|Shares Out. (in M):||124||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,104||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||32||EBIT||0||0|
Summary: Euromoney is an LSE-listed B2B information services company trading at ~9.5x EBITDA. While this may be a steep price for a collection of sleepy print publications like its namesake, a closer inspection reveals a much more robust portfolio (e.g., high-margin subscription revenue stream from Research & Data). This portfolio has held up very well despite a challenging macroeconomic environment and will see substantial upside from a broader recovery in the financial services sector. Longer term, we believe that the business can grow at high single-digits annually with limited investment and is worth >12x EBITDA
Euromoney started life as a financial publication but has since expanded to include other publications (financial and non-financial), related events and conferences, training, and proprietary research and data. The business today is vastly different, with subscriptions accounting for 50%+ of revenues and advertising comprising only ~15% of revenues:
1) Financial Publishing (19% of revenues, 18% of EBITDA): A broad portfolio of financial publications in addition to Euromoney that includes Institutional Investor, Euromoney, Asia Money, Latin Finance, Project & Trade Finance, Euroweek, Hedge Fund Intelligence and Air Finance. Not the most attractive business on a standalone basis given dependence on advertising and a relatively slow transition to digital, but high margins (~30%) have held up surprisingly well despite the downturn. Our perspective is that this is a business that can grow low-to-mid single digits while maintaining existing margins, as management has shown a good record of managing costs. In addition, there is substantial upside if (when?) a broader financial services sector recovery occurs
2) Business Publishing (16% of revenues, 17% of EBITDA): A broad portfolio of highly-regarded publications spanning a range of end markets from energy (e.g., Petroleum Economist), law (e.g., IFLR, International Tax Review), commodities (e.g., Metal Bulletin, American Metal Market) and telecom (e.g., Global Telecoms). The quality of publications is good - Metal Bulletin in particular is considered the authoritative pricing index for a number of commodities markets. Our view is that this business is likely to grow mid single-digits while maintaining margins
3) Research and Data (33% of revenues, 39% of EBITDA). This is an attractive subscription business with high margins and great revenue visibility, and is the crown jewel of the Euromoney portfolio that should trade at a mid-teens EBITDA multiple on a standalone basis. Between '06-'12, this business grew from being the smallest to the largest (9% to 33% of revenue), with margins doubling to 42.5% in 2012. Note that there are a couple of moving parts here:
BCA: Leading provider of independent macroeconomic research. For most of us, basic sell-side macro research suffices, but for economists and global macro folks who pay for research, BCA is the de facto choice. Checks have revealed that BCA is better regarded than competitors such as Roubini, Wolfe Trahan and MRB (which was in fact founded by former BCA employees), primarily due to reputation, editorial strength and its willingness to take a contrarian view
Ned Davis Research: Provider of macroeconomic research / indicators. NDR focuses on a quantitative model-driven approach based on economic indicators and as a result is more complementary than competitive with BCA. NDR has very high switching costs as economic indicators are tightly integrated into customer workflows. NDR was acquired by ERM in 2011 and there is likely to be further upside if NDR can leverage Euromoney's distribution outside of North America, as checks have revealed that it is rather U.S.-centric today.
In addition to BCA and NDR, there are several other smaller Research and Data businesses including CEIC and ISI. We believe that this business can grow at low double-digits while maintaining margins
4) Conferences and Seminars (23% of revenues, 21% of EBITDA). These are essentially high-margin brand extensions with limited fixed costs, but are highly cyclical. Euromoney's events business is even more attractive than typical 'events' businesses (e.g., Reed Exhibitions, UBM, Nielsen Expositions) which are more tradeshow focused and rely on volume. Instead, Euromoney's events typically have far fewer participants who are more senior, making them 'must attend' events in their respective fields (e.g., Institutional Investor conferences for pension funds). This business should grow mid single-digits but will be highly sensitive to macroeconomic conditions
5) Training (8% of revenues, 5% of EBITDA). Runs a range of public and in-house training courses in finance and legal fields under the Euromoney and DC Garner brands. This is a less attractive business that is offset by its low earnings contribution
* Attractive business portfolio that is difficult to understand on the surface
Euromoney's business portfolio is much more attractive than the market gives it credit for. It's not a portfolio of print / digital B2B publications: the Research & Data business comprises ~40% of earnings and is a high-margin, subscription revenue stream with high switching costs and a strong market position. In addition, the events business is an additional 20% of EBITDA and represents high-margin brand extensions that are relatively defensive (as far as events businesses go) due to their status as 'must attend' events.
More broadly, the portfolio has held up surprisingly well despite challenging macroeconomic conditions, and any recovery in the broader financial services recovery will likely result in substantial earnings upside, although we do not have a crystal ball to know when (if?) this will happen
* Quality management team with the right incentives
Our impression is that ERM management is highly competent, with two things that stand out. First is that Euromoney has a highly decentralized operating model, which cuts down on 'cross subsidization' of underperforming businesses, resulting in a portfolio that was able to cut costs across the board during the downturn. Second is that management is incentivized on long-term (3yr) EBITDA growth via the CAP plan. While this leads to slightly higher stock incentive costs, we believe it has also created the right mentality amongst senior management - as an example, the 2010 plan targeted 100M in EBITDA by FY13 vs. a base of 62.3M
* International growth represents a two-fold opportunity
Emerging markets represents a twofold opportunity - firstly selling emerging markets solutions to its existing customer base in developed markets; secondly selling emerging markets solutions to a new customer base in emerging markets. We believe this is a growth engine in the medium-term for Euromoney, which is well-established in developed markets. Emerging markets (more broadly defined) account for ~36% of revenues and Euromoney is continuing to aggressively roll out products across all businesses focused on Asian markets (e.g., Institutional Investor events in Asia)
* Sustainable bolt-on M&A strategy
Euromoney has established a strong record of bolt-on M&A over the years by acquiring smaller businesses and (a) driven economies of scale by centralizing support functions, and (b) expanding into new markets or extending the brand (e.g., events / conferences). The most recent example was Global Grain, acquired for ~£5.1M in 2/12. There appears to be a large number of these smaller B2B publications or events 'onesies and twosies' that Euromoney can continue to roll up over time at relatively attractive multiples that are immediately accretive to earnings.
In addition to smaller bolt-on M&A, Euromoney has also made a series of larger acquisitions over time, also with a positive track record. The largest was Metal Bulletin for ~£230M in 10/06 that also included the BCA Research asset. As far as we can tell, this deal has worked out exceedingly well for ERM shareholders. Metal Bulletin has given Euromoney a platform around which to build out a commodities business, while Metal Bulletin itself has expanded its events business and BCA has expanded into new product lines (e.g., international trends, commodities, F/X and some equities and fixed income)
* Potential actions of Daily Mail (majority owner)
The Daily Mail (DMGT) is a majority owner of Euromoney (~70%) but appears to relatively hands-off in terms of day to day management. However, the recent DMGT divestiture of Northcliffe (rural papers) suggests that all options are on the table. We see two potential outcomes that are both net positives for Euromoney. Firstly, DMGT acquiring the outstanding ~30% of Euromoney that it does not own in order to consolidate all of its B2B information services under one parent. Alternatively, it could sell down its stake which would increase free float and liquidity.
While we believe that a breakup of Euromoney could unlock further value for the data & research business, there is no evidence that suggests management at either Euromoney or DMGT would entertain the idea even though the businesses are already run separately
* Substantial free cash flow generation and debt capacity
Euromoney is poised to completely delever by FY13 on the basis of strong FCF generation. Management has indicated that they are comfortable with 2x leverage (~£250M) which leaves the Euromoney with several options. We would prefer to see cash returned to shareholders via higher dividends and / or buybacks. However, management could also step up M&A and have indicated that they are considering three material acquisitions
* Valuation: Admittedly, ERM isn't cheap and one can argue that the quality of the underlying businesses is already baked into the valuation. You could also argue that there is no solid catalyst in the near-term despite a challenging macro environment - all valid. Ultimately, we believe that this is a solid business to own in the longer-term that will benefit from the eventual recovery of financial markets and continued emerging market growth
* Poor M&A: Despite a strong track record of M&A, it's possible that management throws good money after bad. This is a very real risk given they have plenty of cash / debt capacity to burn, partially tempered by the fact that they are still figuring out the NDR acquisition. Given their track record, we are tempted to give them the benefit of the doubt for now
* Financial markets exposure: A significant portion of the business is exposed to the broader financial services sector, and further weakness will create a drag across the entire portfolio. This is partly mitigated by best-in-class cost control, and our view is that there is more upside than downside at this point