Description

Idea / Biz Overview

Wanda Sports Group is an absurdly cheap holdco of 1) sports rights, and 2) sports media/advertising assets, primarily in the US & Europe.  It trades at 6.5x EV/EBITDA right now, when the component businesses would individually easily trade for north of 10x today (conservative).  These are the cheapest performing businesses of institutional size I have seen since the crisis, as the subsidiaries are all compounding double-digit EBITDA growth & the enterprise generates positive levered FCF.  At a $1.2B USD EV, the valuation makes no sense on $185M of LTM EBITDA & de miminis capex.  I very adamantly believe I will triple my money on this anomaly, and it is the single highest conviction investment I have ever made.

This is a private equity-esque investment, as the assets are currently levered 4.5x net and 5.3x gross.  Due to the leverage, if the assets were to re-rate to just 10x (or get sold), this would be a +180% return from today’s 6.5x EV.  If they got back to 12.8x, which is at the low end of Wanda’s & their private equity co-investors’ actual cost basis (they still own 83% of the equity), it would be a triple.  My goal here is to explain why these are above average/growing businesses that rationally should command a double-digit EV mult, and how I think the enormous valuation gap will close.

The underlying businesses are institutional-class assets:

·         Infront Media is a sports media rights & advertising agency.  There are zero traded assets like them, as they are a mix of sports-centered: media brokerage, production, advertising, consulting, and broadcasting.  There are only 4 large/accurate comps for this business on earth, and they are all closely held, but have traded multiple times privately in very robust auctions.  The only material comps are IMG (now Endeavor), Learfield, IMG College, and Imagina (see valuation section below).  This is ~EUR100M EBITDA today with minimal capex.  The business is growing, but operates on predictable 2-year & 4-year cycles, as Olympics years & FIFA World Cup years generate the most revenue & EBITDA for them (both events happening simultaneously provides a noticeable EBITDA boost every 4th year; followed by a trough 5th year).

o   The current consortium (Wanda & their PE co-investors) bought this from Bridgepoint (European PE) in 2015 for Euro 1.05B (12.8x on ~82M EUR EBITDA; or $1.2B USD).  I estimate based on public financials that this biz is around ~100M EUR EBITDA in 2019, which has a weak event calendar (and 2020 will be materially higher due to summer Olympics). 

o   Bridgepoint bought them in 2011 for 11.1x, right after the financial crisis.

o   Strong organic growth over the past 4 years has been driven by appreciation in sports media rights values (which increases average media deal size, which they broker), growth in the number of services they are providing per client as they bolted-on additional capabilities, and expansion of the number of ad clients & type of clients on the ad side.

§  The real business model here is that of a brokerage that takes a fee out of each media deal.  They bolted-on additional low margin capabilities as value-add non-core services to the clients – these help prevent clients from being poached & simultaneously increases the value of the clients’ media rights, which keeps them happy.

·         The full multi-media package offered by Infront includes: media distribution across international platforms (online and broadcast), selection/negotiation of brand/product sponsors, creation of apps/websites for the rights-holder’s events, placement of physical/digital ads at event venues, comprehensive management of an event venue’s hospitality arrangements, logistical & operational consulting to actually create an event or outfit a venue, recording sports events by owning/staffing the physical cameras at the venue, using their equipment to produce the final broadcasted media that is ultimately distributed, and consulting with right-holders on the valuation of their rights & ways to increase rights value. 

o   I want to emphasize that EBITDA at Infront is down YOY in 2019 due to the Olympics/FIFA event cycle (overall EBITDA down -16% YTD at WSG this year).  It will come ripping back in 2020 with the Olympics being back on the calendar, and 2022 will be up even more YOY due to having both the World Cup & Beijing Olympics happening in the same year.  I believe this is a highly misunderstood dynamic, and management has done a por job of explaining it.

§  2019 is the low-tick in their 4year cycle, as it directly follows a World Cup/Olympics year.  However, they already have the same big contracts booked for the upcoming cycle, which means EBITDA will predictably comp up YOY in each of the next 3years. 

§  In 2015 (following Olympics/World Cup both occurring in 2014), revenue at Infront comp’d down -18%, and EBITDA comp’d down -13% organically.  It immediately recovered (and then some) in 2016.

§  There are a number of ‘synergies’ between Infront/Wanda and the sports world that will help Infront to continue to perform well.  Most notably, Philippe Blatter is the CEO of Infront & the nephew of Sepp Blatter. An Infront executive was also appointed as the CEO of Italian Lega in 2018, which I believe is their single largest client today. 

·         Ironman (aka World Triathlon Corporation) is the operator of Ironman races & owner of the Ironman sports rights.  They also run a few non-Ironman races, but these are small contributors. 

o   Ironman was acquired at a $900M EV (20x trailing EBITDA) from Providence Equity by the consortium about 4years ago.  They also injected $100M of additional equity to bolt-on Rock n Roll, which is a brand of marathons, in 2017 for a total $1B USD cost-basis in this business. 

o   Organic EBITDA comps are actually growing double-digits, see ‘financials’ section below. 

o   I’d note that Ironman has an institutional Term Loan B in the market that currently trades over par and is owned by many of the largest credit shops.  They syndicated this publicly earlier this year, and you can get a copy of the public side CIM & asset-level financials by contacting your sales rep at Deutsche Bank (who is the agent on the loan) to see for yourself how strong the financials have been over the years.

·         Wanda Sports China (WSC) was created by Wanda to leverage the IP they acquired in the Ironman deal, plus subsequent bolt-ons.  They are rapidly growing a mass participation business in China that includes: triathlons, marathons, and cycling.  There are some other infant businesses in here (management will repeatedly point at eSports), but it is mostly mass participation today. 

o   According to my discussions with the company, gross profit growth in WSC is compounding at 20%+.  Chinese I’ve talked to have anecdotally confirmed the company’s thesis that there is a trend toward physical wellness among Chinese city-dwellers that will continue to provide a tailwind for marathon/cycling events in the mainland. 

o   This business is growing off of a small base, and it is the only business in the portfolio that is levered only to mainland china.  It can’t be worth negative, and likely has value today that at least offsets the SG&A costs of the Chinese mgmt/holdco. 

o   The company has indicated to me that it is an EBIDTA-positive business.  They also state publicly that margins on mass participation events in China are higher than in the US due to cheaper costs of arranging races/events in China.

o   There are synergies between WSC and the Wanda parent, which allows them to leverage provincial relationships from the real estate business to lock down cities for events.  This should allow them to continue growing race-count organically. 

Financial Performance of the Underlying Assets

Financials are super opaque post-IPO because the company wants to protect the media rights terms from competitors.  With that said, these financials are the legacy historicals based on a mix of hearsay, mosaic, and public-side financial reporting.  All of the businesses appear to be firing on all cylinders & have a long history of growing EBITDA materially/organically. 

Infront

·         Won’t give specific numbers beyond 2010. 

·         Bridgepoint bought this off FYE2010 EBITDA of approx 54M EUR.

·         The company grew EBITDA by at least 11%+ YOY annually (range: 11%-25%) every year after that LBO until 2017 (when public numbers no longer exist post-Wanda).  The only exception was FYE15, when EBITDA comp’d down about -13% after both the Olympics/World Cup occurred simultaneously in ’14 (this trend will persist every 4years going forward, including 2019). 

·         Wanda bought this asset off approx 82M EUR trailing EBITDA in early 2015.  I believe, through inference of the WSG public financials, it is over 100M EUR EBITDA LTM today - implying the growth trajectory has continued. 

Ironman

·         Pro forma EBITDA at this entity has grown every year since the acquisitions (excludes benefit from China expansion, which is part of WSC); EBITDA over the last 3 full FYs, plus 3Q19 LTM were approximately: $51M, $56M, $57M, $62M.

o   Same-race revenue (same concept as same-store-growth) is +3% YTD 3Q19; while YTD EBITDA here is up +14%, which is organic pro forma (including acquired races in both periods), as same-race revenue growth drops straight to the bottom line (100% contribution margin from each additional participant).

WSC

·         Company has stated that WSC events are growing gross profit at 20%+ organically annually, although it is off of a small base.  They are also more profitable than Ironman triathlons. 

Situation Overview & Why the Opportunity Exists

WSG is a July 2019 IPO.  It was originally guided at a $12-$15 pricing range, then cut to a $9-$11 range, then downsized the number of shares offered by -20%, and finally priced at $8 (which was a 10x EV/EBITDA).  In the last 5 months it has generated a -67% total return from pricing at $8.00, including trading down to $5.16 on their first trading day (July 26). It’s been a total bloodbath & god bless the souls of everyone who bought the new issue, as well as the private equity & special sits funds that co-invested alongside Wanda at the 20x Ironman & 13x Infront cost basis. 

They embarked upon this nightmare of an IPO because Wanda parent wanted to take a $400M dividend out of the business to bolster their balance sheet at the parent without selling off the assets.  To fund this dividend, WSG Holdco printed a $400M 364-day bridge loan. This was intended to be repaid with $400M+ of IPO proceeds, but it was instead a bridge to nowhere as $200M of it still remains outstanding today after the downsized IPO, maturing in March 2020 with a 11.5% coupon and make-whole (onerous terms).

There has been no bid for this thing since the shares broke for trading due to multiple fundamental reasons: the bridge loan maturity concerns, the link to China & Wanda’s controlling ownership, the CFO’s incompetence around setting EPS guidance, misplaced market expectations around EBITDA growth in 2019, and management’s terrible language barrier & complete inability to explain what is driving financial performance to their US audience on the quarterly calls.

I would also note several technical issues that I think have chilled interest in looking at the asset:  they only sold 23.8M shares publicly in the IPO so the free float is miniscule at ~$60M, their financial reporting is in a different currency (EUR) from the US-traded shares, their capital structure isn’t reported quarterly & is in multiple currencies (have both USD & EUR debt) making it hard to calculate a precise EV, and it is totally un-screenable.  For example, Bloomberg didn’t even have quarterly financials for these guys until I asked them to scrape the numbers from the filings (finally showed up on December 30th), and both CapIQ & Bberg still have wildly wrong LTM EBITDAs even at the time of publishing. 

What these things boil down to is that it feels like nobody has eyes on this (which is understandable given the above).  The publishing analysts that cover it I spoke to only get called on the name infrequently or never (DB, Citi, MS). The company did a roadshow last month in the US, and the ER analyst running it reported that there was “very little investor interest” and they couldn’t even get people to take meetings.  Another of those 3 analysts even told me I was the first to even mention WSG to them in 2+ months.

Finally, tax loss selling has only accelerated the declines into year-end, making the shares even heavier on no news.  December 30th had the single largest trade of WSG ever, with someone dumping almost 1M shares in a single block.  On Dec 31, in the last 10minutes of the market being open for 2019, another large chunk was dumped indiscriminately.  

To me, the above issues have been more than adequately priced in at this point.  I can’t say for sure when we will hit the low-tick for EV valuation here, but I can say with 100% certainty that it has already reached absurd levels.  And, to be clear, there is 0% default probability when the bridge loan matures in 3months as they already have a refinancing facility in place – but they are still looking for lower cost of capital solutions before drawing it. 

Equity Ownership, Motivations

·         Public float (Class A) – 17.4%

·         Wanda & mgmt (Wanda has Class B, 4x vote) – 71.7%

·         Class A co-investors (below) – 10.9%

Wanda is the Chinese conglomerate that everyone has been reading about.  They got in trouble with Beijing in recent years for multiple reasons, some of which are unknown to this day.  However, at the very least, they levered the shit out of themselves using funds from China-backed banks to buy ex-China assets.  The spigot has subsequently been turned off, and they are currently going through a period of forced deleveraging & assets sales to stay solvent. 

This is the primary reason why Wanda took their dividend & subsequently IPO’d WSG – they were looking for a public currency to both: 1) invest in the business when Wanda doesn’t have the cash to do so themselves, and 2) sell down more shares to fix mama-Wanda’s liquidity problems.

Their liquidity problems persist even today.  They also don’t have the cash to inject to eliminate the bridge loan at WSG.  

Class A Co-Investors is a group of 5 fund families, only 3 of which I was able to identify.  I can’t for certain say who runs/owns the remaining 2, but I have a couple guesses (left them out for now).  

These poor guys all came in alongside Wanda 4 years ago when they initially bought the portfolio of assets that is now WSG.  They paid full-freight and bought in at the same 13x Infront & 20x Ironman valuations. Based on today’s mark-to-market, they have been nearly wiped-out. 

The 2 largest holders here are large Private Equity investors with long track records.  They all have other large media/sports/team investments. They know what these assets are worth, and they aren’t going to take a goose-egg on this investment.  They can see the positive asset-level performance & growth that I mentioned earlier (they almost certainly get better financial reporting than us), and they know the assets have only appreciated in value over the last 4years. 

Based on today’s share breakdown and Bloomberg HDS: IDG/Accel, CMC, and Yifang are the 3 largest equity owners in WSG (besides Wanda).  Based on what I have read about them, I strongly doubt any of them would be sellers at these levels, and I doubt they will puke their shares once the lockup expires in mid-January unless they can do a block-trade for far above the market price.

I think they are in it to win it, and they will likely push Wanda to make some changes that fix the mark. Though I can’t say it will be effective, having some loud/angry co-investors on my side makes me feel good here.  Wanda has a track record of investing with them in the past, especially Yifang, and it’s probably not a good time for Wanda to piss off their financing partners when nobody on earth will lend to Wanda/Jianlin.

Going forward, there are a lot of changes that they could make to fix the mark, many of which would be easy, but probably not popular with Wanda (unless the co-investors complain loud enough).  Some easy ones that would help make this equity more investable to US buyers: change the name and ticker, remove dualclass shares, buy back some shares, start paying a tiny dividend, get English-speaking management on the quarterly calls, get a real website, publish call transcripts, get real independent board members, etc.  Honestly, the bar is so low at this point, and there are so many little things that could be changed to give the appearance of caring about public/minority investors. 

Seems like they may be coming around to the idea of making shareholder-friendly changes, as the CEO actually took my call and let me bitch at him for 45min about these things.  He only completely rebuffed 1 of them (which I didn’t include above). He even got ahead of me and stated that he doesn’t think the Wanda name is acceptable to the US investor base before I had a chance to mention it.  I’m not saying anything will change, but there are some easy marketing gimmicks that would help sentiment here and I don’t feel likethey are 0% probability anymore. 

What I Think Happens Next

Bigger picture, keep in mind: 1) the co-investors are financial buyers & need to exit with an IRR; 2) Wanda parent has no money & is locked out of printing incremental paper in the debt markets; and 3) the public market will not buy this equity from the consortium.  To me, this implies the only path forward is to sell asset-level stakes in the portfolio companies to private equity buyers or strategics, or the outright sale of either Ironman or Infront entirely. 

They have a liquidity need in 3 months (when the bridge matures), and they can’t use all of their BS cash to fund it due to potential working capital flows in the rights business (I have seen new rights deals that require the agent to front $50M+ checks when they win a new client).  They also don’t want to use the delayed-draw term loan that is already lined up to refi the bridge, because the terms are even more onerous than the original loan, including warrants & make-whole.

I believe the base case is that we will see a stake sale in the next 3 months that solves their liquidity problem entirely.  If this were to happen, it would also show the market the true market value of the underlying businesses when the stake inevitably clears at a 10x+ multiple. 

The fact that public market is punishing them has backed them into a corner, and the lower the public valuation gets, the harder it gets to raise money at the holdco through either equity or debt sales.  Perversely, the worse the public mark gets, the higher the probability of crystalizing a near-term gain gets through the sale of subsidiary-level equity. 

Other scenarios exist (basically all of which would either be positive or neutral to today’s state of the world); but I think equity stake sales are far more likely in the next 3 months than ever before.  However; even if this isn’t an overnight homerun, the facts that 1) the co-investors still need an exit, and 2) Wanda is dealing with a perpetual cash crunch still stand. The fact that my cost basis is far below theirs’ gives me confidence that they are working for me now. 

Valuation & Deep Markets for Media/Sports Assets

The comps & anecdotes here are the moneyshot.  I’m going to spend this whole section on Infront, as they are the largest contributor to EBITDA, have limited comps (all of which are privately held), and valuation here would be opaque to anyone who doesn’t actually follow the industry.  Conversely, you can just pull public comps on Bloomberg for Ironman & see it’s prob worth 15x-20x today given its double-digit EBITDA growth (I borrowed a comp sheet, below, from equity research). 

For Infront, I have compiled the following list of material private market transaction comps, which I believe to be 100% comprehensive for platform deals in the last decade.  These are the real comps, with 100% overlap in business model & they frequently bid against eachother for media deals. Refer to the notes/links below for context & anecdotes about who the bidders were that showed up to the auctions. 

IMG:

·         This is the single best comp for Infront.  They bid against eachother frequently & have the exact same business model.  They are both global/diversified players with little reliance on single media deals.  I view them both as analogous to broker businesses that take deal fees/commissions in a world where the gross deal size only increases. 

·         Comprehensive history:

o   https://www.sportsbusinessdaily.com/Journal/Issues/2014/01/06/Marketing-and-Sponsorship/IMG.aspx

Learfield:

·         These guys were the largest media agent for college sports deals.  2nd largest was IMG College, which was later spun out of IMG & merged into Learfield in a deal that probably shouldn’t have been allowed by the FTC (see below). 

·         Slightly different business model, because they were much more concentrated across a smaller number of media rights & college clients.  While more risky from a concentration perspective (always a chance of losing an RFP or getting your top clients poached), the PE owners were rewarded because US college rights have appreciated faster than pro rights in the last decade. 

o   https://www.bloomberg.com/news/articles/2016-10-06/learfield-suitors-thomas-h-lee-tpg-said-to-be-leading-bidders

o   https://www.sportsbusinessdaily.com/Journal/Issues/2016/07/11/Colleges/Learfield.aspx

o   https://www.sportsbusinessdaily.com/Journal/Issues/2016/10/17/Colleges/Learfield-Atairos.aspx

Learfield &IMGCollege merger:

·         It’s a miracle this merger was allowed, given the industry was already effectively a duopoly.

o   Just look at the list of rights they manage post-merger:  https://www.learfield.com/what-we-do/partners/

·         https://www.bizjournals.com/bizjournals/news/2017/09/19/learfield-img-college-close-to-merger-reshaping.html

Imagina:

·         Lastly, Imagina is a relevant comp to an extent as it was the latest platform to trade in the industry.  However, I have heard that north of 50% of EBITDA was derived from a single deal with Spanish La Liga (https://en.wikipedia.org/wiki/La_Liga), which makes this a far riskier & less valuable asset to own long-term.  This was compounded by the fact that the company was going through a contract dispute with the counterparty of a separate large contract during the auction process, which allegedly resulted in Orient Hontai trying to back out of their winning bid for the company (this is hearsay that I can’t confirm).     

o   Lower multiple here is likely justified for Imagina, and I wouldn’t even consider it as an accurate comp.  But I included it in the average for conservatism. 

Infront Acquisition History:

·         I would note that I’m 99% sure that Bridgepoint’s 2011 acquired EBITDA & EV in the chart above are correct.  I would also point out that it occurred right after the crisis, when valuations were not so robust. I consider their 11.1x as the absolute floor on this, as they were a financial buyer, pretty savvy, and got in at cycle-trough multiples.  I don’t think it is possible to rationally argue that Infront could be worth less than their 11.1x today under any circumstances given the positive growth trajectory. 

·         From talking to the company before Wanda bought them, there is light contract concentration here, but way less than the other names on this list.  Like IMG, this is a broadly diversified & global media agent/broker. By my guesstimate, their largest deal is ~10% of GP/EBITDA today, and I doubt they will ever lose that contract since just last year the head of Infront Italy became the CEO of the contract counterparty (Italian Lega): https://www.infront.sport/en/news/2018/12/infront-italy-s-luigi-de-siervo-appointed-ceo-of-lega-serie-a.  FIFA, by contrast, is a much smaller deal for them, but provides a noticeable boost in EBITDA once every 4years for the World Cup. 

·         Note that Providence Equity was also a leading bidder in the 2016 auction:

o   https://www.sportsbusinessdaily.com/Global/Issues/2015/02/06/Marketing-and-Sponsorship/Wanda-Infront.aspx

o   https://www.ft.com/content/28cc0848-d56c-11e0-bd7e-00144feab49a

o   https://www.ft.com/content/0304c85c-8bd4-11e0-854c-00144feab49a

Ironman:

·         Getting lazy with the comps here, but Ironman is certainly worth a higher multiple than Infront.  I’m just going to cop out and use Infront’s target multiple for the entire enterprise (conservatism!). 

·         There is a long growth run-way for these assets, as mgmt leverages their IP to launch similar races throughout Asia, which is underpenetrated relative to the US & Western Europe.  Meanwhile, same-race comps continue to grow nicely in established markets (US & Western EU). 

Cap Structure & Implied Returns

WSG mgmt don’t give debt balances on a quarterly basis, nor updated earnout numbers.  I have estimated a net debt balance that is materially larger than what is on their quarterly balance sheet – so I’m going to ignore their balance sheet & use my numbers (sourced from Bloomberg, which has all of the actual loan amounts updated quarterly).  Note that the Infront facility is in EUR, and I think it’s composed of a EUR 329M TL & 100M drawn on the revolver (for a total of EUR 429M drawn).

My EBITDA of $185M is based on my LTM 3Q19 EBITDA of EUR 165.2M (converted at 1.12).  This is just the actual reported EBITDA from the financials, less normalized stock-comp.  The company adds-back stock comp, which I simply reversed (and excluded the large post-IPO stock grant that was expensed). 

I would also note that I view this $185M EBITDA as the low-tick in their 4-year event cycle (mid-cycle EBITDA is likely even higher, around $195M today, so I’m being pretty punitive).  Forward EBITDA is certainly higher than today’s: for example, going from 2014 to 2015, Infront realized -13% EBITDA YOY as they came off the Olympics/FIFA peak in ’14 (this is broadly similar totoday’s YTD EBITDA decline of -16%).  They will continue to follow this EBITDA pattern every 4 years: 2020 will comp up.

Implied returns on just the re-rating and/or asset sales are shown below.  EBITDA will certainly be up YOY too, but I haven’t included that as a source of returns. 

The levered equity is juicing the returns significantly.  The far-right 13.57x is the actual industry average clearing multiple for all of the media agency comps I showed above (which I believe is 100% comprehensive of platform acquisitions).  I believe it is realistically achievable in a sale process.

Catalyst

I view this investment as having many ways to win, and the valuation bar is currently set so ridiculously low that anything would help the mark:

·         Wanda has no money and needs to raise capital through asset sales.

·         The co-investors are private equity & need to generate an IRR.  They need to sell in a realistic timeframe.

·         WSG has a maturity in 3 months and no money to pay it off.  The refinancing facility they have lined-up for it is onerous & best avoided.  I think there is a good chance that we will see stake sales in the subs to pay off the debt.

o   As seen in the auction history section, there are many bidders (both financial & strategic) that have hung around the industry.  If Wanda/mgmt want to pull the trigger, the bid will 100% be there.

·         Management seemed open to at least listening to my laundry list of things they could change to look more like a real public company – maybe they implement one or two. 

·         2020 EBITDA will comp up organically, as it does every 4years, due to the Olympics/World Cup cycle. 

·         Time.  It’s a new/crazy story with no public comps.  The market needs a sec to figure it out.