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Summary

Townsquare Media (“TSQ” or the “Company”) is one of my favorite ideas today. TSQ is a growing, capital light business that trades at a ~24% forward free cash flow yield, has hidden assets, and possesses several catalysts that I believe will accrete substantial value to shareholders over the next two years. I project 2.9x cash-on-cash returns and a 46% IRR are possible by the end of 2024. In an upside case, 4.0x cash-on-cash returns and an 64% IRR are possible by the end of 2024.

I believe this opportunity exists, because TSQ is the third largest radio broadcaster in the U.S. and most investors overlook the Company’s fast-growing digital segment and dominant digital local media assets, which will soon comprise the majority of revenue and cash flows. TSQ also hasn’t screened well historically because earnings were negative and obfuscated from 2017 – 2020, primarily due to substantial non-cash charges that are not reflective of economic reality (impairment charges against FCC license values). Lastly, TSQ is a “public LBO” with ~5x net leverage, which I believe precludes many institutional investors from owning shares currently.

TSQ’s management recently segmented the company’s financial reporting to highlight the value of the digital advertising segment, TSQ’s earnings turned positive in 2021 and should remain that way going forward, and I expect the Company to de-lever quickly (~3.8x net leverage at the end of 2022).

I estimate that TSQ has $170mm+ of NOLs, which alone have a gross value of $35mm - $45mm (against a <$250mm market cap) and I don’t expect the Company to be a taxpayer until 2025 at the earliest. I believe that TSQ will deliver substantial value to shareholders by simply de-levering through a combination of EBITDA growth and cash flow generation. A 2023 refinancing of TSQ’s 6.875% notes (due 2026) could save $8 - $11mm of cash interest per year (adding ~4% to an already large FCF yield). Perhaps most importantly, TSQ’s board recently authorized a $50mm repurchase plan that runs for the next three years, which equates to over 20% of TSQ’s shares outstanding at today’s prices.

Management is financially sophisticated (Chairman was formerly a senior investment professional at Centerbridge) and has shown a willingness to aggressively buyback shares in the past – TSQ repurchased more than 1/3 of the TSQ’s shares for $6.40 / share in 2021 from Oaktree Capital Management. Furthermore, TSQ has opportunistically repurchased their debt at a discount to par value in the past as well.

TSQ Overview

TSQ’s predecessor (Regent Communications) was a legacy broadcaster with ~62 radio stations in ~13 markets that filed for bankruptcy in 2010 and emerged from BK with Oaktree as its control investor.

The Company has underwent a drastic transformation over the past decade and has two segments: (i) Digital – a fast growing segment built from scratch using legacy broadcaster cash flows and (ii) Radio Broadcasting – 320+ radio stations across 67 U.S. cities. TSQ also has a live events business that has largely been a failure financially and makes up less than 5% of revenue and an even smaller proportion of EBITDA that is not relevant to the thesis (I group it within the broadcaster segement). TSQ does not have customer concentration (all sub-1% of revenue) and no advertising category, market, or state makes up more than 20% of revenue.

TSQ’s mission is to be the #1 local media company in small and mid-sized markets (outside of the top 50) in the U.S. – Their strategy is reminiscent of Gray Television (NYSE: GTN) in the TV broadcasting industry, a company that I have owned shares of (off and on) for more than five years. In almost 2/3 of TSQ’s 67 city footprint for its advertising solutions, the Company does not compete against any of the five largest national radio competitors. The Company possesses #1 market share in ~70% of its city footprint and has either #1 or #2 market share in ~96% of city footprint.

TSQ’s largest market is Texas, which is one of the fastest growing states in the U.S. and TSQ’s top 15 states comprise 87% of their markets served and almost 90% of the Company’s FCC licenses. Many of the Company’s markets are state capitals, cities with large universities, or cities with major military installations – All of which I am typically attracted to in location-oriented businesses due to the economic stability that is usually derived from proximity to such institutions. Well over half of TSQ’s markets are either in Texas, a state capital, have a relatively large university, have a major military installation, or are a likely to be a beneficiary of the remote working revolution (Boise, ID, Bozeman, MT, etc.). Some of these markets are easy to pick out (Tuscaloosa, AL – University of Alabama, Albany, NY and Trenton, NJ as state capitals), but TSQ also serves some hidden gems that are easy to overlook for a typical wall street crowd, such as: Grand Rapids, MI (which consistently has one of the fastest growing economies in the U.S.), Bismark, ND (state capital), Yakima, WA (U.S. Army’s Yakima Training Center), Lawton, OK (Fort Sill), and Sedalia, MO (proximate to Whiteman Air Force Base; home of the B-2 Spirit Bomber).

It is well documented that small media markets often give rise to attractive economics for the incumbent operator, because such markets are not large enough to support multiple competitors. TSQ’s scale and reach in its markets are a formidable, self-reinforcing barrier-to-entry (TSQ’s digital media platforms reach ~70% of the adult population in their markets). Not only does TSQ’s dominant scale in their markets deter new entrants, but also creates a valuable “installed base” (of audience eyeballs and advertiser relationships) that TSQ can leverage for cross-selling / increasing sales force productivity through organic initiatives or bolt-on M&A. more than 70% of TSQ’s broadcasting customers (advertisers) opt to use at least one of TSQ’s digital products.

TSQ has three classes of shares A, B, and C. The A shares are the topic of this write-up. Class B and C are not public, and Class B has super voting rights (10 votes per share) which were primarily owned by Oaktree (and have mostly been repurchased and retired now). Class C shares do not have voting rights.

Segments

Digital

Digital is comprised of two principal assets, Townsquare Interactive (“TSI”) and Digital Advertising. Digital comprised ~48% of TSQ’s revenue and segment EBITDA in 2021. By the end of 2023, I expect Digital to represent more than 50% of the Company’s revenue and EBITDA, which I believe will expand to close to ~60% by 2025.

TSI

TSI is a fast growing, subscription business that provides comprehensive digital marketing solutions to more than 26k SMEs across the U.S. for ~$300 / month. Such solutions include: website development and hosting, e-commerce, search engine optimization, social media management, appointment scheduling, email marketing, and online reputation management. TSI provides unlimited updates and its key value proposition is driving organic search traffic to SME sites (TSI guarantees first page placement on Google for a certain number of keywords). TSQ’s current CEO was responsible for growing TSI from less than 1k subs / $1mm of revenue / 3 employees in 2012 to ~21k subs / $82mm revenue / ~650 employees / ~30% segment EBITDA margins today. TSI is a national product with ~60% of its customers located outside of TSQ’s 67-city radio station and digital news footprint.

TSI is a highly scalable managed services / subscription business with a strong value proposition and weak competition (self-serve options and local digital ad agencies). TSI uses its own proprietary internal tools (e.g. the same content management system for each SME customer) and has ~650 employees specializing in digital presence management with backgrounds in software engineering, marketing, design, copyrighting, SEO, etc. that have experience driving engagement and sales for thousands of SMEs. TSI’s ideal customer profile is a private, independently owned business with <20 employees and <$5mm of annual revenue – most businesses that fall into this category do not have the time or human capital / expertise to develop and maintain their company’s digital presence in an effective manner (self-serve competition from Wix, GoDaddy, etc. has a weak value proposition). The same solution from local digital ad agencies typically costs $10k+ upfront plus annual fees, is more customized (can use one of several third-party / white-labeled technologies), and is less focused on providing ongoing, dedicated customer support versus ~$300 / month for TSI’s comprehensive, “one throat to choke” solution that focuses on active and dedicated support (each customer has a customer success manager) and minimizes commitment (SMEs can cancel at any time).    

TSI has grown revenue more than 10% every quarter since its inception in 2012 (including during the depths of COVID in 2020), has generated positive segment EBITDA since 2014, and is opening a “west coast” office in 2Q22 (I believe in Phoenix) to further accelerate growth from its current MDD rate. Segment EBITDA margins have reached as high as ~40% on a quarterly basis in the past, but the Company is currently focused on reinvesting in growth, because management believes the growth runway is very long (TSI has only penetrated ~2% of TAM in TSQ’s 67 city footprint and less than 0.5% of national TAM) and expects to continue to manage the business to stable 30% segment EBITDA margins. The Company does not disclose TSI’s churn rate, but mentioned on the 1Q21 earnings call that TSI exhibits “best in class” churn rates based on data from employees TSI has hired from competitors / public comps and that churn rate was the lowest since the beginning of the business in 2012.

Digital Advertising

Digital Advertising includes two units: (i) Townsquare Ignite (“Ignite”), a vertically integrated ad agency and programmatic advertising business that possesses its own demand server platform (DSP) / data management platform (DMP) and utilizes proprietary first-party data from TSQ’s owned-and-operated digital media publishers (“O&O” also referred to as “AMPED” by the Company) to run highly targeted advertising campaigns, primarily for local and regional advertisers and (ii) direct advertising revenue generated directly from O&O properties. Ignite and O&O make up ~60% and ~40% of Digital Advertising revenue, respectively.

1.      1. Ignite’s in-house buying team and DSP programmatically buy digital advertising inventory from publishers (e.g. ad slots on ESPN.com) that they believe will deliver the highest expected value for its customers (advertisers). This business is akin to traders at Goldman Sachs using Goldman’s proprietary algorithmic trading software to acquire securities at the best value for clients

a.      Ignite’s DSP (algorithmic trading software) is integrated with more than 1,000 ad exchanges (akin to a securities exchange) and sees 250bn impressions per day, making it one of the largest ad trading desks in TSQ’s markets

b.      Ignite’s DMP houses first and third-party data and runs analytics to create customer profiles and segment audience demographics to optimize the DSP’s programmatic bidding. Specifically, Ignite’s DMP possesses valuable first-party data for 15 million user profiles (and growing) that is captured from O&O properties

Similar to TSI, Ignite is a full-service solution in that Ignite owns its own technology and the customer relationship from end-to-end (campaign message design / planning / targeting, tracking / optimizing advertiser returns in real-time, and providing detailed attribution / reporting to customers). Ignite is TSQ’s fastest growing revenue stream – digital / programmatic advertising is the fastest growing ad channel in the U.S.

2.      2. O&O includes the Company’s ~340 local news websites + mobile applications (across 67 cities), which utilize the brands of TSQ’s radio stations and have benefitted from the decline of local / regional newspapers to become one of the largest producers of local news content in the U.S. These websites create and publish ~30k pieces of original local content every month and have in many cases replaced small town newspapers (the existence of these “local news deserts” has reached such a desperate point in some markets that Google provided TSQ with a $260k grant in summer 2020 to create news outlets in Tuscaloosa, AL and Portsmouth, NH. In the first month after launching, the Tuscaloosa site had 93k unique visitors)

a.      In 2010, O&O generated less than 1 million unique monthly visitors and had no social or video platform presence. At the end of 2021, O&O had an average of 60 million unique visitors per month, more than 40 million social media followers, and 3.5 billion lifetime views on YouTube

O&O has a superior economic model to traditional local media producers due to: (i) digital content delivery across desktop / mobile / social channels (versus printing and distributing physical periodicals), (ii) a scalable national architecture driven from the Company’s in-house codebase, technology tools, and content management system, (iii) the collection and monetization of first-party data, and (iv) local on-air DJ / influencer talent that also create digital content (TSQ refers to these individuals as “the original social influencers”).

O&O’s proprietary first party data that it collects from its users is a competitive advantage not only for maximizing the value of its own advertising inventory on its O&O properties, but also for improving Ignite’s ability to target specific demographics and optimize bidding on behalf of third-party advertiser customers through digital programmatic channels (and improve audience targeting through TSQ’s broadcasting channels). Simply said, unique data gleaned from TSQ’s O&O assets provide allows greater insights into its audience and more targeted / personalized advertising, which ultimately delivers a higher ROI on customers’ marketing dollars across display, video, and native ads through desktop, mobile, connected TV, email, paid search, and social media channels. This approach serves “1,000 ads to 1,000 people” rather than the traditional linear business model of serving “1 ad to 1,000 people.” Traditional local TV and radio broadcasters do not possess first-party data (customer name, age, gender, email address, physical address, credit card data, social media accounts, when and what you consume / click on / view online, etc. that are captured and analyzed by Ignite’s DMP), because they are not publishers.

Ignite has a HDD growth profile and O&O has a HSD growth profile and together the Digital Advertising segment also generates ~30% segment EBITDA margins. I expect a stable margin profile over time for the segment – I don’t think Ignite margins are likely to improve dramatically over time, while O&O margins will likely improve a bit due to momentum on increased audience size and engagement. I understand that Ignite’s competition largely consists of local TV broadcasters, print media, or ad agencies that white label third-party solutions that lack Ignite’s scale, breadth of advertising solutions, and first party data. O&O of course competes against all forms of media, but is differentiated through its hyper local focus.

Radio Broadcasting

This segment is called Townsquare Media (“TSM”), which owns and operates more than 320 terrestrial radio stations in the same 67 city footprint as the Company’s O&O portfolio. TSM acquired ~125 radio stations from Cumulus Media in 2012 – 2013, which account for ~40% of its terrestrial radio footprint today and has done an excellent job of building its small market radio station portfolio through M&A historically. The Company continues to believe there is an opportunity to acquire radio assets outside of the Top 50 U.S. markets and use their experience and infrastructure to build leading digital local media platforms. This segment competes against other local media companies, such as local TV broadcasters, print, and digital media.

The integration of TSQ’s scale in small / medium markets across digital media and broadcast allows local, regional, and national advertisers to engage with their target market across several channels (on-air, online, and at live events) and for TSQ to generate higher revenue per audience member than media competitors that operate in more competitive media markets or possess less integrated offerings.

Terrestrial radio is a declining, but extremely resilient industry. Despite the advent of the internet, social media, etc. terrestrial radio still reaches ~85% of Americans (age 12+) each week, which has been consistent since the 1970s. TSM’s audiences listening times are also stable and as mentioned by management on most earnings calls / presentations, TSM is strongly outperforming other radio broadcasting peers due to TSM’s dominant market position in its geographies, combined with the sophisticated data / attribution / one-stop shop solution provided in conjunction with TSQ’s digital advertising (digital advertising customers often allocate their radio broadcasting budget to TSQ and vice versa).

TSM’s stations are also diversified across categories – country, rock, and news / talk / sports content comprise ~22%, ~21%, and ~19% of TSQ’s radio stations, respectively.

Base Case Financial Projections / Valuation

I assume core Radio Broadcasting revenue declines by 2% p.a. and political advertising is stable. I also grow corporate expenses by 8% p.a. and FD share count by 3% p.a. to account for SBC. For exit EBITDA multiple, I use the weighted average of segment EBITDA applying 12x for TSI, 8x for Digital Advertising, and 7x for Radio Broadcasting (which captures multiple expansion as the business shifts towards digital, which eventually represents ~60% revenue and EBITDA at the end of 2025).

Wix trades for ~23x 2023E EBITDA (current EBITDA is negative) and GoDaddy trades for ~24x LTM / 16x forward EBITDA. As mentioned before, I believe TSI’s white glove / full service model is superior to self-serve options. I believe 8x EBITDA for Digital Advertising is conservative given the growth profile, contribution from O&O / publisher assets, and first-party data versus ad agency comps. 7x EBITDA is in line with other public, scaled radio broadcaster assets (iHeartMedia, Cumulus, Audacy, and Entravision) and I believe it is also conservative to apply to TSQ given the Company’s best-of-breed performance and differentiated market position in smaller markets with favorable market structures.

I assume no buybacks or accretive M&A. Importantly, I conservatively assume TSI and Digital Advertising growth below trend and if the market stubbornly only assigns a 7x EBITDA multiple to TSQ in the aggregate at the end of 2023, the investment would still generate a 1.7x MOIC / 32% IRR.

Management, Alignment, and Ownership Structure

Insiders eat their own cooking and are sophisticated – Bill Wilson (CEO) and Stuart Rosenstein (CFO) own more than 6% and 5% of the Company, respectively. Mr. Wilson is an ex-AOL Media executive who has been with TSQ since 2010. He was co-CEO and responsible for leading the growth of TSQ’s Digital segment prior to being named CEO in early 2019. The chairman of the board is Steven Price, who served as the Company’s CEO from 2010 – 2017 and owns ~11% of the Company – He was previously a Senior Managing Director at Centerbridge. Several other members of the team have backgrounds as investors, lenders, and TMT investment bankers – I haven’t seen a sub-$250mm market cap company with a management team more financially sophisticated than TSQ before. Rounding out the major shareholders are Madison Square Garden Company (NYSE: MSGE) with ~15% ownership and MSD Capital with ~7% ownership.

Major Risks

·        - Lower EBITDA / cash flow (leverage cuts both ways)

·        - Macro (advertising spending is correlated with GDP)

·        - Business is indexed to the health of SMEs in small / medium markets

·        - Management team turnover

·        - Adverse effects from changes to Google’s search algorithm or new ad blocking technologies

·        - Adverse effects from new or increased regulation

·        - New / increased music royalties

·        - Cybersecurity

·        -  Internet outages or ISP access charges (opposite of net neutrality)

Catalyst

·        De-levering through EBITDA growth and cash flow generation

·        Refinancing of 6.875% notes (due 2026) in February 2023 with a cheaper and more flexible term loan facility

·        Execution of $50mm authorized buyback (effective for the next three years)

·        Accretive M&A

·         Other “Soft” catalysts include: Spectrum sales, local news payments from Google / Facebook, collapsing of the tri-class share structure, and any addition(s) to indices as the Company de-levers and grows its market cap