Description

Meredith

I was planning to submit this next week when my annual contribution was back on. With the recent announcement about IAC potentially acquiring Meredith, I wanted to at least get my thoughts out there and have a place to discuss the transactions and benefit from the collective VIC wisdom on the topic. Initial reports are that IAC plans to acquire New Meredith for "over $2.5B." If it does, I think it's a great deal for IAC, and the combination with Dotdash would be terrific. I wouldn't be surprised to see an acquisition/spin transaction, or at a minimum a spin of Dotdash/MDP before too long--probably trading north of 12-15x EBITDA. Full disclosure I have updated nothing below for valuation based on the recent run. 

Summary

Meredith currently operates two optically crummy businesses that scream melting iceberg: (1) local broadcasters (local media or “LMG”) and (2) magazines (national media or “NMG” or for my purposes “New Meredith”). If that weren’t bad enough, it is controlled by the Meredith family and is leveraged to 3.7x Debt/EBITDA, and accordingly, seems to deserve its 7.3x EV/EBITDA multiple.

These are the current optics, but these optics belie the upcoming transformation that values New Meredith at 5x EV/EBIT while generating ROIC over 200%.

Company Overview

Meredith owns 17 local broadcasters through the United States (“LMG”) and owns and operates long-standing magazine brands that reach 95% of American women. Its brands include People, Better Homes & Gardens, Southern Living, Entertainment Weekly, Shape, Southern Living, and others. 

Meredith has reached an agreement to sell its broadcast business to Gray for 10x EBITDA or $2.825B. The transaction is a bit complicated, but Meredith plans to separate LMG and NMG and then spin-off NMG on a 1:1 basis. Shareholders will receive a special dividend of $16.99. The remaining proceeds will be used to pay down Meredith’s debt, allowing it to deleverage from 3.7x under 2x.

Meredith also plans to update its reporting segments, which should further enhance its appeal. Currently, Meredith reports under two segments: LMG and NMG. After divesting LMG, Meredith will update its segments within its NMG segment to explicitly break out “digital” and “magazine.”

Meredith’s digital business has been growing materially for the past five years and digital revenues have now surpassed magazine revenues. The digital revenue is split between digital advertising and licensing. Digital advertising increased 28% YoY and licensing increased 35% YoY. Meredith should be able to continue to grow at a similar clip for the foreseeable future and has yet to fully monetize its crown jewel, People.

Transaction

Meredith is spinning of NMG and selling LMG. New Meredith will retain the MDP ticker and  virtually all key directors and officers -- aside from the head of LMG. Ultimately, Gray will pay $2.825B for LMG. To effectuate the transaction, New Meredith will need to bring the total debt of Old Meredith to $1.975B (currently $2.74B). According to the Proxy (as of March 31, 2021), this will require a payment of $781.2M from New Meredith to old Meredith. The remaining $850M in consideration will be used to issue a one-time payment of $16.99 to each New Meredith shareholder. Thus upon effectuation of the spin, Meredith shareholders will receive one share of New Meredith and $16.99.

While complicated by the spin structure for tax reasons, the essence of the transaction is that New Meredith is selling LMG in exchange for taking over all the debt, and then taking on $780M in new debt (it will be less as discussed below) to issue a one-time special dividend of $16.99/share.

As of the Proxy (March 31, 2021 financials), New Meredith projected the following balance sheet:

Pulling in the updated financials from June 30, 2021 gives the following balance sheet:

Ultimately, when the transaction closes, the ultimate debt needed should be well under $600M depending on FCF generation between June 30, 2021 and close (should be before year end).  

History/Future

This section focuses exclusively on the history and future of New Meredith and largely omits any details on the LMG group. After the transaction, New Meredith will consist of the following brands/properties:

Meredith has a long history beginning in 1902 as an agricultural publisher. (Despite being around since 1902, it has only been written up once before on VIC--and that was as a short.) It published the first Better Homes & Gardens in 1924 and then got into the broadcast business in 1948. Over the years, Meredith acquired or launched various publications that up until 2017 included Better Homes & Gardens, Shape, Parents, Family Circle, Martha Stewart Living, Allrecipes, and myriad other “special interest” (low circulation) brands.

Meredith has historically been active in licensing its brands. In 2016, Meredith became the second largest global licensor (behind Disney) based on retail sales and has held that position since then. Its largest licensing agreement is with Walmart for its Better Homes & Gardens brand, but it has been effective in licensing many of its brands.

2018 was a transformational year for Meredith and not all for the positive. On January 31, 2018, Meredith purchased Time Inc. for $2.8B. Although the process started prior to the acquisition of TIME, Meredith announced its intention keep the “female-focused” publications acquired with Time and divest the rest. Accordingly, Meredith kept People, InStyle, Real Simple, Southern Living, and Travel+Leisure (and a few others) and divested TIME Magazine, Golf, Sports Illustrated, Fortune, Money, and the non-female-focused smaller brands for around $500M. I was very confused initially.  They divested Time Magazine, not the Time Corporation that they had just acquired.

After the acquisition of the female focused publications of Time, Meredith became the go-to publisher for female-focused advertisers. It reaches over 95% of American women with over 150M monthly visitors to its digital properties. Over the past 3  years, Meredith has been actively working to monetize the TIME-acquired properties and has begun to enhance its licensing operations across the brand portfolio--as it has done with the historical Meredith properties. For example, Meredith’s licensing of the TIME-legacy properties includes its partnership with Dillard’s for the Southern Living brand and the recently announced partnership with Clorox for the REAL SIMPLE brand. Meredith has not licensed its People brand to anyone yet, but that is another area of significant potential growth--as it is Meredith’s key asset. Meredith has begun to dip its toe into this pool with a People TV series that has been renewed through 2024.

Digital and licensing are the growth engines of the company, but are hidden underneath a crummy, boring, “dying” magazine business. The following table sets out the revenues for digital advertising, print advertising, and licensing along with the growth and digital’s share of advertising revenue (although the TIME acquisition was in January 2018, MDP’s FY ends in June):

Meredith is working to further capitalize on its unique position with advertisers and launched Meredith Data Studio, which is a suite of advertising solutions (similar to a data management platform) that uses its first-party data and predictive analytics to aid its partners with insights into the 95% of American women and 190M American consumers for whom it has an established  relationship. Meredith is positioning itself well for the programmatic advertising structure and further establishing itself as a go-to partner for a key demographic. It has also positioned itself well for the transition (whenever it finally does go into effect) from third-party cookies since it gathers so much first-party information. (For a good discussion of the importance of first-party data and the advertising marketplace, I commend agentcooper210’s write-up on MGNI. https://www.valueinvestorsclub.com/idea/MAGNITE_INC/7446089137).

Valuation

After the spin, Meredith will be capitalized as follows:

In FY2021, Meredith’s NMG business generated over $2B in Revenue, $392.3M in EBITDA (less some portion of corporate drag of $63.2M). Conservatively, putting 2/3 of the corporate drag on NMG results in trailing EBITDA of $350M. This results in an EV/EBITDA multiple of 4.4 and an EV/Revenue multiple of 0.85.

Meredith is also absurdly cheap on an EV/EBIT basis. Meredith does not distinguish between maintenance and growth CapEx, but even if we conservatively assume that all $19.4M of CapEx is maintenance, Meredith generated $331M in EBIT. Thus, Meredith trades at 5.2x EV/EBIT.

Meredith also generates tremendous ROIC as it is a negative working capital company that gets subscription revenue upfront. It has NWC of -$94M and Net Equipment of $248.6M giving an ROIC of 220%.

A company with tremendous brands, growing materially in new lines of business, generating 220% ROIC should not trade at an EV/EBIT multiple of 5.

There are no clear domestic public competitors to Meredith. Future (FUTR.LSE) is a comparable company (though with higher growth) as it publishes magazines and associated websites (and operates events). Some of Future’s brands include Women & Home, Marie Claire, TV Times, Tom’s Guide, Tech Radar, Guitarist, Cycling News, Cycling Weekly, Horse & Hound (shout out to Notting Hill). Future is admittedly growing much faster than Meredith and is further along in the digital transformation. Future, however, trades at 10.37x Trailing Revenue, 34.6x Trailing EBITDA, and 44.8x Trailing EBIT.

The New York Times is a decent domestic comp. Newspapers faced a grimmer future than magazines. NYT recognized that issue and has pivoted away from traditional publishing to a digital future. Analysts and shareholders have bought into the vision, and the stock commands a premium. The Meredith transition is similar. It has core brands that have developed a reputation for quality. Meredith has an advantage over NYT, however, in that its legacy business is not in the state of decline that newspapers are experiencing. The upside, however, is similar: people will gravitate to and pay for digital content from quality publishers.  Like Future, NYT trades at a major premium to Meredith: with trailing multiples of 25.7x and 3.9x EBITA and Revenues, respectively.  

Two other possible comps are DotDash (not public) and Leaf Group (formerly Demand Media). DotDash is an IAC property that was recently written up on VIC (and which I am also bullish on). Leaf and DotDash operate websites. DotDash typically receives an EV/EBITDA multiple in the 20+ range from analysts and Leaf is a smaller-scale operator that is not yet profitable. 

Perhaps Meredith doesn’t command a 20, 25, or 35 EBITDA multiple. I do think it should be much closer to 20x than 5x, however. Even if it is 15x, that is 3x upside from the current valuation based on multiple re-rating alone.

In addition to simple re-rating, Meredith is fully committed to its digital future and is positioning the company to accelerate the transformation. It is not hard to project 20-30% growth for the intermediate future for digital and licensing while seeing under 10% decline of the legacy business. Meredith has tremendous brands and scale, and provides a unique marketing pitch for advertisers looking to target women that is unparalleled.  

Catalysts:

·        Spin-off

·         Increased exposure of digital growth story

·         Cheap

·         Special dividend

Catalyst

  Spin-off

·         Increased exposure of digital growth story

·         Cheap

·         Special dividend