Value of Torstar and how it could be unlockedHi guys,
Mr. Boynton said that he wants to "unlock value" at Torstar. That's why I want to present to you my ideas to unlock that value (as an Appendix: My Torstar valuation which I posted some weeks ago) :
1. Possibilities of action Break up of the company From a raider perspective this would be the most realistic approach to uncover the true value of Torstar in a very short period of time. But because of the ownership structure and the social and political principles (Atkinson) that guide some of the people involved, this is an absolute unrealistic case at the moment.
Selling non-core businesses to free up tied cash At the moment Torstar is a grocery store. Many subsidiaries have no real synergies with each other. A lot of cash is tied in other and minority investments such as Blue Ant, Eyereturn, Black Press and many others (e.g. Teamsnap or Nest Wealth), which do not distribute any money to the parent company. „Trial and error“ is a good strategy in R&D, but in an asset allocation game it would be better to have a coherent strategy or, if not possible, give the money back to your owners. Furthermore, freed up cash could be used for digital, bolt-on acquisitions that have some synergy with for example Metroland’s local advertising business. If not, they could give some money back to the shareholders or at least increase the dividend.
Unlock the Value of Verticalscope With respect to the 56% of Verticalscope: In general it does’t make a lot of sense for Torstar to have this structure with Verticalscope (only 56% share; only two of 4 board seats etc.; no real control, just an investment) for a very long time. But, unlike many other investments of Torstar in the past, the Verticalscope purchase seems to be a wealth generator for the sahreholders (as of today). The problem at the moment is that the very good free-cash flow of Verticalscope can’t be seen in Torstar’s dividend, because VS uses its FCF for value-generating acquisitions and doesn’t make distributions to Torstar. No matter how, the value is there, it only has to be unlocked - currently it’s tied. They could sell Verticalscope after July 2018, or wait till Verticalscope does an IPO and distribute the shares to the shareholders of Torstar. On a smaller scale, they could do a recap after July 2018 and through that bring some money back home to „mother Torstar“.
Separating the „Atkinson principles business“ Toronto Star from the other parts The Voting Trust could sell Torstar to an investor (e.g. Fairfax) or do a "Toronto Star" transaction without selling the company. As part of any transaction a company that includes only the Toronto Star will be sold back to a foundation of the Voting Trust members. This could solve the conundrum called Atkinson principles. I fully understand and respect the importance of the principles for many of the Voting Trust members, but imo these principles only apply to the Toronto Star, not its other investments (as proof look at the gun forums owned by Verticalscope). The Toronto Star as the voice of the Atkinson principles would remain intact with this transaction and - at the same time - the value of Torstar also be unlocked for the advantage of all shareholders (including the Voting Trust). A win-win.
Better market communicaton (IR) One thing they could do, as soon as Mr. Boynton (a marketing expert) is on board, is to improve the communication about the company and try to make the true value of the company more transparent. If this doesn’t work, try some more practical alternatives described above.
Appendix - Valuation with additional comments Imo Torstar‘s stock is very undervalued. The cloud of a newspaper company is hanging over the stock, even if most of the company’s value lies (and is tied) in its other ventures. To undersore that, I want to show you, once again, my conservative approach to value Torstar in a „ sum of the parts“ valuation with additional comments:
Traditional newspaper business – Star Media and Metroland: (US newspapers valued at EV/LTM adj. Ebitda between 3-6) ratio range (4 – 5) X 43 million LTM adj. Ebitda of Star Media Group and Metroland Media
= 172 - 215 million EV + net cash 75 million =
Equity Value 247 - 290 million The real problem (from a financial perspective) seems to be the Star Media group, because national advertising sales are falling at very high percentages at the moment and you nearly can’t restructure fast enough to compensate for that decline. For Metroland it is easier to defend its adjusted Ebitda, because it has more local ad revenue. I’m optimistic that over time the percentages of shrinking will get smaller and be similar to the circulation decline rates. As long as the ad sales decline is very heavy, much or all of the operating cash flow will be used for restructuring costs. I also think that there is no real other possibility in the short term than restructuring until the rapid decline stabilizes. Imo, over the longterm, the aim for newspaper companies should be to be less independent from advertising sales. But, I know, there seems to be no real easy solution to that general problem as of today.
Verticalscope: (comparable transaction-> Internet Brands buyout by KKR in 2014 at EV/LTM adj. Ebitda of 13): ratio range (12 -13) x 43 million LTM adj. Ebitda = EV 516 - 559 - net debt about 100 million
= Equity value 416 - 459 x 0.56 =
233 - 257 million FYI Verticalscope's value could be higher because there was a big jump in quarterly Ebitda from second to third and fourth quarter (advertising from programmatic to direct). Based on
the fourth quarter Ebitda (7.5 mill.) assuming constant Ebitda over the quarters without growth in 2017 Verticalscope could be valued in one year (because then it's LTM) at 7.5 x 4 = 30 / 0.56 = rounded 54 million Ebitda in 2017 x (12 – 13) ratio range = EV at the beginning of 2018 at 648 - 702 million - net debt 100 (assuming only using FCF for acquisitions in 2017)= Equity value (56%) 307 - 337 million
Other investments: Blue Ant (18%): original investment of 29.2 over 2011-2016 x 1.4 = 41 million (according to Torstar's Q4 report investor paid 40% more for a Blue Ant share in 2016 than Torstar's historical purchase price)
Eyereturn (100%): conservative EV/Sales of 1 = estimated 20 million (low for adtech companies at the moment; compare for example to AcuityAds)
Black Press (20%): net income for 20% of 5 million x 4 = 20million (unfortunately not much info available)
Conservative value for 50% Singtao, 50% Workopolis, Canadian press, Kanetix, Canadastays, Teamsnap etc. = estimated conservatively at 20 million
=> Sum of other investments
101 million Intrinsic value of Torstar: (247-290) + (233-257) + (101) = range of 581 - 648 million
Pension liabilities: solvency deficit at the end of 2016 122 million. A present value is difficult to calculate, because it could fall significantly if interest rates rise further and/or there is legislative action regarding pension liabilities in Ontario. Conservatively I take the solvency deficit as NPV of pension liabilities.
=> Intrinsic Value of Torstar: 459 - 526 million CAD divided by 80.6 million shares = 5.70 - 6.53 per share Some factors not considered: - There is a real possibility that future yearly cash outflows regarding pension liabilities will be relieved through further rising interest rates and/or legislative action in Ontario with respect to financing of solvency deficits.
- As indicated the value of Verticalscope could be somewhat higher, because there seems to be a successful transition from programmatic to direct advertising for some accounts, which can be seen in a jump of Ebitda from second to third and fourth quarter. This was also the explanation Mr. Holland gave at a conference call. Furthermore, Imo the trend to digital advertising seems to be secular as is the decline in newspaper ad business. The customer base of Verticalscope seems quite diversified with its extensive network of forum websites. Of course, an economic malaise - especially in the automobile sector - would hit Verticalscope, but because of its giant Ebitda margin (about 60%) this would be mitigated a bit and Verticalscope would continue to have healthy Ebitda.
- Verticalscope‘s shareholders agreement between Torstar and Laidlaw/Resch forbids selling the 56% of Verticalscope for three years after purchase (Standstill till the end of July 2018). Then it’s possible to sell Verticalscope or make a recap transaction, which could give Torstar some invested cash back.
- A holding structure (as with Torstar) - like conglomerates - always has a natural discount (e.g. 20%) to its intrinsic value on the stock market. This is why it would make sense to break the company up without sacrificing the Atkinson principles.
- The Trudeau governement could try to help the newspaper Industry through legislative action. One should not expect too much help from the Government imo.