Investment Thesis:

The recent share price decline in Townsquare Media (“Townsquare,” “TSQ,” or “the Company”) presents an opportunity to own an underappreciated business that generates strong levels of free cash flow at an extremely attractive valuation (~30% FCF yield; note: TSQ’s FCF is currently bolstered by meaningful tax assets such as NOLs). What’s more, the Company has two overlooked businesses under its umbrella (Townsquare Interactive and Townsquare Ignite) that are growing rapidly, boast strong levels of profitability (~30% EBITDA margins), and diversify the Company’s business mix away from terrestrial radio. Based on my projections, these two businesses in the aggregate could be worth more than the current enterprise value of the Company within the next 3-5 years. Accordingly, at current levels, I believe that investors are effectively receiving the Company’s traditional radio and live events business for free (at a conservative 6x multiple applied to radio’s current EBITDA), which approximates $11 per share in additional value. Even including the ~15% share price increase today (3/11/2019) in advance of tomorrow’s 4Q 2018 earnings report, shares of TSQ have declined by 44% from recent 52 week highs and are down over 60% from all time highs reached in 2015. TSQ shares were particularly hard hit during the 4Q of 2018 small cap stock sell off when they were cut in half, bottoming out at ~$4 a share. Townsquare is no stranger to VIC (profiled four times previously) and prior write-ups have addressed the Company’s background and merits of the radio industry in general and the Company’s local market focus in particular so I won’t spend much time rehashing these topics and would refer you to those prior TSQ writeups for additional detail. However, it warrants mention that following adverse ongoing trends in the pay-TV industry, radio now reaches more consumers on a weekly basis than any other media. In fact, radio has reached more than 90% of Americans (12+ years of age) since 1970 and its usage is growing due to the introduction of streaming services, mobile apps and smart speakers (Alexa, etc.). One particularly noteworthy catalyst for TSQ’s radio business is the potential for the elimination/easing of radio station ownership restrictions in the Company’s small markets. In my view, any meaningful loosening of station ownership restrictions would likely have several positive implications for TSQ by providing an opportunity to increase its presence in existing markets via station swaps and/or acquisitions that would bring scale and pricing power benefits.

Why Does This Opportunity Exist:

• Low Liquidity and High Leverage: During the 4Q 2018 small cap stock route, shares of TSQ were cut in half and were likely disproportionately punished due to its low liquidity (average weekly volume of ~$1.5 million) and outsized leverage with net debt/EBITDA at 5.3x. The low liquidity of the shares reflects large positions held by several long(er) term oriented investors including Oaktree Capital (~45% stake), The Madison Square Garden Company (12%), Michael Dell (6%) and insiders (6%). Although the Company’s leverage may be considered elevated, the Company generates strong levels of free cash flow that should enable it to delever rather quickly over the next 12-18 months.
• Out of Favor Industry: The Company’s core business is traditional terrestrial radio (~50% of total revenues not including station websites). There have been a number of high profile radio bankruptcies recently (iHeart and Cumulus) and the combined CBS/Entercom radio business has delivered mixed results since merging. Although the radio industry is currently out of favor, TSQ’s radio business is posting strong results with low to mid single digit revenue growth. TSQ operates in small markets where radio is often the lifeblood of the community. Similar to how loyal Sirius listeners seemingly have a connection to Howard Stern, many listeners in the communities TSQ serves have a strong connection to their local station DJs. Also, with many small market newspapers shuttering in recent years, the radio station (and its associated website) are often the only source for local news. It is also worth noting that TSQ is more than a traditional radio company and has two high growth and profitable digital businesses under its umbrella. More on this later.
• Unsuccessful Foray Into National Live Events: The Company’s foray into live events outside of its local markets did not pan out for the company. The Company made a big push into live events in 2015 with the purchase of North American Midway Entertainment (NAME) for $75 million. The business faced some structural issues (elevated labor costs due to Visa issue) and the Company ended up selling NAME last year for $25 million. In 2017, Steven Price, one of the architects of the live events expansion, stepped away from his CEO position (Price still remains chairman). Although the Live Events expansion was not successful, Price has a generally strong historical track record (Price sold PriCellular, a business he built along with his father, to American Cellular in 1998, for $1.4 billion). It is also worth noting that one of the co-CEOs (Dhruv Prasad) that took over for Price, and was associated with the events business, has moved on from the Company, suggesting that TSQ will be sticking to its knitting going forward with a focus on its local market businesses. Indeed, the Company has recently resumed its M&A in the core radio business with a couple of bolt on M&A transactions completed over the past year. 
• Minimal/Limited Disclosure Around High Growth Businesses: As previously noted, TSQ has two high growth businesses in its portfolio. Townsquare Interactive is a rapidly growing subscription-based business that provides an array of services for local businesses (website design, search engine optimization, social media marketing,etc.) that is currently generating ~$50 million in revenue (annual run rate basis) having been established in house in 2012. In the second quarter of 2018, Townsquare began breaking out revenue for the business though not its profitability. Meanwhile, Townsquare Ignite, not broken out separately, is an organically built digital advertising platform that enables customers to efficiently and effectively optimize their local media spending. Townsquare has yet to provide a breakdown of Ignite’s results though it is believed to be slightly smaller than Townsquare Interactive from a revenue perspective, but growing faster on both a percentage and dollar basis. Management has recently stated that both businesses currently generate attractive levels of profitability (~30% EBITDA margins) and are expected to generate $100 million of revenues a piece within the next 5 years.
• Underfollowed/Overlooked: Townsquare is not widely covered by the sell side with just 5 analysts following its shares. Moreover, only a couple of the analysts listed as following the shares are active on the Company’s quarterly earnings calls.

Business Description:

Townsquare owns and operates 321 radio stations and over 330 local websites serving 67 small and mid-sized markets. In addition to its radio assets, the Company operates a number of other businesses including a digital marketing solutions business (Townsquare Interactive) that currently serves 14.5k small and medium sized businesses, a programmatic advertising platform (Townsquare Ignite) that is currently conducting 1,700 campaigns each month on behalf of clients, a live events business that conducts 200 live events per year attracting over 1 million attendees, and a national digital business that operates music and entertainment websites including XXLmag.com, Taste of Country.com and Loudwire.com.

Additional Detail on Townsquare Interactive and Townsquare Ignite:

Although the Company’s foray into national live events was unsuccessful and viewed as a negative from a capital allocation standpoint, TSQ has successfully built two attractive digital business organically. These businesses, Townsquare Interactive and Townsquare Ignite, will likely have a meaningful impact on the Company’s future valuation. Both businesses appear to have long growth runways and are currently generating strong levels of profitability. Management has gone as far to say that both businesses should each be generating $100 million in revenue within the next five years. Notably, profitability is on par with the traditional radio business with EBITDA margins currently in the ~30% range. The following provides additional detail on each business:

Townsquare Interactive:

Townsquare created its Townsquare Interactive business in 2012 after receiving feedback from an employee in a local market (St. Cloud, MN) who had difficulty selling the Company’s well-regarded digital advertising  products because customers did not have a website or were not happy with their current website. Since Townsquare had experience in building websites for its local radio stations, it created Townsquare Interactive (TSI), which develops and hosts desktop and mobile websites and provides an array of services (search engine optimization, online directory optimization, social media marketing, etc.) to small and medium sized business for a monthly subscription. The first customers of TSI were advertisers of the Company’s radio stations, but the business has grown both outside of its advertiser base and local station markets. As of 3Q 2018, TSI  had 14.5k customers that were paying ~$300 per month on average translating into a business with an annual revenue run rate of ~$50 million. The business has continued to experience an increase number of net subscribers with the addition of approximately 2,500 net subscribers for 12 months ended 3Q 2018 compared with 1,800 net additions for the 12 months ended 3Q 2017. Management has attributed the growth to increased sales velocity and reduced churn. During 2019, Townsquare expects approximately 3,000 net subscriber adds. The business generates a nice stream of recurring revenues with customers’ credit cards charged monthly. There is a long runway for future growth as TSI currently has just a few hundred clients in each of its markets on average compared with an average of ~7k total small and medium sized businesses in each of its markets.

Townsquare Ignite:

In 2014, Townsquare began to build its programmatic digital advertising platform, which is now known as Townsquare Ignite, because of the desire of its customers to advertise not only on TSQ’s station websites and digital properties, but also to target a specific customer group on multiple platforms such as the Internet and social media sites. The Townsquare Ignite platform enables it to meet its clients advertising needs by offering inventory on the Company’s own station sites as well as the Internet as a whole. As of September 2018, Townsquare was running 1,700 ignite campaigns for clients each month, well up from ~1,000 campaigns in 2017 and 385 in 2016. According to Townsquare, the average per month order size is roughly the same as a broadcast order, but the Ignite campaigns run twice as long. Townsquare Ignite is the fastest growing business in the Townsquare portfolio on both a percentage and dollar basis. Accordingly, I would not be surprised if its annual run rate approaches the size of the TSI business in the next 12 to 18 months. As a testament to the Company’s digital advertising prowess, industry researcher Borrell Associates recently signaled out TSQ as a top digital performer. In fact, the August 8, 2018 edition of Inside Radio stated the following about Townsquare Media:

Among radio companies, [Gordon] Borrell points to Townsquare Media as a top digital performer. He bases that on what he calls “addressable” digital ad dollars, meaning those that are readily available to in-market media companies like radio, TV and newspapers.

Across its 67 markets, the Greenwich, CT-based company “holds a phenomenal share of addressable digital advertising”... Two of Townsquare’s market clusters control half of the addressable digital a advertising in their markets, Borrell says. And Townsquare’s overall share of addressable digital ad dollars in its markets is 2.6 times the average for radio stations. What’s more, in seven markets, Borrell says Townsquare bills more digital revenue than any of its in-market competitors including newspapers, TV and radio stations and yellow page companies.

Companies like Townsquare should no longer be thought of as radio companies, he says, a belief shared by numerous broadcasters that have replaced the word “radio” in their company names with “media.”

Elevated Leverage, but TSQ Generates Robust Free Cash Flow:

As of September 2018, TSQ had $562.4 million of debt and $49.6 million of cash resulting in net Debt/Adjusted EBITDA of 5.3x. Although, this leverage level may appear elevated for a traditional radio business that still derives 75% of its overall revenues from advertising it is worth noting the following. TSQ converts a very high percentage (~45-50%) of its EBITDA into free cash flow due to NOLs ($137 million for federal purposes as of 12/31/2017) and other tax benefits including a tax shield associated with the tax amortization of intangible assets. As a result of these favorable tax attributes, TSQ is not expected to pay a meaningful amount of cash taxes until 2024. It should be noted that the Company does not face any near term maturities with about half of its debt coming due in 2022 (the balance matures in 2023). The growth in the TSI and Ignite businesses will become an increasingly large percentage of overall profitability and help diversify the Company away from the traditional radio business. Although advertising contribution may not decline as a percentage of total revenue due to the strong growth of Townsquare Ignite (an advertising business), the source of the Company’s advertising revenues will likely become more diversified.

Potential Elimination of Station Ownership Limitations Could Be a Game Changer for TSQ:

As part of the latest Quadrennial Review of the FCC’s ownership rules, the FCC is looking into the number of radio stations that a company can own in a single market. Under current regulations, companies in smaller markets can own no more than ~7 stations with no more than four from the same service. The National Association of Broadcasters (NAB) has proposed that there should be no limits on AM station ownerships or any ownership restrictions of radio stations in smaller markets (below the top 75). Townsquare operates only a handful of its stations in the top 75 so an elimination of ownership would likely be a boon for Townsquare enabling it to build additional scale within its markets via station swaps and/or M&A. Although it is difficult to handicap how the FCC will come out on ownership rules, it is worth noting that radio ownership caps have been little changed since the mid 1990s. Furthermore, In 2017 the FCC lifted media cross ownership rules that had been in place since 1975. The media landscape has clearly changed in the past few decades with a number of competing radio services introduced (satellite radio, streaming services, etc.) and new avenues for businesses to reach consumers (Google, Facebook, etc.) since ownership limitations were established. Although a complete elimination of ownership restrictions in local markets might be too optimistic, even an increase in the subcaps (facilitating an increase in the number of stations one company could own in a single market) would likely be viewed as a positive for Townsquare and provide an opportunity to benefit from greater efficiencies.

Risks:

• The Company generates 75% of its revenues from advertising, which could be pressured during an economic downturn
• Rising interest rates and an inability to refinance debt when its first maturity comes due in 2022
• Inability to attract and retain key talent