| 2018 | 2019 | ||||||
| Price: | 7.00 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 27 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 130 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 510 | EBIT | 0 | 0 | |||
| TEV (in $M): | 640 | TEV/EBIT | 0 | 0 | |||
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Townsquare Media, TSQ has been written up on VIC a few times in the past so we won’t rehash a detailed overview of the business. Also, see our previous writeup on ETM for a discussion of radio listenership trends and local vs. national advertising revenue characteristics.
From the latest Q: assets included 317 radio stations and more than 325 local websites in 67 U.S. markets, a digital marketing solutions company (Townsquare Interactive) serving approximately 12,000 small to medium sized businesses, a proprietary digital programmatic advertising platform (Townsquare Ignite) and approximately 550 live events with nearly 18 million annual attendees in the U.S. and Canada. Our brands include local media assets such as WYRK, KLAQ, K2 and NJ101.5; music festivals such as Mountain Jam, WE Fest and Taste of Country Music Festival; touring lifestyle and entertainment events such as America on Tap craft beer festival series, and North American Midway Entertainment (“NAME”), North America’s largest mobile amusement company; and tastemaker music and entertainment owned and affiliated websites such as XXLmag.com, TasteofCountry.com, Loudwire.com and BrooklynVegan.com.
Thesis/Backdrop: TSQ’s management set out to transform the company from a local radio business to a local media/events company that utilizes radio cash flows to buy events businesses while leveraging radio advertising to drive traffic to those events. The stock has sold off after a host of 1x issues in the events business that we highlight below. Investors view this as poor capital allocation/value destruction since, rather than acquiring more radio stations while delevering, the events businesses they’ve purchased have severely declined in profitability.
It’s anyone’s guess whether the strategy was poor or management was just unlucky as these 1x issues in events hit them but regardless, we believe the stock is interesting here given the extremely low valuation, entrenchment of local radio and most importantly, management has thrown in the towel on a less predictable strategy and will now focus on a more predictable, albeit boring strategy of simply using FCF to buy cheap radio stations and delever. As the market sees that management is willing to do the simple, boring, predictable thing rather than try to ignite growth through their previous strategy, the stock will trade up on renewed confidence. Moreover, we believe we also have two additional free options, (1) the sale of their NAME fair business and (2) a potential sale of the entire company.
In our base case, at 6x 2018 FCF, the business is worth $11.40 or 52% upside; at 7x, there’s 77% upside to $13.30. In our upside case where they sell NAME for $50m, we believe there’s 75% upside to $13.11 at 6x and 104% upside to $15.30 at 7x.
Recent Revenue/Profitability Trends and 1x Issues:
· Q3 2017
o Local Marketing revenue up 1.7% yoy (3% ex political) due to growth in local station revenue, introduction of station mobile apps and programmatic advertising revenue through TSQ Ignite
o Entertainment revenue down 4.1% yoy due to decline in Inflatable 5K business while NAME (state fair business) expenses increased by 15% due to H-2B visa caps thus an inability to source temporary workers cheaply, resulting in limited Entertainment profitability
o Increased NAME costs and overall Entertainment revenue miss resulted in $164m in revenue vs. consensus of $167m and EBITDA of $40m vs. consensus of $47m
· Q2 2017
o Local marketing revenue up 4.3%, 4.8% yoy ex political due to growth in local station revenue
o Entertainment revenue flat due to miss in the Inflatable 5K business
o Slightly missed consensus on revenue and slightly beat on EBITDA but Inflatable 5k issues lingering into early 2018 weighed negatively on sentiment
· Q1 2017
o Local marketing revenue up 1.2% yoy (2.5% ex political) due to strong local revenue and improvement in energy related geographies
o Entertainment revenue down 35.8% due to divestitures and the timing of a fair moved into Q2 from Q1
o Slightly missed guidance/consensus
· Q4 2016
o Guided 2017 revenue to $525-535m but consensus now at $512m for 2017 (2/27/18) given the misses highlighted above
· Q3 2016
o Local marketing revenue up 2.7% ex political, better than consensus
o Entertainment revenue down 4.5% due to poor weather patterns in NAME state fairs plus an oversupply of festivals in TSQ geographies
o $166m in revenue missed consensus of $173m despite positive surprise in local radio because of NAME disappointment in a business where 100% of EBITDA should be generated in Q3
· Q2 2016
o Expect improving festival climate and NAME synergies in 2017/2018
§ Clearly this didn’t come through
· Q4 2015 – With the acquisition of NAME, management highlighted their live events strategy:
o NAME extends reach across middle America to nearly 18M people yearly through live events
o Significant investment in Live Events in 2015
§ Decision to strengthen position as a leading operator of music festivals by investing in talent and production and launching a few new festivals (HASN’T HELPED)
§ Investment in newer initiative including the "Insane Inflatable 5K Obstacle Race" (HAS GONE AWAY)
§ Family friendly focus with launch of "Krazy Kids Inflatable Fun Run" DON’T TALK ABOUT THIS ANYMORE
§ Recently won contract for Tulsa State Fair, 14th largest fair in NA from an incumbent who held the contract for 20 years (DESPITE THIS, STILL NOT PROFITABLE IN ENTERTAINMENT)
§ Believes ability to offer incremental services to fair boards may have influenced this decision (HASN’T HELPED PROFITABILITY)
o NAME details
§ Season starts mid March and lasts through November
§ Seasonality means negative cash flow in Q1 and Q2, more than 100% annual cash flow in Q3, and approximately breakeven in Q4
§ 4 levers for NAME: Extend shoulders of season, better utilization within season, longer/better terms with fair boards/win new business – NONE OF THIS REALLY HAPPENED
o Expected $5M to $10M in NAME synergies by year 3 of operation (had NAME for 4 months in 2015, 2016 first full year of NAME) HASN’T HAPPENED
o 2016 will be a year where many strategies are tested for NAME, which will be ramped up in 2017 and beyond HASN’T HAPPENED
o NAME has decent flexibility and capacity to add events/expand before additional investments are necessary HASN’T RESULTED IN PROFITABILITY
§ Also some capacity to upgrade events, make them bigger
o Live events strategy called "events in a box": finding a concept, testing in a few markets, and then scaling across and even beyond all of the other advertising markets
o Insane Inflatables (kids festival), America on Tap (craft beer) are the two franchises scaled up the most so far. "17 or 18 different concepts" from haunted houses to bridal shows I DON’T NEED TO KEEP SAYING THE SAME THING!!!
o Growth approach is 1/3 organic growth from more participation in existing events, 2/3 rolling out more successful product in additional markets
o Margins should improve as "Events in a box" are scaled up
My point in including these highlights from the transcripts is that you can clearly see that none of what management has guided in Entertainment has come to fruition a few years later, which has killed credibility and is the reason the stock is down so much and also, undervalued.
As shown through the bullets on Local Marketing, the radio business has been very predictable and as discussed in our ETM writeup, radio stations like TSQ’s that skew towards smaller, rural markets consist of a greater percentage of local revenue which is more entrenched given the salesforce relationships and lower CPM for local advertisers.
We believe the diminished credibility will alleviate itself with the recent shift to a more predictable strategy of delevering/acquiring cheap local radio stations and future buybacks/dividends. As such, we think TSQ will soon be valued by the market at a more realistic multiple that rewards them for the long tail in rural radio.
Liberty: Yesterday (2/26/17), Liberty proposed a term sheet to the creditors of IHRT with about 5.7x leverage and about a 7.5-8x EBITDA multiple. In the past, when Liberty has invested in riskier businesses they’ve opted to come in at a better place in the cap structure (i.e. preferred in the case of Pandora and Barnes & Noble and equity plus a ton of warrants in the SIRI white knight) but they are proposing to take 40% in equity in terrestrial radio with a 5.7x levered balance sheet, likely signifying they believe the tail in terrestrial radio is longer than the market gives it credit. TSQ could be a very easy acquisition for a restructured IHRT given the limited regional overlap (FCC restrictions on stations owned in a single DMA).
Valuation:
Base Case: We believe that the Entertainment business is currently generating no EBITDA and likely negative free cash flow given higher capital intensity. We assume about $365m in Local Marketing revenue (up 4% yoy given that it’s a political year but even then, given organic growth, we think revenue is about flat in 2019 so you can look at our 2018 estimates as an average of the two, therefore normalized). We assume about $162m in Entertainment revenue, resulting in about $527m (low end of original 2016 and then 2017 guidance) and about $105m in EBITDA. With $33m in interest expense, no cash taxes and about $20m in capex, we expect FCF of $52m or $1.90/share. At 6x, the business is worth $11.40 or 52% upside. At 7x, there’s 77% upside to $13.30.
Upside Case: Sale of NAME
See below for stats from transcripts on NAME. Assuming TSQ can sell NAME at $50m (they paid $75.5m), they can reduce interest expense to $30m and reduce capital intensity to $15m. As per the most recent Q, capex was 60/40 split between LMS/Entertainment with the majority of Entertainment capex related to NAME. This yields $60m in FCF or $2.20/share, 75% upside to $13.11 at 6x and 104% upside to $15.30 at 7x.
NAME Notes
At Purchase (Closed Q3 2015)
Additions
Performance
Valuation
It’s anyone’s guess whether the strategy was poor or management was just unlucky as these 1x issues in events hit them but regardless, we believe the stock is interesting here given the extremely low valuation, entrenchment of local radio and most importantly, management has thrown in the towel on a less predictable strategy and will now focus on a more predictable, albeit boring strategy of simply using FCF to buy cheap radio stations and delever. As the market sees that management is willing to do the simple, boring, predictable thing rather than try to ignite growth through their previous strategy, the stock will trade up on renewed confidence. Moreover, we believe we also have two additional free options, (1) the sale of their NAME fair business and (2) a potential sale of the entire company.
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