Description

Good ideas don’t always get much attention on the VIC, and blaueskobalt’s June’22 writeup on Ströer is a case in point.  Out-of-home advertising (OOH) is a structural winner, and I dare say these are the cheapest OOH assets in the world.  While the shares haven’t done much due to a soggy German economy, there are now fewer shares, more digital displays, and the first of two non-core asset sales will get underway very soon. 

Ströer is the world’s 6th largest OOH company.  Revenues are 90% Germany, 10% rest of Europe.  Unlike its OOH comps, Ströer also has a large digital segment with both online content and advertising businesses, and has synergies with OOH, especially now with the shift to digital OOH displays.  This is ~1/3 of FCF.  Shares trade at 7.9x FTM EBITDA (ex IFRS16), a big discount to comps which generally trade at low-to-mid teens multiples.  This doesn’t make sense for 3 reasons:

1. Aside from Lamar, Ströer’s margins are more stable, owing partly to the digital segment, but also to a large portion of local OOH clients, as well as a focus on private lessors for OOH real estate (a rarity in Europe).

2. FCF per share will grow faster than comps since their rollout of digital displays is still early-days and they have ~100% market share in digital.

3. Ströer owns 2 non-core assets (Asam & Statista) which add little to earnings today, yet are worth over half the market cap.  These will be sold or spun-off - my best guess is the smaller one is sold around mid-2024, and the larger one around spun-off to a NASDAQ listing at the end of 2025.  Ex these assets, Ströer trades at 5.3x, while peers are at hsd to mid-teens multiples.  It just makes no sense.

Note that this is a family-controlled business.  The 2 founding families own just over 40% of shares, but the KGaA structure gives them control – somewhat like super-voting stock.  That said, management is highly competent and returns capital to shareholders.

By the way, all figures in Euros.  FYE 12/31.  Debt and EBITDA have been adjusted to remove IFRS16 lease expense capitalization unless indicated.

Background

Ströer was founded in 1990, when 58 year-old Heinz Ströer, owner of a mid-sized billboard company, met 28 year-old Udo Müller, who was one of the first to acquire ad facades in East Berlin that were clearly visible from the West.  Heinz died in 2004.  His son Dirk, along with Udo today own just over 40% of shares.  Udo is CEO, while Dirk Ströer has no role other than as a major shareholder - he resigned from the board in 2021.  

In 2004, Ströer teamed up with Cerberus to win the final rounds of OOH consolidation in Germany.  Cerberus got debt plus warrants out of the deal.  The company IPO’d on July 15, 2010 at €20 per share, allowing Cerberus to exit and Ströer to pay back the debt.  Udo and Dirk each bought shares in the IPO. 

Ströer owned OOH assets in Poland and Turkey and hoped to further expand internationally, but Turkey’s economy fell apart just as the Eurozone crisis was pressuring ad spend everywhere.  Shares sank as low as €7. 

CEO Müller then began an acquisition spree to diversify into online advertising.  Believe it or not, this worked out really well.  Excluding Asambeauty and Statista (more on these later), Ströer paid about 900m, 350m of which in stock.  He bought some established businesses, like the Nov 2015 deal for t-online.de and InteractiveMedia for 300m in stock.  He also bought a lot of startups.

Conveniently, all these businesses (aside from A&S) are now in the same Digital & Dialog Media (D&DM) segment and we can clearly see the results.  D&DM did 155m EBITDA in 2022, or a multiple of 5.8x for a capital-light business (6.8x using today’s share price).  2023 will likely be a bit lower due to the tough ad market, but 2024 will likely see a return to growth.  

Statista and Ströer’s 51% stake in Asambeauty were also bought around this time for a total of 142.5m in cash.  Each is capital-light and capable of healthy margins, and is just now starting to ease-up on growth capex.  These assets - Statista and a 51% stake in Asambeauty - are arguably worth at least €1.3 billion, or 55% of the current market cap. 

In April 2016, shortseller Muddy Waters (MW) published a 62-page report on Ströer which hit the shares hard.  Long story short, this isn’t MW’s best work.  While the report does make some valid points (sort of), it was IMO full of faulty assumptions and many of the allegations are just silly.  In any event, I don’t see any of the issues as particularly valid today.  Short interest today is de-minimis.  Nevertheless, I’ve attached an appendix in which I examine the more valid issues in detail. 

Covid

Covid -19 was clearly the worst-case scenario for OOH, and Germany went through two lockdowns - the second one lasting until May 2021. Yet Ströer did fine.  One reason is that it’s tough to cancel ads in Germany – 60 days notice is usually required.  It’s also one of the very few countries where clients pay in advance.  Also, Ströer has worked since 2012 to boost local ad revenue, as these customers are not only more profitable, but also more stable in terms of demand vs national accounts.  Finally, lease contracts for OOH are structured to handle such events.  Management claims they could see a 85% drop in revenue before burning cash. 

ValueAct

Activist investor ValueAct disclosed a 5.2% stake in early March of 2021, when shares were trading around €75.  By mid-2022 they were over 11%, and at mid-October over 15%. 

This is pure speculation on my part, but I suspect ValueAct may have been the driving force behind a number of things that clean up the story, so to speak.  These are:

1. Ströer’s first share buyback.  On the November 2021 3q21 call, management said, “our share buyback program wouldn't really support the share price because it reduces liquidity of the stock and makes it maybe more challenging for investors to get in.”  But on October 3, 2022, the company launched a 50m buyback program, or over 2% of shares outstanding, and completed the buyback earlier this year.

2. 2021 reorganization of segments, which isolates the non-core Asam & Statista, and also brings all digital OOH assets into the OOH segment, making it easier to use public comps to value this segment.

3. 2022 return to the standard method of calculating organic growth (more on this later).

4. The CEO stopped selling out-of-the-money put options on the shares.  While it’s always nice to see a vote of confidence from senior management, this makes the story cleaner.

Segment One - OOH

VIC member rii136 also posted Ströer back in March of 2014, and I can’t do a better job of describing OOH in Germany than he did.  But here’s my best attempt: this market is basically a duopoly between JCDecaux & Ströer on the public side, and pretty much just Ströer on the private side.  Competition between them is low.  Ströer has 65-70% share of total OOH, and close to 100% of digital OOH (DOOH).   They also do ~35m of OOH revenue in Poland, plus ~20m in the Netherlands & the UK.

Unlike the US, most of Europe doesn’t allow private businesses to put up billboards.  OOH assets are typically owned by cities and awarded via a public tenders every 5-15 years.  But in Germany, there are both public and private contracts, and Ströer has both.  The company lost only one public contract of any size in the past decade (Düsseldorf in 2018), and they got it back less than two years later after the winning bidder couldn’t make it work.  Ströer ’s private contracts are far more profitable, and typically run 5-10 years, with no rent escalators, automatic renewals, and a ROFR to match any competitor’s bid.

JCDecaux, meanwhile, is focused on public contracts and national advertisers, both of which have lower margins and do worse in recessions. I believe Clear Channel Outdoor's European business is similar to JCDecaux’s. 

About 60% of revenues come from roughly 60,000 local and regional clients (out of 600,000 potential).  Ströer began building up its local sales force in 2012 because local ad revenue is stickier and more lucrative.  Today they have around 1,000 salespeople dedicated to local accounts.  While sales costs are higher than with national advertisers, smaller clients pay rates that are 3-5x higher than what national clients pay.  Advertising is by far a smaller part of their P&L.  Local customers tend to book for longer periods (1 -3 years).  For them, it’s not just about branding – it’s about letting customers know you have a location right nearby.

Public Video

Ströer first got into digital displays in 1994 by acquiring a stake in Infoscreen – an early DOOH pioneer which had TV displays in public spaces.  This evolved into what Ströer used to call “Public Video” until 2021.  Management now uses the term Public Video to also include its digital roadside billboards, but I’m going to use the term in the old sense. 

In 2010, they began expanding this network across train stations (a common way to travel in Germany) and airports.  In 2011 they bought ECE Flatmedia, giving them about 1,000 digital displays in shopping malls.

The algorithm here is revenue = screens * price * fill-rate.  Covid-aside, Ströer has raised prices 6-7% a year on average.  Viewers in a mall/train station/airport will see a changing mix of ads mixed with news, weather, train/flight schedules, etc.  The fill-rate was in the mid-30s% a couple years ago.  Today it’s probably in the low-40s %, and the goal is to exceed 70% - on par with their analog OOH business.  It’s been highly profitable for a long time. 

Roadside digital

Ströer began converting their best roadside billboards to digital in December 2015.  Roadside DOOH got underway relatively late in Germany.  Given the size of displays and their distance from the road, Germany needed higher resolution screens so that images don’t appear pixelated. Thus it took longer for LED prices to reach the right level.  Ströer had the luxury of waiting since it had already secured the locations in advance.  Comps, meanwhile, were often fighting over locations in other European countries. 

Converting is lucrative.  Ströer can typically at least quadruple the revenues.  For €68k of capex, they can take a location doing €10-15k in yearly revenue and raise that to nearly €50k after ramping up the fill-rate for 6-9 months. Opex for a digital board isn’t much higher.  Electricity costs are greater, and these costs are up 60-70% vs 2019 levels, yet still probably not more than 1.5% of total company revenue.  In all, they’re getting 20-30%+ IRRs and 2-3 year payback periods.

At their Capital Markets Day presentation on October 7, 2021, Ströer unveiled the following projections:

Since OOH is already around 2/3 of FCF, growing that FCF at >27% CAGR is a big deal.  Having spent a ton of time modeling this, I do think that’s a realistic goal.  The plan thru 2026 is to digitize another 2,600 roadside displays (vs ~1,970 already done), and add another 1,600 screens to their indoor Public Video business.  They can fund the capex internally even in a down year.  And conversions could continue beyond 2026. 

Margins will rise because lease costs should stay flat while the rest of opex grows far less than the growth in revenue.  With digital, they can alternate between many more ads in a single display, with each ad pulling in as much revenue as a comparable static display.  We’ve seen this work before - you can see the progression in margins vs the mix of digital revenue at Lamar, oOh!Media (OML AU), and Clear Channel Outdoor’s American business.

After converting roughly 500 roadside displays in 2021 and 700 in 2022, the company has slowed the pace down a bit.  Around 75% of the growth here has come from national advertisers, who, as mentioned, are more macro-sensitive in terms of demand.  Electric and subcontractor costs have risen as well.   I’m assuming they’ll return to a long-term pace of 400/year in mid-2024.

Segment Two - Digital & Dialog Media

Digital

Ströer has gone through a number of segmentation changes over the years.  D&DM combines segments previously dubbed “digital”, (online) “video”, and “transactional.”  Basically, this is online ad sales along with some online businesses.  The bulk of Ströer’s acquisition spree wound up here. 

The biggest piece of this segment came from the Nov 2015 purchase of t-online.de and Interactive Media from Deutsche Telecom, which is how that company wound up with the Ströer shares they sold in 2021-22 (possibly causing the price decline seen in early 2022).  t-online is a news portal with a wide reach in Germany.  InteractiveMedia was a pioneer in the programmatic sale of ads.

Ströer didn’t expect to grow t-online revenue, although they have.  Instead, this was an asset that Ströer knew could be run more efficiently and turned into a cash cow.  There are also synergies with other businesses – e.g. they fill some unused slots in their digital displays with t-online content.  They’ve also used t-online to incubate other web properties via links to that site (e.g. Vitalsana).

t-online was doing ~100m in revenue and 27m EBITDA at the time of purchase, plus 3m EBITDA from InteractiveMedia.  Management commentary on this asset has been fairly sparse, but they did mention flattish to msd growth a couple times over the years since.  By mid-2019 they said the margin was “beyond 50%”, and in early 2021 that they’d almost doubled the profits since acquisition (so maybe ~50m).  This June'23 article from t-online rival Business Insider claims that t-online did ~90m in sales and more than 60m in EBITDA in 2021, then just over 80m sales and ~55m EBITDA in 2022. Management has noted that online ad sales were weak during much of 1H23, but saw them stabilize in 2Q23.  

The rest of digital includes some other proprietary content sites which I’d imagine have similar margins.  There’s also a lot of revenue from the placement of ads on 3rd party sites, where margins are 10-15%. 

Dialog Media

Programmatic advertising, while a boon to the OOH business, has put distance between brands and their customers and so many brands are seeking to re-establish more direct communication.  PWC forecasts mid-term 8% revenue growth for call centers and old-fashioned door-to-door sales.  Also, dialog is a “defensive” business : under rougher economic conditions, advertisers tend to shift slightly more money to performance marketing that directly converts into sales, and dialog is one example.

Ströer thus began rolling-up dialog assets.  In August 2017 they bought Ranger Marketing for its door-to-door salesforce, which numbered around 2,000-2,500 salespersons as of late 2019.  Ranger’s margin is a decent ~20%.  In October 2017 they bought the first of a few call center businesses where margins have been 5-6% lower, but those have since been improved.  Meanwhile, the call center industry is also consolidating.  Call centers numbers in Germany peaked in 2007 at 1,357, and have come down quite a bit - to 780 in 2019, for example.  Yet industry revenues have been going up pretty much every year, from €1.9 billion in 2012 to €2.9 billion in 2021.  

Overall, Dialog revenues have grown 17% yoy on average for the past 6 quarters, and  the overall margin has been ~18% - at the high-end of peers.

Segment Three - DaaS & E-Commerce

This is the non-core assets of Asambeauty and Statista.  Note that when these are sold and/or spun-out, 95% of the proceeds will be tax free.  Some analysts get this wrong.

Asambeauty

Imagine watching the Home Shopping Network on your mobile phone, but it’s all one brand of natural beauty and personal care products.  That’s Asambeauty in a nutshell.  Asam also sells via TV and physical third-party retail, but online is by far the largest and fastest-growing sales channel, accounting for well over half of revenue.

Ströer bought its 51% stake in August 2016 from founder Marcus Asam, who owns the remainder.  It paid 34.9m with an earnout of 5.1m.  Asam’s revenue was at a ~40m run-rate at the time.  They’ll likely do ~200m in 2023, despite a somewhat tough backdrop for consumer spending due to inflation/war in Ukraine.

Most revenue comes from the “GSA” (Germany, Switzerland, and Austria).  Since early-2021, Asam has expanded into France, Poland, USA, and most importantly, China.  Entry into new markets has depressed margins in the past, but long-term this business should do 18-20% EBITDA margins (they’re doing ~22% in the mature GSA market).

Asam will start selling through one of Germany’s biggest pharmacy chains (DM) starting in 1Q24.  Moreover, their China business is booming - pre-orders indicate that China sales will be up 2-3x 2023 levels.  Management has always said they’d begin a sale process at 200m in sales, and thus are looking at kicking that off in 4Q23.  This will be a sale - likely a trade sale.  Possible buyers are online retailers such as Zalando and Sephora.  The plan is to pay all/nearly-all proceeds in a special dividend.

Statista

Management describes Statista as “Data as a Service” (DaaS).  Imagine Bloomberg, but for statistics in general.  They employ their own in-house data scientists, and >55% of data comes from their own content.  Another 30-35% comes from exclusive secondary sources, and the rest is freely available.  Statista looks pretty good on any SaaS-type metric - e.g. net revenue retention, which is over 100%.  Net Promoter Score is 57. 

Ströer first bought an 81% stake in Feb 2016 at a valuation of 10x trailing revenue of 9m.  It bought the rest in April 2019 for 29.9m.  

Statista has grown like a weed and will likely do at least 150m in sales for 2023, despite a weak 1H23 caused by a realignment of the salesforce.  They’re targeting 250m in 2025/26 - I think they’ll pretty much get there in 2025.  At the 200m of sales I expect in 2024, EBITDA margins should be over 30%.  In mature markets like the GSA, EBITDA margins are approaching 35%.  But they’re expanding rapidly in other countries like the US, which is now over a third of revenue. 

In May 2019, mgmt said, “the clear borderline for us is the valuation of EUR 1.5 billion. So the moment the valuation is exceeding EUR 1.5 billion, actually, we are open to discuss with interested parties or we are going to have an IPO. … we don't believe that it would be possible to have a proper valuation on the outdoor business plus Statista in one company.”

Ströer received several offers in 2021 from financial buyers in a valuation range of 1.0-1.5 billion, which it declined.  Last we heard, the plan is to monetize via an IPO on the NASDAQ.  Best I can tell, the process will likely start mid-2025.

Valuation

Note that I’ve discounted Statista’s value by 10% over two years, and this equates to just 3.9x 2025E sales of ~250m.  This valuation for Asam equals 3.2x 2023E sales.  Honestly, I didn’t put a ton of thought into these multiples, but I’m pretty darn sure they’re conservative.

I hope I’ve convinced you that the OOH Media business deserves a mid-teens multiple in line with comps like Lamar and Outfront Media.  Lamar’s margins are higher and they do well in recessions owing to a high % of local clients.  But Stroer isn’t much less defensive, and FCF will grow more quickly.  Outfront’s margins are similar, but it’s less defensive and growth is much slower.  Clear Channel has a nice – albeit less-defensive business in the US, but its European ops are crappy, as are JCDecaux’s.  Decaux is also trading around a mid-teens multiple, and the discrepancy vs Ströer makes no sense.

Management expects 2H23 to be a big improvement vs 1H23 on a yoy basis.  Online ad sales appear to be stabilizing and Dialog is seeing strong growth.  Moreover, Statista’s growth should get back on track, and margins at Statista and Asam are inflecting.  

Ströer should easily do FCF per share of 4.00 or more in 2024-2026, not including special dividends.  Note that the company has paid dividends for many years, most recently €2.25 in 2022, putting shares on a ~10% FCF yield and a >5% dividend yield.

Acquisition spend has been tiny for nearly four years now.  OOH in Germany, Poland, etc. is fully consolidated already, and so is much of the digital landscape.  Management appears to have no desire for major acquisitions.  They do seem committed to growing the dividend, and that’s where I think the money is going to go.

For reasons I cannot quite fathom, management doesn’t plan to renew the buyback, even though they openly talk about their frustration with the share price.  Their comments seem to suggest a fair value estimate not far from my own.  Any “encouragement” that folks could give them on the buyback front would be appreciated. 

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Appendix

In early 2016, a number of articles appeared in the media that stoked concerns about Wirecard – concerns that would later turn out to be well founded.  And so it’s understandable that short sellers got to work on looking for other lurking problems in the German share market.  Ströer appeared like a promising target: it was at the time a high-flying stock, it had an unconventional method of calculating organic growth calculation, a recent acquisition spree involving related party transactions, and recent insider selling.

Reading the Muddy Waters report from April 2016, someone unfamiliar with Ströer might think MW had found a morass of sketchy dealings.  And as I’ve noted, there is some merit to some claims, which I explore below.  Yet the report is full of faulty assumptions, most of which could have been avoided if MW had just spoken with management.  MW notes in the report that they decided management was untrustworthy and thus never attempted to contact them.  Many of the reports assumptions were dispelled at the AGM in mid-2016.  A transcript of the meeting is available (ironically) on MW’s website.

Ströer Interactive deal

Perhaps the ugliest assertion that MW made about Ströer was regarding its combined purchase of Ströer Interactive and ADscale from Media Ventures in March of 2016.  The background here is that Dirk Ströer (son of co-founder) has spent his career building an online business incubator called Media Ventures, which is 51% owned by him, and the rest by Udo Müller.

This deal was the first step in the afore-mentioned acquisition spree.  Obviously, a CEO buying assets from a firm he controls is not a good look.  This was the only acquisition the company purchased from Media Ventures aside from another company called Evidero, which is so tiny that I only mention it for the sake of completeness.  They bought a 60% in Evidero for €200k, and since Media Ventures owned only a tiny slice, it received around €25k of that price.

At the end of March 2013, the company purchased 3 related assets later renamed to the “Ströer Interactive Group.”  SIG consisted of Ströer Interactive – an online marketing firm which had been founded 15 years before by Dirk Ströer, freeXmedia, and a 50.4% in Business Advertising GmbH.  They paid 49.5m in shares with a potential 13.5m earnout to be paid in cash (only 10.7m was ultimately paid).

Four days later, they bought ADscale, an online ad exchange for 21.9m in cash.  This would then be combined with the SIG companies to form a new business segment in 2013 called Ströer Digital (now in the DDM segment).

Muddy Waters makes some faulty assumptions and speculates that freeXmedia had been purchased by Media Ventures for 2m and then flipped shortly thereafter to Ströer KGaA for 20m.  This is totally incorrect.

Media Ventures did indeed pay 2m for freeXmedia, but it sold the company to Ströer for 1.8m – a slight loss.

ADscale was generating around 2m of EBIT at the time, so the price was ~10.5x EBIT.  Ströer Interactive and freeXmedia were doing around 5m in EBITDA, with freeXmedia being just 200k of this.  Business Advertising GmbH did was doing around 1.1m in EBITDA.

A slide in a Ströer presentation from mid-May 2013 sums it up: 5/14/13 presentation: SI deal + ADscale = 2012 operational EBITDA ~7.5m (incl annualized savings already implemented between signing and closing).  In all, the combined price was under 10x EBITDA – hardly unreasonable.

My issue with this deal involves something never mentioned by Muddy Waters – the fact that they paid in stock.  At the time, Ströer shares were in the dumps – trading at €7.31, with a forward EBITDA multiple around 4.7x.  Now, every public OOH company in the world was in the dumps and trading at a ~50% multiple discount.  Should Dirk and Udo have known their shares were cheap?  I don’t know, but suppose that is entirely possible.  (In fairness, they did the much larger t-online deal for stock when the multiple on their shares was quite rich.)

At the time, net debt to EBITDA was around 2.8x, and management claims the Board felt that paying that 49.5m would have left them with too much debt (pushing the ratio to 3.3x).  I don’t really doubt this, as corporate Germany tends to be much more conservative with leverage vs the U.S.  But I have to wonder if they couldn’t have just waited to buy this stuff after paying down debt for a few quarters and/or selling their Turkish assets, the earnings of which had fallen off a cliff in 2012 and never recovered.

SAW

Dirk Ströer receives additional revenue streams from Ströer through a company he owns called Ströer Aussenwerbung GmbH & Co. KG (“SAW”), which has its own non-digital advertising space in Cologne and Berlin.  Ströer KGaA markets the space, taking a fee and passing the rest of the ad revenue on to SAW.

These are some traditional wet glued billboards that the Ströer family has owned since the '60s and '70s.  Had Ströer KGaA purchased these, they wouldn’t have been able to do the much more important deal for DERG back in 2005 because their market share would have exceeded what the regulators would allow.  I see no problem here.

Organic growth

Muddy Waters takes issue with the fact that Ströer adopted an unconventional formula for calculating organic growth in 2015.  Under this method (which was discontinued in 2022), a proportionate amount of the revenue reported by newly acquired companies in the prior year was added to the company’s prior-year revenue figure. For disposals, the Group’s revenue in the prior year is adjusted on a pro-rata basis to cover the months in the reporting year when the companies that were sold were no longer contributing revenue.

Was this aggressive?  I’d basically agree that it was.  The acquisitions were generally growing faster than the OOH business and so this juiced the numbers a bit.  To be fair though, the company quickly responded to requests from analysts for numbers calculated the conventional way, and typically presented both calculations side-by-side.  As you can see, the consolidated numbers were a tad higher with the new method:

But it’s not so much the consolidated numbers that MW is concerned with.  MW was really taking issue with what this method did to the Ströer Digital segment’s organic growth, as this segment was the heart of the growth story at the time.

MW further alleges that management likely decided to move their Public Video business into this segment in 2015 to pretty-up the growth story.  So let’s take a closer look:

So, this move certainly did boost organic growth, especially in 2015.  Is that why they did it?  Possibly.  Keep in mind, though, that there are some legitimate reasons for doing it too.  Unlike classic OOH or even DOOH, Public Video is sold by a separate sales organization.  In fact, it’s frequently sold as a package along with online advertising for the same marketing campaigns.  Public Video is basically trying to take market share from TV advertising, which OOH is generally going after market share of print advertising, especially for local clients.

Catalyst

Continued rollout of digital displays

Asambeauty sale mid-2024(?) followed by special dividend

Statista EBITDA inflection and spinoff at end of 2025(?)