Summary

Trade show operators are remarkable businesses.  Attractive economics (asset light business model, negative working capital due to customer pre-payments, customer value creation which is many multiples of the product’s price) are augmented by the potential for long-term growth within a franchise (network effects of blockbuster events, geo-cloning to emerging markets, GDP plus growth of some industry niches served by trade shows).  Tarsus is a small pure-play trade show operator run by an aligned and experienced management who have serially acquired their way to a wealth-creating exit once before.  Too levered for some, not cheap enough to hit you between the eyes, this is not a perfect pitch but a long-term investor might still do ok. 

Introduction

When I try and look far into the future, I tend to get a lot of things wrong.  But I don’t feel bad, because so do most people.  Take media companies, for example. Managements and investors were almost universally bullish about their future prospects in the late 1990s as the Internet’s positive impact on media businesses was plain to see.  One decade on, while many media assets have crumpled in value rather than vault higher, one curious segment has gone from strength to strength: trade shows.

Trade shows might have been an obvious short to the far-sighted a decade ago.  Anyone who could imagine the breadth of communication technology choices now available and rendering physical meetings redundant, or the wholesale destruction of informational inefficiencies by the, uh, Internets, would surely have foretold a sorry end to the quaint, humble trade show, right?

Wrong.  Let’s look at a simple case study of a trade show that should no longer exist.  The Leipzig Book Fair is neither owned by Tarsus, nor is it a remarkable outlier from the rest of the industry, but should serve as an illustration.  It is the second largest book fair in Germany, and has been held in Leipzig for four centuries; annual attendance data is audited and public.  By my reckoning now that amazon.com, bookfinder.com and any number of other Internet forces have relentlessly made the global book market more efficient, bibliophiles should have stopped their annual, expensive, time-consuming, and environmentally unfriendly face to face meeting in Leipzig.  In fact the data shows the opposite has happened, as in the past 10 years the number of exhibitors at this physical trade show have increased 2.6% annually, while total rented exhibition space has increased 5.5% annually, and visitors have increased 9.8% annually.  These are attractive, pre-inflation unit growth rates.  Why is this happening?

Grass roots business people the world over still really want to meet each other face to face, and both increased global competition and the rate of technological change appears to be driving this demand up, not down.

For some media companies otherwise wrong-footed by the future, owning blockbuster trade show events is proving an unusually pleasant way to make money.  In contrast to the grooming of other media blockbusters and stars which is often followed by either vertical wage demands or a short-lived career, trade show blockbusters simultaneously present very modest demands (relatively low industry wages and negative capital requirements) and seem likely to outlast the Rolling Stones (e.g. Tarsus’ Labelexpo Europe is 30 years old and attracting more visitors every showing).  Management's peers such as David Levin, who inherited a smorgasbord of old and new media assets when he became CEO of UBM in 2005, now repeatedly emphasizes the beauty of trade show assets relative to other media properties his company owns (such as the gem PR Newswire, which along with Berkshire’s Business Wire enjoys a 80% US wire market share).  His recent presentations include the simple title, “Why we love trade shows”.

Trade shows: unglamorous, non-obvious, media meltdown survivors, there is in fact a lot to love.

The bad news: wonderful businesses don’t often come cheap

Trailing 24 month EBITA less non-recurring exceptionals:       £13.4 million           

EV/trailing pre-tax earnings:                                                     9.3x

T24 FCF (Net CFO before WC changes less capex):                 £8.9 million

P/FCF:                                                                                         10.2x

Net debt/mkt cap:                                                                         39%

Net debt including deferred income / mkt cap:                                 61%                                   

Dividend yield:                                                                             5.6%

Three company-specific valuation features should be noted.  Firstly the biennial nature of certain events produces higher profits in odd years, therefore I use 24 months’ earnings numbers, annualized.  Secondly amortisation expense for intangible assets is significant so EBITA is a more accurate reflection of pre-tax earnings than EBIT.  Finally although I ding the company for “exceptional restructuring” charges, which simply represent the cost of doing business for a frequent acquirer, there were also some genuinely non-recurring exceptional expenses in recent years which warrant adjustment.

The combination of a valuation that is not obviously cheap and a balance sheet that is obviously leveraged are the two biggest negatives to this investment.  Further valuation caution comes from UBM’s recent £185 million acquisition of Canon Communications’ trade show portfolio - bigger than Tarsus - from a private equity seller for a 7.8x EBITDA multiple.  This transaction clearly simultaneously sates some of the sector’s M&A appetite and demonstrates that any future exit multiple would need to be realistic.

Valuation bottom line: neither compellingly cheap, nor especially safe, so why do I even bother bringing this company to your attention?

The good news: ownership of successful trade shows is a wonderful business

The product:  Trade shows can create considerable economic value by gathering people together with similar commercial interests.  The face-to-face meeting between many participants in the same industry remains a highly efficient format for generating sales, informing attendees on product developments, and providing networking opportunities.  This is especially true in industries that are fragmented or undergoing rapid change or where participants ascribe value to networking and competitor monitoring.  Key industries served by Tarsus meet these criteria: labels & packaging, anti-ageing and preventative medicine, discount clothing, aerospace and IT.

The investment:  Owners of the intellectual property rights to such trade shows are attractive businesses to own because they capture a large slice of the economic value created by the product.  Owning the exclusive rights to operate a must-attend event in a niche industry generates very high economic returns on capital because:

1.     Profitability is high and stable (28% pre-tax margins since 1998 founding, similar to all comps) due to business quality, scoring highly on all of Porter’s five forces, for example:

a.     Barriers to entry: once an event achieves critical mass and a following within its target industry, it is not only hard for competitors to enter, but industry participants actually want just one dominant organizer (i.e. one location and one date to meet all prospective buyers or sellers). 

b.     Bargaining power of buyers: must-attend trade shows are, well, must-attend for Tarsus’ customers: paying exhibitors.  Typically outnumbered 100:1 by trade buyers visiting a show, these exhibitors can efficiently close orders worth many multiples of the cost of exhibition space, causing organizers to have pricing power.  

c.     Bargaining power of suppliers: selling stand space at blockbuster trade show events is not rocket science, and suppliers of this labor are paid accordingly (Tarsus’ £50,000 mean annual total compensation for all employees, of whom 10% are senior management, is not unusual for the trade show industry but is a clearly a world apart from common compensation rates attainable by talented blockbuster creators in other media segments).  Suppliers of physical exhibition space are also typically fungible, with trade shows often rotating between competing exhibition halls or even different cities vying to attract hoards of visiting business people.  That the balance of negotiating power lies with the event organizer, rather than the event host, is evident by the consistent 100% mark-up that public trade show operators apply to space that they rent from exhibition hall owners and resell to exhibitors; there is no evidence that real estate owners can successfully hold dominant trade show operators to ransom by charging exorbitant rents.

2.     Negative capital requirements.  Exhibitors pay for stand space in the exhibition hall well in advance, creating float or negative working capital.  Exhibition hall real estate is only used for the few days of the trade show, thus can be rented not owned.  Tarsus’ float represents about 25% of its equity value (defining float = operational capital = working capital excluding cash and interest bearing debt plus net PP&E).  Business models with both negative working capital and negligible fixed assets are quite rare.

Growth opportunities

1.     Network effects of individual trade shows becoming more of a “must-attend” event for more industry participants, as evidenced by the higher proportion of repeat bookings at larger events. 

2.     Geo-cloning of successful flagship events, literally providing “growth within the franchise”.  Tarsus has a successful track record of acquiring a dominant trade show and then launching it in a new geography to reap the benefits of globalization and emerging market growth.  E.g. Labelexpo, the dominant trade show for the labels and packaging industry, was held in just three locations when acquired in 1998.  In the subsequent decade Tarsus grew revenues by 6.7% CAGR in part by launching the same event in emerging markets, for example in India and China.  Tarsus is a clear beneficiary of recent emerging market infrastructure investment in exhibition halls and other tourism capacity, all borne by third parties such as governments and development agencies, in addition to increased trade in emerging markets occurring either domestically or “South-South”.  For example at early editions of Labelexpo China, 100% of exhibitors were European suppliers trying to sell into China; the most recent show saw 75% Chinese exhibitors.

3.     Organic growth within the industries served.  Management’s consistent strategy has been to own market leading trade shows in industries with above average growth rates.  Some industries obviously fit this bill, such as the company’s US-based anti-ageing medical segment which has gone from holding 8 events in America 2 years ago to 23 this year and 35 next year as rapid industry change fuels demand for education and professional interaction.  Operating profit at this business grew 39% CAGR between Tarsus’s initial 80% investment in 2006 and its completion of the remaining 20% in 2010.  Even superficially mature industries like Aerospace focus on growth geographies, for example the 2008 acquisition of the Dubai Airshow which has grown rented exhibition hall space by 7.3% CAGR over two decades and whose International Airport now ranks 4^th busiest airport in the world by international passenger traffic.  If management executes well, they should continue to focus on trade shows with the potential for GDP+ growth prospects.

Capital allocation and management

Management’s capital allocation track record is not perfect, but nor is it the worst I have seen.  Importantly, management is aligned through large equity ownership, which should mean that mistakes are sincere and quickly corrected.

On the acquisition front, as could be expected from media entrepreneurs around the new millennium they spent far too much buying far too little of lasting value in New Media assets.  But they woke up pretty quickly, cutting their losses by closing divisions and firing staff.  They made up for straying by returning to their first love and continuing to build leadership positions in attractive trade shows.

On the liability management side there have also been blemishes, for example simultaneously issuing new equity at £0.91 per share in July 2009 while maintaining dividend payouts.  Thankfully this was relatively small at 4.9% of shares then outstanding.  The track record of equity issuance to repay debt has occasionally clearly left money on the table, for example in April 2002 when both interest rates and equity valuations were low they were forced to issue equity at £0.90 per share to repay a loan originally taken in 2000 to fund an acquisition.  This should serve as confirmation that adding interest bearing debt to the capital structure just seems an unnecessary handicap in an uncertain world, forcing you to do things you would rather not and when you least want to.  Personal preference for a more conservative balance sheet seems especially fitting here: a business with access to such deliciously cheap float seems to have little strategic rationale for raising expensive bank debt.  What’s the rush?

Much more comforting has been their use of equity issuance at rich valuations to fund acquisitions, notably in 2000 when they shrewdly funded acquisitions with their own richly valued stock (over £3.00 per share), which cushioned the blow somewhat when all that New Media goodwill proved truly intangible. 

In hindsight then, capital allocation decisions have proven good when valuing their own equity for acquisitions, good when acquiring trade show and associated media assets, dreadful when acquiring New Media at bubble valuations, and quite poor in the selection and timing of debt versus equity funding, though this final aspect is admittedly subjective.

Management alignment starts with the 64 year old Chairman and Founder Neville Buch who owns 12% of the company.  In 1982 he founded and operated (with Tarsus CEO Douglas Emslie) another tradeshow company, Blenheim PLC, and after a whirlwind 14 years during which he constructed a portfolio of 350 exhibitions including some highly lucrative tradeshow brands, he sold the company in 1996 to United News and Media (predecessor company to United Business Media) for £593 million.  Both parties interested in buying Blenheim at the time, UBM and Reed Elsevier, have continued to grow and prosper in the tradeshow space, and strategically remain committed to acquiring more trade shows, especially events which are either already large or in Emerging Markets. 

Neville Buch paid for the majority of his current holding in cash.  Historically he owned a larger percentage of the company but has elected to dilute himself in exchange for growing the business through acquisition.  For those who don’t like to see an ever-expanding share base, at least he is eating his own cooking.  Total equity ownership by management and board is now 22%.

Additional risks

• Any event which sharply reduces appetite for travel or congregating with lots of people
• Thin liquidity

Random candy

• Pre-bookings produce high quality, predictable earnings.  At big events, 60-80% of the entire capacity for the next showing of that event gets booked before the close of the prior event (i.e. up to 2 years in advance).  Forward bookings are predominantly backed by cash due to the typical schedule of 4 payments: first within 30 days of signing, then 50% within the next 12 months and the final 25% 6 months prior to the event.
• Irish domicile produces 17% tax rate
• Berkshire-like model for acquisition and management retention:
  • One of the many reasons that Berkshire Hathaway has been so successful for so long is that when new businesses are acquired, WEB does a Larry David stare at management to decide if they love the money or the business.  More often than not he has judged well, retaining entrepreneurial managers who continue to operate and grow their businesses.
  • Trade show groups pursue a similar strategy.  The primary factor why this is possible is that there are few economies of scale or synergies from running a portfolio of many blockbuster trade shows.  You can get rich once by simply starting one and building it into a true blockbuster, (though before you rent a 15,000 square metre hall you had better ensure that the crowds have a very good reason to turn up).  Portfolio groups like Tarsus seek out entrepreneurs, typically with a rich background and deep respect within the industry their event serves - crucial for credibility and achieving the critical mass of attendees in the early years - and retain them to continue providing the intellectual leadership critical to remain central to the industry served and grow the event further.
  • When done well this produces many non-correlated engines for growth.
• Might MCI, their US based anti-aging medical business, be a small natural hedge against longevity increases?
• Zero pension liabilities.

For further reading & comps

Trade shows have storied beginnings in medieval Europe; the first commercial fair designed for the meeting of merchants was held near Paris in 629 A.D.  As long distance trade developed and eventually the industrial revolution brought major technological change, trade fairs spanned several functions: matching buyers with sellers, disseminating ideas and product development, congregating mixing people from different cultures with similar commercial interests.

For much of the industry’s history, most of the economic rents have accrued to real estate owners, the local royalty or city elders who provided physical and transactional security, and of course the participants themselves.  Even today, many trade show operators are not-for-profit entities either with deep links to the relevant co-operative trade association or state organizations interested in luring tourist spending.  Some publicly traded for-profit companies are merely exhibition hall real estate vehicles, pre-occupied with finding the next three day tenant for a cavernous – and ultimately commodity-like - exhibition space, typically generating the mediocre returns one might imagine.

In contrast, for-profit, publicly traded, focussed trade show operators who collectively account for less than 10% of the global trade show market have only really emerged in recent years.  Most are quoted in London, and due to the dynamics of the trade show industry whereby a labels trade shows in no way competes with a boat equipment show, these should be considered peers rather than direct competitors:

Reed Elsevier PLC                                   

United Business Media Ltd           

Informa PLC                                                           

ITE Group PLC

Tarsus Group PLC

And we’re done

Cheap and safe?  Not really.

An attractive position in an attractive industry with the odds slightly in favour of shareholders?  Yes.

Notes

Text numbers are all expressed in £ sterling.  Header consensus forecast EPS and the £1.20 stock price are £ sterling.  Other header numbers are $. 

This is not investment advice.