.

o   Connected System: NLSN has historically been people-intensive, which creates the dual problems of (i) a cost structure that prevents serving smaller customers, and (ii) slower customer service. Connected System is NLSN’s answer to these issues and aims to be a platform for customers to access a variety of third party analytics tools. Connected System was developed with five partner clients and is currently being rolled out to others. Management has noted stronger interest in Connected System than any other product in 20 years.

o   WMT: NLSN recently won an opportunity with WMT to provide data to its “One Source of Truth” initiative to create standardized categories and definitions for its suppliers to adhere to.

o   IRI: Buy’s competitor, IRI, completed a dividend recap to New Mountain two years ago after a failed sale process. The company is again for sale and, in a final push to sell the business, IRI has pushed for revenue growth at the expense of margins. This led to the significant win of the Kroger business from NLSN in 2016. As this sale process concludes in 2018, competitive pressure should subside.

·         Valuation

o   Data/information peers trade at 17x EBITDA and 22x FCF with 2.4x leverage and NLSN was valued in the upper-end of this peer set prior to problems with the Buy segment.

o   NLSN is currently valued at 9.6x EBITDA and 17x FCF (on depressed FCF margins) with 4.5x leverage. Assuming the Buy segment improves, the current valuation is 8.7x EBITDA and 11.9x FCF in 2020, almost half the multiples of the peers.

o   NLSN also pays a 4.5% dividend.

·         Growth/Innovation in Watch

o   Watch Digital Share Gains: There are several indications that NLSN is gaining share from SCOR as digital currency (current estimate 70%/30% SCOR/NLSN):

§  NLSN IR directly said they were gaining share and could cite numerous no-names examples.

§  Numerous industry calls

§  In Q2, SCOR’s digital audience business declined by 8% vs. the market overall at MSD and NLSN at 7% growth.

o   Capabilities in New Media: NLSN has made great strides in the past year in developing the capabilities to measure digital content:

§  In 2017, NLSN reached an agreement with FB to received anonymized user data, which was substantially unchanged during FB’s public scrutiny in early 2018.

§  NLSN has developed its own viewability and fraud products, which will be launched in summer of 2018

§  In 2018, NLSN gained the ability to capture YouTube TV census data.

§  NLSN recently launched a panel+STB data set to replace diaries in small markets, eliminating a historical disadvantage over SCOR.

o   Marketing Effectiveness: In a fragmenting media environment, NLSN is taking advantage of demand for marketing ROI measurement by acquiring and developing a marketing cloud and other big data assets.

o   GDPR/Privacy: NLSN was caught off guard in Q1 by GDPR and privacy issues, primarily in Europe. At the core is Europe’s requirement that any company collecting data be required to delete that data if requested by a consumer. As such, many of NLSN’s data partners temporarily stopped sourcing to NLSN while they’re able to work through new regulatory procedures. This has been exacerbated by the summer slowdown in Europe. This issue is likely to be resolved by data providers Q4 2018 or Q1 2019.

·         Strategic Interest: NLSN is conducting a strategic review and its new Chairman has a background at Goldman and Carlyle TMT. There is also active interest from buyers, evidenced by the IRI and DNB sale processes, both with high leverage. I think it’s highly likely that the outcome includes a sale or spin of the Buy segment.

Issues

·         Leverage at 4x

·         60% of Buy’s customer base is seeing margin pressure from competition in retail

·         Threat of emerging competition in Buy from Infoscout and from various smaller analytics companies (very long-term)

·         Consolidation of Watch customers (though no near-term elimination of channels)

·         Persistent fear of emerging competition in Watch from digital players (very long-term)

Analysts / Sell-side

·         12 Buys, 2 Holds and 2 Sells

·         Average price target of $28

Price Target

·         NLSN is worth $40 at 12/31/20 assuming a multiple of 19x unlevered FCF (20x for Watch and 10x for Buy), for a slight discount to peers. This results in a 14.7x P/E with 4x leverage, in-line with the median of 16.5x since IPO in 2011.

·         At the current share price of $26, valuation at 12/31/20 would be 8.4x EBITDA, 15.4x unlevered FCF and 10.5x EPS. Backing out the cumulative dividends through 12/31/20, valuation would be much lower.

Additional Information

This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.

Catalyst

Catalysts

·         Evidence of revenue turnaround in Buy

·         Cost savings beginning to raise margins

·         Continued acquisitions in Watch that further entrench market position

·         FCF generation

·         Dividend

·         Strategic interest in Buy

·         Return to growth in Watch once GDPR/Privacy issues are resolved