IAC/InterActiveCorp To Spin-Off Match Group By 2Q20 | #facebookdating | #tinder | #pof


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Deal Overview

On December 19, 2019, IAC/InterActiveCorp (NASDAQ: IAC, $246.57, Market Capitalization: $20.86 billion) announced that it had agreed to separate Match Group (NASDAQ: MTCH, $80.94, Market Capitalization: $22.69 billion) and form two independent public companies “New IAC” and “New Match”. Post the spin-off, IAC would continue to operate ANGI Home services Inc., Vimeo, Dot dash, Mosaic Group and other businesses. On the other hand, Match Group, Inc. would continue to operate the subscription-based online dating websites and applications such as Tinder, Match, PlentyOfFish, OkCupid, Hinge, Pairs, Ship, Meetic and OurTime. The agreement has been approved by the Board of Directors of both IAC as well as MTCH, and is awaiting approval by IAC shareholders, majority of disinterested stockholders of the company and other customary conditions and approvals.

As part of this transaction, MTCH public shareholders will receive one share of New Match and $3/share in consideration (which they can choose to receive in cash or additional shares of New Match worth $3), while IAC will receive ~$680 million ($3/share) in cash consideration. IAC shareholders will receive 2.35 MTCH shares per IAC share. If MTCH public shareholders choose to receive their consideration in the form of MTCH shares, additional cash of $160 million will be paid to IAC, reducing the distribution ratio to 2.32. IAC may potentially sell New Match equity shares worth $1.5 billion, the proceeds of which will be paid to IAC. This would in turn decrease IAC shareholders’ stake in New Match proportionately, reducing the spin-off ratio to 2.1 from 2.35. IAC will transfer its complete debt of $1.7 billion to New Match, while MTCH will borrow $500 million to fund the cash consideration of $840M ($680 million + $160 million). Post spin-off, net leverage of MTCH will rise to 4.2x (from ~1.2x pre-transaction) and is expected to reduce to less than 3x within 18 months of the deal. The transaction, expected to be completed by 2Q20, will eliminate the dual class voting structure (one share/one vote), thus making it eligible for inclusion in S&P 500. The transaction will enhance the trading liquidity of MTCH shares and is expected to be tax-free for shareholders of both the entities (except for the cash consideration).

On October 11, 2019, IAC had announced that it will undergo full separation of Match Group from the remaining businesses of IAC. Earlier, on August 7, 2019, IAC, as part of its 2Q19 results release, announced that it is considering the spin-off of its stake in listed companies Match Group Inc. and/or ANGI Home services Inc. In the last 25 years, IAC has spun off several businesses which have grown in scale and maturity. In total, IAC has separated nine publicly listed entities such as ANGI Homeservices Inc., Match Group, Expedia, TripAdvisor, HSN, Tree, Interval, and Live Nation (formerly Ticketmaster). As of September 30, 2019, IAC held 80.8% stake and 97.5% voting interest in MTCH, along with 83.7% stake and 98.1% voting interest in ANGI.

Carve-Out Details (Match Group)

Earlier, on November 19, 2015, IAC completed the initial public offering of Match Group Inc., creating the eighth public company. Match Group offered 38.3 million shares in the IPO. At the IPO price of $12.00 per share, Match Group raised net proceeds of $460 million, which was used to repay indebtedness it owed to IAC.

Carve-Out Details (ANGI Homeservices)

Earlier, on September 29, 2017, ANGI Homeservices completed the acquisition of Angie’s List by way of the merger of its subsidiary Casa Merger Sub, Inc. with and into Angie’s List, with Angie’s List surviving the merger as a wholly-owned subsidiary of ANGI Homeservices. Accordingly, the common stock of Angie’s List was delisted from the NASDAQ Stock Market effective September 29, 2017 and beginning October 2, 2017, ANGI Homeservices started trading under the symbol “ANGI”.

Deal Rationale

IAC evaluates its portfolio on a regular basis for the possibility of separation of units to ensure improved future prospects and value creation. Moreover, IAC’s management has explicitly stated that their investment philosophy is tilted towards being an anti conglomerate. In its long history as a publiclylisted company, IAC has spun-off many businesses after they achieved sizeable scale and maturity, including Expedia, Lending Tree, HSN and Interval Leisure Group, amongst others.

IAC’s results have been primarily driven by its controlling stakes in MTCH (September 30, 2019: 80.8% stake) and ANGI (83.7%). MTCH and ANGI accounted for ~43% and ~29% of IAC’s 3Q19 revenue, respectively. Moreover, growth in MTCH’s 3Q19 operating income outpaced that of the overall group, while ANGI contributed 13.3% to the group’s operating income. Management admitted that the robust results and size achieved by MTCH relative to IAC prompted them to consider a separation (initially ANGI was also under evaluation for similar reasons). During the latest presentation, management cited that MTCH represented ~$160 per IAC share and the remaining businesses (New IAC) represented $63 per IAC share as of December 19, 2019.

For all practical reasons, we believe IAC may have expedited the spin-off announcement as it seeks complete withdrawal of exposure to MTCH, which has witnessed a slew of unforeseen setbacks recently. MTCH faces concerns over sustainable growth, given Facebook’s new dating offering and the Federal Trade Commission’s recent lawsuit against the company alleging fraudulent practices to coerce users into taking paid subscriptions. We reckon the rush (to spin-off MTCH) is probably reflected in the management’s decision to evaluate the ANGI spin-off only after completion of the MTCH spin-off. IAC is also using the spin-off of MTCH as an opportunity to bolster its own balance sheet by transferring its entire debt to MTCH and receiving cash consideration.

Post spin-off, IAC might be relieved from the conglomerate discount. Besides, having already carved out and generated value from MTCH previously, we believe it makes sense for IAC to create even further value through a divestment of the remaining stake in the company. Post separation, IAC can focus on building scale of its other businesses and drive further shareholder value, while the spin entity could benefit from optimized investment decisions to pursue respective organic/inorganic growth opportunities. Separately, MTCH also benefits from enhanced trading liquidity due to higher float and elimination of dual-class structure, which makes it eligible for inclusion in the S&P 500 Index.

Investment Thesis

MTCH is a leading provider of dating platforms and operates under various brands such as Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs, Hinge and others. For the period 2015-2018, MTCH’s revenue grew at a 21% CAGR to $1.73 billion, while operating income grew at a 32% CAGR to $553.3 million. Over the years, its popular dating app, Tinder has grown at a rapid pace (average subscribers in 2Q19: 5,233k; 1Q16: 915k). The dating app is expected to continue to drive MTCH’s results, with top-line and margins boosted by the introduction of paid services, coupled with a focus on growth from advertising revenue. Additionally, strong cash flow generation helped MTCH strengthen its balance sheet over the years, with net leverage falling to 2.1x in 2018 from 4.1x in 2015. However, as part of the transaction MTCH will raise ~$500 million to pay out a special dividend, in addition to $1.7 billion debt from IAC. This would increase the company’s pro forma net leverage to 4.2x, thus putting pressure on its balance sheet. Additionally, with Facebook launching its own dating platform, the company would face increased competition. Moreover, the case initiated against MTCH by Federal Trade Commission (FTC) over the use of fraudulent methods to push users into converting to paid subscribers raises uncertainty on the stock.

On the other hand, IAC’s other units look promising. ANGI is amongst the leading providers of platforms for home improvement services through domestic brands (HomeAdvisor, Angie’s List, Handy, Fixd Repair) and international brands (HomeStars, MyHammer, MyBuilder, Instapro, Travaux and Werkspot). The company serves more than 15 million homeowners generating more than $20 billion worth of projects through the platform. ANGI’s attempt to monetize its user base by offering prepaid services could provide it with substantial operating leverage going forward.

In addition, IAC continues to expand inorganically by investing in growth areas. On December 20, 2019, IAC announced that it agreed to acquire Care.com, the world’s largest online marketplace for finding and managing family care, in an all-cash deal implying an enterprise value of $500 million. This acquisition will give IAC a foothold in a new and growing market. Recently, the company also acquired Nursefly, a growing company in temporary healthcare staffing industry, and invested more than $250 million in Turo, a car sharing platform, thereby becoming its largest shareholder. We believe such investments are vital for IAC as they will largely determine the company’s future growth trajectory subsequent to the separation of MTCH. Additionally, post the MTCH spin-off, IAC will have a net cash position of $2.9 billion, which should help the company to continue investing in other businesses.

In essence, IAC’s legacy of creating shareholder value through carve-outs and spin-offs should instill confidence that its recent announcement on MTCH would remain accretive for shareholders. In fact, we believe the separation will prove beneficial for shareholders of both the companies, given the ability to focus on their respective businesses with clear opportunities to increase scale and deliver sustainable value creation.

Valuation

We now value IAC (the stub entity) and MTCH (spin-off entity) separately, as the pro forma net debt levels of each entity is available. We value both IAC and MTCH on a relative basis (EV/Sales and EV/EBITDA) on our 2020E Sales and Adjusted EBITDA. Consequently, we value the consolidated entity as sum of the equity value of stub entity and equity value of IAC’s 80.8% stake in MTCH. We believe that rising competition (Facebook’s announcement of its dating app) in the online dating space could impact MTCH’s growth prospects. This could also impact the performance of IAC (Consolidated), although we prefer to wait before incorporating any significant impact. Furthermore, the Federal Trade Commission’s lawsuit on MTCH alleging tricking users into availing paid subscriptions using fraudulent practices remains a major overhang on both companies until spin-off.

IAC/InterActiveCorp (Stub)

For IAC (Stub), we compare the entity with other listed companies engaged in similar internet and media services. We choose to apply a discount to peer multiples given timid sales growth prospects and a weaker margin profile after the MTCH spin-off. However, post the transaction, alleviation of investor concerns over the company’s exposure to MTCH, a stronger balance sheet (net cash position) and improved growth prospects through pursuit of inorganic opportunities could drive the valuation of the stub upwards.

We calculate the 2020 Sales and Adjusted EBITDA estimates by deducting the corresponding figures of MTCH group from IAC’s consolidated figures. We calculate non-controlling interests (NCIs) of the stub by deducting proportionate equity value of MTCH (which comes to $43.7 million) from the total Minority interest of the consolidated entity. We add back pro forma net cash of $2.9 billion and deduct NCI of $942 million to arrive at an equity value of $9.3 billion for the stub entity. Considering shares outstanding of ~89 million, we arrive at fair value estimate of $104.00 per IAC share for the stub entity.

Match Group Inc (Spin Entity)

For MTCH, we look at valuations of listed companies offering social media platforms including Facebook Inc, Weibo Corp, Twitter Inc, and Snap Inc. We raise our valuation multiples for MTCH, considering growth prospects in international markets. We acknowledge that multiples remain at substantial premium to peers, given strong growth potential of dating apps (through paid services and advertising revenue) and margin improvement prospects. That said, further multiple expansion looks unlikely and rising competition should limit the valuation premium around current levels at best.

As part of the transaction, MTCH will raise new debt of $500 million and assume exchangeable notes of ~$1.7 billion from IAC. Accordingly, we subtract pro forma net debt of $3.5 billion and NCIs worth $1.1 million to arrive at an estimated equity value of $20.0 billion for MTCH. We consider pro forma shares outstanding of 276 million. Consequently, we lower our target price to $73.00 per share (previously: $75.00) and maintain our Hold rating on the stock. We prefer to remain on the side lines given the likely spike in leverage post spin-off, along with impact of rising competition on sales growth.

IAC/InterActiveCorp (Consolidated)

For IAC (Consolidated) entity, we add the proportionate estimated equity value of 80.8% of the MTCH stake owned by IAC (which comes to $16.2 billion) to the stub equity value (which comes to $9.3 billion). Accordingly, we arrive at a fair value of $25.6 billion for the consolidated entity. Considering shares outstanding of ~89 million, we raise our target price to $286.00 per share (previously: $278.00 per share) and maintain our Buy rating on the stock. We believe that IAC’s current market capitalization of $20.8 billion does not fully reflect the fair value of its stake in MTCH and ANGI, and growth prospects in its other businesses.

Company Description

IAC/InterActiveCorp

IAC is a leading media and Internet company comprised of some of the world’s most recognized brands and products. The company operates through Match Group, ANGI Homeservices, Vimeo, Dotdash, Applications, and Emerging & Other segments. Incorporated in 1986, the company is headquartered in New York. For FY18, IAC reported revenue of $4.3 billion.

Match Group

Match Group is a provider of dating products available in over 42 languages to users across the world through applications and websites. The company operates a portfolio of brands, which includes Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs and Hinge, as well as a number of other brands, each designed to help the users to find a suitable partner. The company is headquartered in Dallas, Texas. The company reported revenue of $1.7 billion for FY18.


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