Estimating the Value of VertigoScopeHi All,
In trying to understand the value of Torstar beyond the $45 million the stock market currently assigns it I believe it is important to try and unpack the value of VertigoScope. It represents their largest single investment outside the core business.
I refer to it as VertigoScope because it induces a dizzying sensation whenever I try to understand the rationale for buying it and the ongoing results.
Others abbreviate it to VS. When I see VS I immediately think of Victoria Secret which is a perfect link to VertigoScope. One largely focuses on boobs and the other was bought and run by boobs…
Moving on – here are the facts as best I can tell from the MD&A and my thoughts:
Torstar paid $178 million for 56.4% of VS or about $2.20 per Torstar share. Torstar has not received a single dollar since this investment in July of 2015. Dead money for more than 4 years. Where was that in the plan?
VS continues to show net losses, which as I understand it are largely the result of amortizing investments in content and goodwill. They appear to have paused on buying more businesses. This is the most intelligent thing they have done since July 2015. As for their debt, I do not believe Torstar has provided any guarantees debt as it would have been disclosed. VS is gradually paying down the debt which should be viewed as good.
Revenues in Q3 were down 17.3% versus the same period last year. Year-to-date they are down 12.6%. That is now attributed to the disruption caused by the transition to the new technology platform. I am not sure I buy that explanation/excuse as the previous explanation was that Google had changed the algorithms and they were modifying their search engine optimization to recapture the lost revenues.
It’s almost impossible to separate the spin from reality, but a 17% decline in year-over-year revenues is cause for serious concern. The new technology excuse may be another time-buyer or possibly the truth. Time will tell. I am inherently skeptical of significant revenue declines blamed on technology by a management team that was making serial acquisitions to mask the rot in the core business.
VS had a total EBITDA of $25.5 million to the end of September. I would estimate they will end the year with EBITDA of $33 million on $75 million of revenues. My research suggests digital media companies sell in the range of 8-12 times EBITDA, under the right circumstances.
Revenue declines are not the right results, but if we suspend our disbelief for a moment and assume they can again generate reasonably growth, let’s apply an 8 multiple. That would produce a total enterprise value of $264 million. I would not rush that number to the bank, but it is a reasonable ballpark valuation. That would give Torstar’s 56.4% ownership stake a value of $149 million. This represents a negative return of 16.4%. By Torstar standards that's outstanding.
If the $149 million value is correct, this asset would theoretically represent a value of $1.84/share to Torstar shareholders. With Torstar shares currently trading at $.55 and Torstar holding $52 million in cash with no debt, the math is at best interesting.
The market is applying a huge discount because of a lack of confidence in the fundamentals of the business and the capabilities of the current leadership to arrest the decline. Regardless of how big a discount you apply, $.55 makes no sense. I believe this will be corrected in the coming months. MW