Description

In a year with as many IPOs of unprofitable tech companies as in 2019, winning the title of ‘worst IPO of the year’ is no small feat. While the year isn’t over, Wanda Sports Group is hands down the frontrunner to take this prize home this year.

Wanda Sports Group (WSG) initially set out to raise 450m USD while controlling shareholder Dalian Wanda wanted to sell another 125m USD worth of stock. A debt fueled M&A frenzy had left both entities highly levered and in need of cash. Unfortunately for them, market demand for a non-controlling stake in yet another Hong Kong entity with difficult to read financials was already saturated by a dozen of Chinese scams that are written up on VIC. Dalian Wanda had to postpone their sale of shares, while WSG had to downsize their offering. In the end they ended up raising 190m USD while reducing the pricing from 12-15 USD / ADR to 8 USD/ ADR. With insufficient cash to fully pay back their expensive 11.5% bridge loan, a continuing overhang from share sales of Dalian Wanda combined with a general fear of everything that smells Chinese, the stock traded down 35% on their first day. At 3.66 USD per ADR it is now down 54%. Try beating that, WeWork.

With most of the negatives out of the way, let me tell you why I own shares of WSG, owner of the iconic Ironman brand and Swiss based Infront Sports & Media.

Note: adding confusion to the already difficult financials, WSG reports in EUR and has a listing / market cap in USD. 2 ADRs equal 3 Class A shares (1 vote each) in the HK entity. B shares (4 votes) are held by Dalian Wanda. There are 211.3m shares outstanding for a market cap of (3.66 / (3/2) / 1.11 EURUSD * 211.3 shares) 465m EUR.

Participation Sports / World Endurance Holdings / Ironman

In 2015, Dalian Wanda acquired World Triathlon Corp, owner of the Ironman brand, for an EV of 900m USD (650m plus 250m USD in debt). The selling shareholder was Providence Equity Partners, who has held WTC since 2007 and is said to have made a 4x return since then.

Ironman is the organizer of long-distance triathlons (an Ironman is 3.8km of swimming, 180km of cycling and 42km of running) that has been growing on the back of a strong growth in various endurance sports. Let’s face it, for middle aged men, endurance sports have replaced golf and fast cars as a means of dealing with their mid life crisis. Young overachievers (many of them working in finance) who feel like their mundane job doesn’t give them any sense of achievement turn to 20-hours per week training plans, 200 euro / month online coaches, 10,000 euro bikes, 1,000 euro wetsuits and special diets to be able to say they ‘did an Ironman’.

And while there are a dozen different brands popping up, covering obstacle runs, marathons and triathlons, none of the brands is as strong as Ironman. Triathletes don’t say they do triathlon. They do Ironman. How many brands do you know that get their logos tattooed on people’s calves? Not even Nike got further than having their logo printed into people’s haircut in the 90s. On top of that, Ironman organizes the annual world championships in Kona, Hawaii, where every pro and amateur wants to compete at least once. Long distance triathlon is Ironman. For Ironman as a business this means they can charge 600 dollars per race, charge host cities hundreds of thousands of dollars and still sell out almost every race. That’s what a strong brand name does for them.

WTC is based in Tampa, Florida. It’s run by American Andrew Messick, who’s been CEO since 2011. He’s been given 1.2m options on ordinary shares at the IPO and will receive another equity grant within 6 months. His interests are aligned with minority shareholders.

Since the acquisition, WSG has expanded their portfolio through bolt-on acquisitions, including Lagardère Sports Group in 2016, Rock ‘n Roll Marathons, Cape Epic mountain bike series in 2017 and XLETIX in 2018. This is about 25% of revenue but is considerably lower margin. While they are probably able to extract more value out of those events, they are diluting a very strong brand with weaker ones. I’m not a great fan of acquisitions outside of triathlon, but like to be proven wrong on this point.

Mass Participation (predominantly Ironman) earns their money as follows:

-          44% of revenue is earned from registration fees

-          25% comes from sponsors

-          9% is paid by host cities

-          8% merchandise

-          3% licensing (races not organized by WSG carrying the Ironman brand)

-          11% other

As anyone who has ever participated in one of their events can confirm, after every race you are asked to fill out a questionnaire. Now I know people get overloaded with surveys, but with this one you can win a free entry into a next race, so people actually fill it out. The result is that WTC knows exactly with how many companions you travelled to your latest race, the price of your hotel, the money you spent on merchandise, the brand and price of your bike, etc. Now as mentioned, the stereotypical triathlete is an affluent white male. They’re incredibly valuable customers to have and WTC does a good job at extracting maximum value by charging host cities and sponsors.

So as long as more people are spending more money on triathlon, Ironman will capture its share. Growth can come from:

-          More races. The typical model is to buy well-organized races, brand them as Ironman and hand out some extra slots to the world championships in order to max out participation.

-          More side events (e.g., Irongirl).

-          Fit even more people in 1 race. There are physical limits to this as it compromises safety during swimming and doesn’t give cyclists enough space without breaking so-called drafting rules.

-          Even higher entry prices.

-          Extracting more money from sponsors and host cities as described above.

On the cost side, apart from corporate overhead, fees for local businesses related to road closures and an undisclosed but small sum paid to Marvel for the rights to the Ironman name, races are run by local volunteers in exchange for a goodie bag and lunch. This makes Ironman a very profitable business that I’d usually pay a premium for to own. If it were a stand-alone company, people would compare it to F1, which trades at an EV/EBITDA in the high 20s.

Spectator Sports / Infront Sports & Media

Dalian Wanda acquired Infront from Bridgepoint in 2015 for 1.05b EUR. It was later expanded with several bolt-on acquisitions such as Omnigon in 2016.

The core business is to arrange media rights (rights-in) on sports events through various contract structures: either on a commission basis, commission with minimum revenue guarantee or the purchase of all media rights in a specific region. Such rights are then monetized, predominantly through the sale of broadcasting rights in different countries and by arranging sponsorship and marketing. On top of that, Infront tries to sell services such as event operation and digital solutions. The best example is FIFA, where Infront has handled the sale of broadcasting rights in 26 Asian territories since 1999. Later on, they started providing host broadcasting and LED advertising solutions.

The business is described in detail in their prospectus and I have little value I can add here. The point is that it is a legit business with partnerships that go back decades (FIFA partnership goes back 20 years and German football partnership 35 years). CEO Philippe Blatter has been with Infront since 2005.

Wanda Sports China

This business was built from scratch. They are the partner of the Tour of Guanxi (cycling) and the China Cup (football). They also organize 4 half distance Ironmans in China. At least the Ironman races had a slow start with 2 of the races in 2017 being cancelled last minute due to permitting issues, angering athletes who planned their training and travel around those races.

The entity owning the mainland China business is a VIE with contractual arrangements with Infront. While there is huge growth potential here, this is not where currently the value is.

Financials

Reported GAAP profit has been volatile over the years, hitting 96m EUR in 2017 and 73m EUR in 2018. 2018 included a 27m EUR bad debt expense and 17m non-recurring loss on derivatives, masking the growth in the underlying businesses.

WSG will use cash on hand and 170m EUR of proceeds plus cash on hand to pay down 200m USD of their 400m USD term loan. They’re in the process of refinancing the remainder of the term loan.

When accounting for the reduction in debt and excluding IPO costs, we should be at a run rate of about 100m EUR in Net Profit and 200m EUR in EBITDA. That’s on a market cap of 465m EUR and an EV of 1.1b EUR.

Conclusion

We have 2 valuable businesses that would be worth substantially more than the current EV when you could buy it without any layer of Chinese corporate governance on top. However, the businesses are run by non-Chinese executives that have grown their respective businesses quite well in the last years. I believe the Holdco management team to have underestimated the effort it takes to tell the story when going public. I believe IR is run by a well-meaning 26-year old who joined the company 3 months ago. The poor performance since the IPO is a function of poor communication with the market and not reflective of the performance of the underlying business.

Parent Dalian Wanda wants to sell shares to manage their own debt problem, but not at prices at or below 8 USD / ADR. It is in everyone’s interest that the stock starts performing and to do so, a few quarters of steady earnings, more communication with the investment community and even a better website (investor.wsg.cn seems to have been made in half a day) will definitely help.

Risks

-          M&A frenzy will continue

-          I passionately hate VIE structures, but believe there is only limited value in the mainland China business.

-          Share overhang from Wanda Sports Group

-          Wanda will cannibalize the business through related party transactions

Catalyst

-          Refinancing of term loan

-          Q2 financials, to be released in September

-          All the triathletes working in finance finding out that their favourite brand can be bought for a MSD P/E multiple

-          Potentially a minor buyback program