|Shares Out. (in M):||72||P/E||11.7||11.1|
|Market Cap (in $M):||912||P/FCF||0||0|
|Net Debt (in $M):||549||EBIT||0||0|
Investment Thesis Summary
-Market leader and only pure-play exhibitions business of scale in the U.S.
-High quality business model in one of the more structurally attractive subsectors in the media sector – wide and durable competitive moat driven by significant network effects
-Best-in-class platform to consolidate the highly fragmented exhibitions industry in the U.S.
-Underfollowed asset with nascent institutional following given recent 2017 IPO/Onex ownership
-Opportunity to invest at a double digit to mid-teens FCF yield with numerous upside levers in multiple expansion (re-rate closer to peers) and earnings upside from acquisitions
-Near-to-midterm catalysts include bolt-on M&A, investor discovery, ongoing debt paydown, strategic sale (likely to UBM/Informa), and Onex secondary sales
Emerald Expositions Events is the largest operator of business-to-business (B2B) trade shows in the U.S. with a portfolio of ~60+ leading trade shows. Trade shows are high quality businesses with excellent revenue visibility, pricing power, network effects, and limited competition, and 95% of Emerald’s trade show franchises hold market-leading positions within their industry verticals. Examples of EEX-owned trade shows include ASD Market Week (#1 general merchandise show), Outdoor Retailer (#1 outdoor sporting goods show), and HD Expo (#1 hospitality design trade show).
Emerald Expositions was carved out of Nielsen by Onex for $950M in 2013. Under Onex’s ownership, Emerald invested significantly in internal capabilities, hired a number of key senior management positions, and completed 15 bolt-on acquisitions. Emerald was taken public on April 28, 2017 -- all IPO proceeds were used to pay down debt. Onex retains a ~75% ownership stake in the business and has yet to take out any significant distributions.
Revenue Model – Trade show operators generate revenue by selling booth space to exhibitors on a per square foot basis. Exhibitors typically pay ~$30-50 per square foot for the privilege of setting up a booth to have the opportunity to meet thousands of focused buyers during the show. Because booth space rentals only represent a modest ~30% of a typical exhibitor’s total exhibit cost, exhibitors are less sensitive to pricing increases for booth space – as a result, Emerald has been able to achieve price increases of ~3-5% p.a.
Key Investment Merits
Wide Competitive Moat Built through Network Effects – Emerald’s shows are the largest and most well attended in their respective industry verticals, thereby attracting high-quality exhibitors (who perceive these shows as “must attend” events to introduce new products and drive sales) as well as key buyers with purchasing authority (who use trade shows to fulfill procurement needs, identify trends, and source new suppliers). This network effect helps establish a significant competitive advantage that is very difficult to displace and, as a result, direct competition is often weak.
Product Creates Real Value, Far Exceeding Its Cost – The live, face-to-face element of trade shows is difficult to replicate through other marketing channels. This rings true for Emerald’s key end markets (retail, sporting, technology) where you see significant “order-writing” activity during each show (i.e., exhibitors generate a large portion of annual sales during the show itself). The Company achieved historical renewal rates of ~80%, demonstrating the high degree of loyalty within the customer base.
Best-In-Class Consolidation Platform within a Highly Fragmented Industry The highly fragmented nature of the exhibitions industry presents a significant opportunity for consolidation. Of the ~9,400 trade shows in the U.S., Management believes ~500 are actionable targets. Since 2014, Emerald completed 15 tuck-in acquisitions, contributing ~$10M in EBITDA annually at average valuation multiples of ~7 – 8x. Consolidation is a key part of Management’s strategy, as evidenced by their recent hire of Eric Lisman (Former Head of Corp. Dev. at UBM) as Head of M&A in 2018.
Attractive Financial Characteristics – The sales cycle of a trade show builds significant revenue visibility with ~85% of next year revenue sold by Q1 and ~98% sold by Q2 – this results in negative working capital dynamics as cash deposits are collected far in advance of the actual shows (while expenses are incurred on the day of). Furthermore, the business is highly FCF generative, asset-light and requires minimal capex (<1% of sales) with EBITDA margins are typically north of 40%. On the cost side, venue real estate is rented for the few days of a trade show, not owned. Bargaining power of suppliers is weak, because many venue owners are non-profits/local governments and are not seeking to maximize profits (different incentives: e.g attracting a trade show crowd to a certain city / generating more commerce). All in all, this is a very high return on invested capital business.
Leading Strategic Takeout Candidate – UBM and Informa both publicly highlighted the growth potential of the exhibitions industry and acquired significant trade show assets over the last few years (Informa/Penton for $1.5 billion in 2016, UBM/Allworld Exhibitions for $485M in 2016). Management for both companies have gone out publicly with an “events first” strategy, and we expect consolidation to continue as strategics hit their publicly stated leverage targets and fully digest past large acquisitions.
We see near-term earnings upside from acquisitions and M&A. Furthermore, Emerald currently trades at a meaningful discount to its peers (Onex overhang, lack of institutional following, etc.). We see Emerald trading more in line with peers at ~13 – 14x Forward EBITDA – Capex as the Company continues to execute on guidance and proves out the acquisition story for new investors. Emerald is the only publicly traded pure-play exhibitions business in the U.S., and we except investor discovery to accelerate over time.
Key drivers of the base / upside cases include growth in price per net square foot (3 – 5% in line with historical trends), $10 – 15m of incremental EBITDA generated through acquisitions and 2019 (7.5x valuation multiples in line with historical acquisitions), and ~25-50bps of incremental EBITDA margin expansion through 2019. Upside case assumes incremental organic revenue growth (in addition to pricing growth) driven by new show investments and growth in attendance (industry average of ~1-2% per annum). Base and upside cases assume NTM EBITDA-Capex multiples of 13x and 14x, respectively, which reflect the bottom and upper ranges of the current peer set. Downside case assumes flat organic growth in trade show revenue, $5m/1m of acquired revenue/EBITDA per annum (significantly conservative estimate relative to historical performance), ~400 bps margin degradation from 2017 levels (in line with declines seen in the last economic downturn), and multiple contraction to 10x NTM EBITDA-Capex.
Key Investment Risks
Cyclicality – The trade show industry is tied to advertising and marketing budgets, which typically fall during an economic downturn (trade show attendance fell ~5% during the last economic recession). While exhibitors do not stray away entirely from exhibits during a downturn because events remain key sales generators, they may choose to have smaller booths.
Revenue Concentration / Retail Exposure – ~40% of Emerald’s revenue is generated within the General Merchandise sector. Buyer attendees at these events are wholesale buyers for the retail sector, which is experiencing change vis a vis digital disruption, eCommerce, and other online channels.
Mitigant: Counter intuitively, high concentration in retail (gift, home, sporting, jewelry) can be perceived as a strength, because these segments have the highest amount of small and fragmented merchants, making attendance at these exhibitions critical to business success. Sectors where buyers and sellers are very concentrated (e.g., aerospace and defense, healthcare) do not allow for the same network effects because the small existing group of vendors and buyers can transact offline easily.
Mitigant: The majority of Emerald’s trade shows deal in items that need to be seen or touched (e.g., high end furniture, outdoor equipment, jewelry), which provides a layer of customer stickiness. eCommerce players are also becoming more prevalent at trade shows to research new trends, identify suppliers, and generate sales leads.
Onex secondary overhang – Onex currently owns ~75% of the business, making the public float just a small percent of the total capitalization. Limited public float and the possibility of future secondary offerings could limit upside potential in the near-term.
Mitigant: Onex used all IPO proceeds to pay down debt and has not taken out any distributions from the Company since the initial LBO. To the contrary, Onex injected more equity over the course of its investment to fund acquisitions, signaling positive expectations for greater runway for the business.
Leverage – Emerald is currently levered at 3x Net Debt (stated target of 2.0 – 3.0x).
Mitigant: Leverage turns some shareholders off, but we see the potential for meaningful multi-year EBITDA growth which will make that leverage pay off handsomely for the equity. Additionally, the business has attractive FCF dynamics, has de-levered nicely since the initial LBO, and has brought down its average cost of debt from ~7% to ~4%.
Capital allocation: ongoing tuck-in acquisitions, continued debt paydown, and dividend growth closer in line with peers
Strategic sale / M&A
Onex secondary sale