|Shares Out. (in M):||245||P/E||15.5x||10.0x|
|Market Cap (in $M):||1,412||P/FCF||14.5x||12.0x|
|Net Debt (in $M):||743||EBIT||160||181|
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Trade show operators are remarkable businesses. Attractive economics (asset light business model, negative working capital due to customer pre-payments, customer value creation which is many multiples of the product’s price) are augmented by the potential for long-term growth within a franchise (network effects of blockbuster events, geo-cloning to emerging marketss). UBM owns the 2nd largest portfolio of commercially-operated tradeshows in the world, representing half of company profits, plus other attractive B2B media assets such as PR Newswire (main competitor Business Wire bought by Berkshire in 2006). Businesses which simultaneously possess high barriers to entry and growth prospects which will strengthen not dilute their franchise are rare. I think paying 10-12x post tax for such a business, despite the financial leverage which a simplistic equity multiple obscures, qualifies as a good investment.
Business description by segment
Numerous trade shows which are dominant in their sector, e.g. Informex in Chemicals
52% of profits, 35% of sales, 30% operating margins.
Targeting, Distribution & Monitoring
PR Newswire, which together with Business Wire dominate the US market
23% of profits, 20% of sales, 23% operating margins.
e.g. Piers for shipping and trade data: http://www.piers.com/
19% of profits, 21% of sales, 19% operating margins.
Online and Print
Virtual trade shows such as COMDEXvirtual http://comdexvirtual.com/comdex/ and legacy niche print media such as Pyschiatric Times
6% of profits, 24% of sales, 5% operating margins.
I focus below on the largest segment: events, briefly covering the other business segments at the end.
Barriers to entry for successful events from network effects
CEO David Levin: “It is in the interests of buyer and the interests of seller to meet efficiently. And we provide a service for them to do that. So it's in all parties' interests to meet once rather than three times. And typically, when you've got to a strong exhibition, everybody's worked out that you meet for industry X at event Y. And that is the core - the core IP for me is when I hear people leaving an exhibition saying, see you here next year. Even when they say that, even if they haven't booked, I know they're going to be back the following year. It's very hard to launch against that. Extremely hard.
…(O)ur business is essentially the business of creating these must-attend, large-scale events. Our top 20 represent half of revenue and half of the total meters squared and two thirds of the bottom line. So this is really what drives the profitability of our business…And the largest events get stronger. They're 10, 15 years old. They are must-attend events. Buyers and sellers gravitate to where they will do business, where they get the highest ROI and that's what we're able to deliver in these businesses.”
Bargaining power of suppliers is weak
Successful events bring thousands of business people to a city for 2-4 days, creating temporary local monopolies for all sorts of activities. The problem for most suppliers however is that this monopoly pricing does not last, and is typically offset by significant slack during other periods.
Like other commercial trade show operators, UBM runs a real estate rental model. For just a few days per year per event they rent tens of thousands of square meters from an exhibition center and then sell subdivisions of 30-100 square meters to exhibitors in which they can mount their stands for upwards of $100 per square metre per day! Exhibitors therefore pay 10x more than the most expensive commercial real estate in the world for empty space in a cavernous hall for those few days. Trade show operators only achieve their superior profitability (25-32% operating margins) by ensuring that the abnormal profits which can be earned during the temporary monopoly effect of a large convention coming to town accrues to the owner of the trade show, rather than the owner of the real estate, and they can do this only because of the weak bargaining power of the real estate owners. For most events and geographies UBM can realistically threaten to host their event in an alternative location.
Bargaining power of buyers is not strong
Two thirds of event revenues for UBM come from stand rental sales to exhibitors, rather than attendees who make up just 12% of event revenues (most events do not charge trade participants for admission). UBM does not compete on stand rental price, but on the quantity and quality of attendees who will buy the exhibitors’ products. Ideal industries served by trade shows are competitive and fragmented in structure (if strong networks between buyers and seller already exist the trade show should be redundant), often with some element of rapid change that creates value for attendees by updating their knowledge of industry developments (technology, healthcare and fashion are well represented, e.g. http://www.blackhat.com/html/gtec/index.html, http://www.cphi.com/ and http://www.interiorsbirmingham.com/).
Successful tradeshows produce healthy returns on an exhibitor’s investment by generating sales and leads and keeping them abreast of industry developments. UBM stand rental is just one component of an exhibitor’s costs (typical stand fees of about $10,000 can be surpassed by the additional costs of staffing, samples and marketing, accommodation and travel), but has some of the highest gross margins, meaning that if an exhibitor’s ROI is sufficient to trigger an “attend” decision, UBM owns the most attractive component of the value chain and enjoys some pricing power. Exhibitors who wish to attend have little choice but to pay the price charged.
Rivalry among existing firms
UBM is the second largest commercial organizer of trade shows, after Reed Elsevier (for whom exhibitions contribute just 10% of group operating income), in what is an extremely fragmented industry (Reed accounts for 4% of the global market, UBM for just 1.8%). Rival firms do not compete in the conventional sense, and market shares should be defined by industry served, not by the aggregate trade show industry. Therefore Reed’s event portfolio might contain the #1 event for an industry (e.g. Chinese electronics manufacturing http://www.nepconchina.com/en/homepage/) but this in no way competes with the #1 event in another industry (e.g. UBM’s Worldwide Pharmaceutical event http://www.cphi.com/). Commercial trade show operators tend to have a portfolio of blockbuster shows that do not compete with each other, and many smaller ones which they hope to grow alongside the industry or geography into future blockbusters (e.g. UBM’s Brazilian shipbuilding event: http://www.ubmnavalshore.com.br/). Genuine rivalry is limited to smaller trade shows serving the same industry, which due to the nature of network effects, rapidly decrease in size and importance down the rankings. Typically the 20th most important tradeshow for any given industry simply does not exist.
Float and revenue predictability from pre-bookings
Many exhibitors at successful trade shows make their reservation (and partially pay) for the next show that can be 12 or 24 months in the future. The company benefits from this zero cost float which is substantial (£259 million at December 2010, 16% of total assets or 18% of current market cap.) and forward bookings improve the predictability of the business.
Low capital intensity
In addition to the benefits of negative working capital, since the Events business rents instead of owning real estate, and the other businesses are low users of physical assets, net PP&E represents less than 3% of total assets.
Other businesses owned by UBM seem of declining attractiveness as their relative contribution to group profits declines. Accordingly, the 2nd largest segment and next most attractive business is PR Newswire which enjoys a near duopoly in the US newswire market with Business Wire (owned by Berkshire Hathaway since 2006) and faces international growth opportunities. The business has pleasant economics such as low capital intensity and high switching costs. For example Business Wire’s revenues from the Coca-Cola Company during 2010 were $337,000, more than double what this client pays in an average year, presumably solely due to the exceptional news releases that the client made relating to its acquisition of Coca-Cola Enterprises. An additional $150,000 for about one dozen incremental releases, whose marginal cost for Business Wire must be about as close to zero as for any product in the world, is obviously attractive business for the wire service, yet their client faces close to a duopoly (despite attempted entry by Thomson Reuters and some exchanges), and unquestionably high switching costs for exceptional wire releases like this (total cost of the accurate and simultaneous release of the news of the initial transaction and subsequent related wires regarding tender offers etc. represented 1/1000 of 1 basis point of the transaction value. These kinds of dynamics don’t make for the most cut-throat of pricing environments, hence PR Newswire’s consistently high operating margins of 21-35% the past seven years).
The data services business contains some attractive databases, often serving the same clients as other USB segments. The biggest negative I see here is that two thirds of revenues are earned from subscribers, for whom this data has historically been valuable but hard to find, yet extrapolating this environment into the future is not simple. I think that the core uncertainty facing many data businesses, so clearly described in 1984 by Stewart Brand talking to Steve Wozniak, has simply yet to be resolved:
"On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other."
Nevertheless the business is currently quite profitable and enjoying some emerging market growth.
Online and Print segments represent a very small portion of the company’s value. CEO Levin’s strategy has been to divest or simply shut unprofitable legacy print assets that he considered challenged. At just 5% of group profits and after aggressive pruning these two segments should have reached the point at which the future looks like a call option: downside hopefully bounded by disciplined reinvestment only when compelling and a small chance of upside from providing thought leadership to various niche communities creating opportunities for growth.
Threat of substitutes
UBM is experimenting with virtual events more than peers who fear that these will cannibalize live events. The evidence of increased trade show attendance over the past decade or two despite technological advances which have facilitated virtual meetings suggests that substitutes to physical meetings might be more complicated than simply the invention of video conferencing and e-commerce marketplaces. People have a variety of reasons for deciding to attend such events in person, many of which are intangible and not advertised, ranging from the intellectual stimulation of networking with a fellow specialist in your field to the ones which are tacit but can be equally powerful (escaping the boss, or the spouse, for a few days). Maybe in future the benefits of technology will continue to outweigh the negatives for live events as technological development increases key drivers for trade show attendance: competition, global trade and economic growth.
Value destroying acquisitions
Cumulative acquisitions at cost since CEO David Levin joined UBM in April 2005 amount to half the current market cap. (although major disposals have also occurred during the period). The two key reasons that UBM’s strategy of serially acquiring events from small private founders makes economic sense are comparative advantage and advantageous selection.
Comparative advantage: an expert in commercializing trade shows running a portfolio of multiple events has a comparative advantage due to economies of scale over a small outfit (for whom event management is not a core business) running one mammoth biennial event with its obvious inefficiencies.
Advantageous selection (opposite of adverse selection): However the same expert in trade show operation is not well placed to start completely new events because the key ingredient for a successful event is credible industry leadership. No-one attends a trade show because it is operated or owned by UBM, but instead because founders of an event have at some point in history managed to generate sufficient interest within their industry to gather a large amount of the most influential players, which has subsequently snowballed into the current format of a large crowd. Normally the seed has been intellectual or industry leadership, and no surprise, such founder organizations are either non-commercial in intent (e.g. academic or industry mutual organizations) or ineffective at commercializing what they started (running a tradeshow which is growing like a weed with thousands of demanding attendees is not an attractive proposition to your typical thought leader in say medical devices). Therefore unlike the typical acquisition payoff profile which is stacked against the buyer due to adverse selection (insiders sell the worst assets, keep the best), there is a credible reason why some of the most attractive privately held trade show assets come available for sale: successful growing trade shows become too big for their owners to manage.
However, just because an acquisition strategy has underlying economic logic, that does not mean that UBM will continuously execute well. The company targets acquisitions that will surpass their hurdle rates of 10% pre-tax (8% post-tax) in the first year after acquisition; their own calculated track record has fluctuated 9.2%-14.2% over the past eight years. Current acquisitions appear to be occurring around the 7-8x pre-tax mark, but there is significant scope for management to mislead investors when they present these numbers or delude themselves in their analysis. Investors will only discover too late if management proves foolish in what they buy and ill-disciplined in how much they pay.
Like any management (or investor) there is always significant room for improvement in the capital allocation process. During 2008, both acquisitions (£38.5 million) and buybacks (£9.3 million) were small, nevertheless is it depressing to note management’s willingness to spend 4x more on acquisitions which have only subsequently returned 6.5% and 7.8% pre-tax (using management’s calculations which if anything should be flattering) rather than on buying back their own stock which would have returned more than double these rates (their own stock was available to them in size at 6.5x-7.2x EV/EBITA), presumably with much lower execution and analytical risks. Thankfully these examples have been small so far, but should always be foremost in investors’ minds, especially when compounded by the next risk.
Reed Exhibitions is apparently not for sale. Nevertheless CEO David Levin might persuade them to sell to UBM at a silly valuation to engineer higher personal compensation as CEO of a larger company, or merely to satisfy personal megalomania: neither of which would be in shareholder’s interests.
Attempts to align management (agent) with the shareholder (principal) using stock options, and EPS growth as determinants for compensation, contain the typical distortions. Reckless management would be motivated by these to increase risky behavior.
This risk set could obviously be applied to most public companies, but is especially important when the CEO has a mandate to aggressively acquire, and operates in the media industry which has historically proven so seductive to so many apparently smart people.
Management hides balance sheet leverage under attractive float economics
Advance deposits are recorded as deferred income on the balance sheet, but management and most analysts do not subtract this from cash (or add to net debt) when discussing Enterprise Valuation or calculating balance sheet leverage. Sensible people disagree on exactly how to treat this matter (see this site’s spirited debate on Berkshire Hathaway’s insurance float over the years), but somehow the leverage inherent in a business which has taken advance deposits from customers prior to delivering and incurring the cost of the product, and then spent that cash on acquiring other businesses, should be presented in any analysis of business valuation and financial leverage. Float is attractive, but is always Other People’s Money.
Global travel, sensitivity to global economic growth, legacy pension (gross pension liabilities are 21% of EV).
Seasonality and growth: 2011 earnings should be higher than 2010 due to the positive seasonal contribution (both revenues and margins) from some biennial events which occur in odd years, and also due to full year contributions from recent acquisitions most notably Canon Communications (completed October 2010).
EBITA is a more accurate proxy for pre-cash earnings than EBIT: amortization of intangibles arising on acquisition depresses EBIT (e.g. £92 million of intangibles were acquired during 2010 which will be straight line amortized over the next 1-10 years, even though it is not obvious that the value of acquired brands, customer relationships and databases will actually degrade) so even a cynical investor who does not blindly accept the company’s non-GAAP measure of adjusted operating profit nevertheless should prefer EBITA to EBIT.
Header numbers are £; EBITA replaces EBIT; EV treats deferred income as debt in an attempt to demonstrate the riskiness of financial leverage not reflected in the price multiple valuations.
There are many issues that I have not covered in this write-up; if interested in discussing further please feel free to ask in Q&A.
This is not investment advice and is not intended to be distributed in any jurisdiction where it would contravene local laws.
 Note the similarities to earlier write-up of Tarsus PLC.
 Q4 2009 Earnings Call
 “Erik Engstrom, (Reed Elsevier PLC) chief executive, said: “This (Reed Exhibitions) is a well-run business which is at or near the bottom of the economic cycle. It will continue to operate well and create value for shareholders. There are no plans to divest Exhibitions.” He said management had received no direct approaches. Analysts said the most attractive parts of Reed Exhibitions were its emerging markets divisions, such as in China and Brazil. It is understood that United Business Media has looked closely at these assets.” Financial Times, February 17, 2011
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