|Shares Out. (in M):||401||P/E||39.9||0|
|Market Cap (in $M):||1,486||P/FCF||16.4||0|
|Net Debt (in $M):||212||EBIT||43||0|
|Borrow Cost:||Available 0-15% cost|
Ascential is a portfolio of Exhibitions, Festivals and Information Services. Usually the first two are good businesses, with high network effects and barriers to entry. However, the combination of negative catalysts in its most profitable event, the removal of takeover premium from the stock, and bearish signalling from insiders leads me to this write-up as a short.
1. Future sales decline at largest product: Cannes Lions
The Cannes Lions festival, held for the past 64 years in June on the French Riviera, is the company’s largest and most profitable product. It represents 18% of total sales and - though margin is not disclosed - it would not be unusual for this kind of event to generate 25-33% of group profits. The many upsides of owning "must-attend events" are obvious. The downsides of abusing monopoly pricing are not; especially to shareholders who risk finding out too late. Killing the golden goose in events can happen because of abusive pricing, but would normally happen slowly. Layer in another reason for customers to stay away, and risks multiply.
Pricing power will decline as Ascential pushed monopoly pricing too far, and unit demand drops from traditional advertising agencies
Cannes Lions sales grew strongly at a 17% CAGR 2012-17 from £30 million to £65.5 million, but this was mainly on pricing and mix. Units of paying delegates (41% of sales) was flat, having grown 5.9% CAGR 2012-17. Units of award entries (39% of sales) declined last year (41,170 from 43,000) and grew just 3.9% CAGR the past 5 years. So good sales growth masked deteriorating aggregate demand.
Agencies deliver 64% of Cannes Lions revenue, paying to submit Award Entries, to send delegates to pick up any awards they worked on, and for sponsorship. The core customer is undergoing a once-in-a-generation business model change driven by digital advertising, and yet was being charged a lot more each year (€3,040 average per capita delegate fees to Ascential is in addition to accommodation, food & beverage and transport costs). Last year WPP cut in half - to 500 - the number of delegates it sent, and Publicis announced it would take a one year full hiatus from the event in 2018 due to cost, only promising to come back in 2019 after Ascential responded to customer push-back and dramatically dropped attendee prices by €900 from €4,000. The size of this drop indicates the amount of fat that existed in this business - few businesses can drop pricing 20%+ overnight without major restructuring. So historical pricing power and extraordinary margins will now reverse, even if some slack in aggregate demand gets picked up by tech companies such as Facebook, YouTube and Twitter who have all significantly increased their presence at Cannes in recent years.
How Is This Still A Thing? 10,000 registered attendees from creative industries such as advertising, media, fashion and movies (the origins of the Festival were the Cannes Film Festival) congregate for 7 days to receive awards, network and party. Part of the attraction for at least part of the crowd has been party behaviour that – irrespective of your moral viewpoint – is getting more media scrutiny right now. At its wildest fringes, imagine inviting your key customers to Burning Man, but business is at the heart of it, and reputation is your currency. CEO Duncan Painter was already trying to rein in “an excess of celebration” last year, before the #MeToo movement’s added momentum. Advertising agencies are paid to create reputations. When reputational risks of events outweigh the benefits, corporate spending - by global companies that prize consumer perceptions - will decline. For example, Martin Sorrell CEO of the world’s largest advertising firm quickly decided to suspend his company’s sponsorship of an unrelated London charity event subject of today’s Financial Times investigation.
So if you are going to skip Cannes Lions once, this is probably the best time. A once off stay-away would immediately hit revenues since delegate admissions are 41% or revenue. But unlike many businesses, temporary declines in event businesses are not once off; instead lots of value can get permanently destroyed. This is because the network effect of a live event that captures the zeitgeist and is the meeting place for the in-crowd works both ways: up and down. Consider how the decline of COMDEX – once the largest tradeshow in the world – is short-hand for this experience in Consumer Electronics tradeshows:
If you were to look at tweets from influential people before the show, there was a lot of “not going this year” and “CES is done for me” sort of thinking. One good (and old) friend even said “CES is the new COMDEX” which is a way of saying the show is over. This got me all depressed before boarding the plane—I mean who wants to go to a show that is horrible.
Cannes earnings could therefore dramatically decline due to lower pricing and lower attendance. A must-attend event that is not really well managed can become a zero: look at COMDEX.
What happens in Cannes does not stay in Cannes. Management uses the festival to attract institutional investors, hosting a small number of Ascential’s largest investors at “product deep dives” in Cannes on 21 June 2017. For example, the company’s biggest institutional shareholder bought more shares the day after this event (admittedly after a decline in the price). So although there is no fundamental link between the portfolio of events (attendees at Money 20/20, for example, are not impacted by World Retail Congress), investors’ buying decisions on the stock could be more impacted than a straight % of revenue would suggest.
Other products. Some of Ascential’s other events remain high quality. In particular I like Bett, the education event that is typical of high quality shows: capital-light; recurring revenues; real value to the customer; network effects. I am less positive on another Top 5 event: Spring Fair, which serves the retail industry and is unsurprisingly growth-challenged.
2. Removal of takeover premium
A big risk to shorting this company is the prevalence of M&A within the events industry. The combination of rarity (high quality tradeshows are quasi-monopolies; long-lived; but small at less than $100 million in sales) and managements incentivized by compensation to empire build, can result in some pretty high takeover multiples, even for businesses facing major challenges. Examples would include UBM’s 2014 purchase of Advanstar’s MAGIC fashion franchise just as the apparel industry was confronting major challenges.
UBM and Informa have been the most active publicly traded M&A participants. Ascential would appear to be off the menu for both as of this month’s takeover approach by Informa for UBM. Relx prefers organic growth in the space. Emerald Expositions is US focused and is probably too small to bid, as are most of the other publicly traded event companies.
The most likely takeover threat would therefore come from private equity. Blackstone in particular is building a large platform of these businesses. But Blackstone is not dumb money. Synergies would be small (on both the cost side and revenue side). And any takeover would require paying 75%+ higher than the price at which the most recent private equity owner sold; which must increase their caution.
3. Signalling. Do as I do, not as I say.
Executives continue to hold significant stock relative to their annual compensation. CEO Duncan Painter holds 3.5 million shares (0.89% of outstanding) and CFO Mandy Gradden 0.77 million shares.
Bearish signals from history
Dec ’07: Apax Partners and Guardian Media Group partnered to take private Ascential’s predecessor Emap. Neither investor is stupid. Peak cycle timing was poor though.
Mar ’08 closing to Feb ’16 IPO at £2.00 per share: eight years of tight management by informed private equity investors; followed by one year of constructing a narrative for institutional investors to buy their stake.
Feb ’16: Apax/GMG sold some of their stake at £2.00 IPO.
Sep ‘16: Apax/GMG sold more at £2.50. “Both investors said they will remain "significant shareholders" of Ascential, and said they have "every confidence that the board and management will continue to execute in line with the company's stated strategy and manage the company in the best interests of all shareholders".
Dec ’16: Apax/GMG sold more at £2.60.
Mar ’17: Apax/GMG sold their final 23% of the company at £2.88. Complete exit at weighted average of £2.56 per share, a 31% discount to current valuation.
Mar ’17. Within days of her IPO lock-up expiring, the CFO sold more than one third of her shares at £2.98.
|Year ending||Cash generated from operations||Changes in Working Capital||Capital expenditures on tangible fixed assets and acquisition of software intangibles||FCF||FCF excluding Changes in Working Capital|
|Dec-17 (Jun-17 TTM)||101||(9)||(13)||89||98|
I think the cleanest metric for the company is EV / FCF excluding interest expense, which gives an unleveraged post-tax multiple free from a lot of the myriad adjustments made to the Income Statement. If deferred income is not added to EV, this provides a current valuation of 17.3x.
So this is not obviously overvalued based on trailing earnings. But I think trailing earnings includes a fair amount of pricing power in Cannes Lions that has now run its course.
Put another way, if the private equity owners for 8 years could see these trees really growing to the sky (as depicted on page 15 of the November 2017 Capital Markets Day presentation) why would they have completely sold out at 12.6x FCF?
18-22 June 2018 Cannes Lion festival