Tuesday, 20 October 2015

Blucora, Sell First, Ask Questions Later

Want to see a nasty chart?

Here's Blucora (previously Infospace).

It's been showing up on my 52 week low list nightly, and I figured what the heck, why not look at the story (it's not like I have anything better to do with my time).

So here it is, straight from the 10K:

Blucora, Inc. operates a portfolio of Internet businesses. Our Search and Content business (formerly known as our Search business) operates through our InfoSpace LLC subsidiary ( “InfoSpace” ) and provides search services to users of our owned and operated and distribution partners’ web properties, as well as online content.

Our Tax Preparation business consists of the operations of TaxACT, Inc. ( “TaxACT ”), which we acquired on January 31, 2012, and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services.

Our E-Commerce business consists of the operations of Monoprice, Inc. (“ Monoprice ”), which we acquired on August 22, 2013, and sells self-branded electronics and accessories to both consumers and businesses.

Following the acquisitions of TaxACT and Monoprice, we determined that we have three reportable segments: Search and Content (formerly known as Search), Tax Preparation, and E-Commerce. Our Search and Content segment is the InfoSpace business, our Tax Preparation segment is the TaxACT business, and our E-Commerce segment is the Monoprice business.

Ok.  Three distinct businesses all smushed together under one corporate umbrella.

Here's what makes this company so difficult to value.  On October 14 (last week), the company issued the following press release, link here:

BELLEVUE, WA -- (Marketwired) -- 10/14/15 -- Blucora, Inc. (NASDAQ: BCOR) today announced a definitive agreement to acquire privately-held HD Vest Financial Services® ("HD Vest"), the holding company for the group of companies providing financial services under the HD Vest name, for approximately $580 million. HD Vest is the leading independent broker-dealer providing wealth management and advisory solutions specifically for tax professionals. The acquisition is synergistic with TaxACT and is expected to be immediately accretive to Blucora earnings per share. The transaction will be financed with cash on hand and $425 million from a new debt facility.

The acquisition of HD Vest marks the initiation of a larger strategic transformation of the company, under which:
  • Blucora will initiate separate processes to explore the divesture of Infospace and Monoprice, with the goal of completion in the first half of 2016.
  • Corporate operating expenses will be reduced by 30% to $12 million run rate by the first half of 2017.
  • Capital allocation priorities will shift to pay down debt initially, and upon reaching a leverage ratio of 3.0x net debt to EBITDA, at least 30% of actual free cash flow will be returned to shareholders in the form of share repurchases or dividends. The goal is to reach that level of leverage by early 2017.

"This is a transformative acquisition for Blucora," said Bill Ruckelshaus, President and Chief Executive Officer of Blucora. "HD Vest is a well-run company and a clear leader in its market. HD Vest and TaxACT operate in adjacent markets with complementary solutions. This transaction enables a transformation for Blucora that allows us to focus strategically, streamline our portfolio, and meaningfully reduce corporate overhead in the coming months. With these moves, the new Blucora will be well positioned in markets that will benefit from positive trends within the financial services and technology space and the company will generate substantial free cash flow that will be returned to shareholders starting in 2017."

So all of a sudden, no one really knows what the company is going to end up looking like post acquisition of HD Vest.

They're going to be taking on $425M of debt to finance the purchase against a current market cap of $475M.  If market cap stays where it is, EV will end up being around $900M.  Looking at the chart above, it seems like it wants to take a run at the old 2011 lows around $8, which would put market cap at $336M, and post transaction EV at $760M.

Here are some additional excerpts from the above press release:

  • On a pro forma basis, TaxACT and HD Vest are expected to generate 2015 revenue of $436.8 million and adjusted EBITDA of $86.5 million excluding synergies, which represent a 3-year compounded annual growth rate of 10 percent and 16 percent respectively. The combination is expected to generate synergies with a $5 million contribution to EBITDA by 2017. This transaction provides Blucora with stable growth, increased visibility, and high cash flow generation.
  • The acquisition has the ancillary benefit of maximizing the value of Blucora's federal net operating loss carryforwards. The company anticipates being able to fully utilize its $570 million in federal net operating loss carryforwards before their expiration.
  • With the benefit of the NOL, HD Vest is being purchased for 13.5x estimated 2016 unlevered free cash flow excluding synergies and 12.1x including synergies.
I think there are two key elements to attempt to value here:
  1. A possible range of values for the newly created entity's estimated free cash flows, and 
  2. Possible values for Infospace and  Monoprice
A possible range of values for the newly created entity's estimated free cash flows

Here, I'm going to use management's initial growth estimates and then chop these in half (to be conservative), and I'm going to assume two stages.  First stage, EBITDA - interest expense of say, 6% x debt on a sliding scale for the first "x" years.  They have NOL cfwds of $470M which should shelter taxable income up to year 7.  They mention above that they want to pay down debt aggressively to the point of carrying debt = 3 x EBITDA, so I've estimated a 12 year repayment schedule with a view to carring $320M in debt  = 3 x year 5 EBITDA.  I've made a generalization that EBITDA minus interest expense minus tax should be a good enough proxy for FCF, but I'm obviously missing capx and working capital adjustments.

Here's what I came up with:

8%Yr 1Yr 2Yr 3Yr 4Yr 54%Yr 6Yr 7Yr 8Yr 9Yr 10Yr 11Yr 12Terminal
Interest expense26242322211917151210740
PV 585959595955323231302928249
Total DCF's779

Possible values for Infospace and  Monoprice

Here's the segment analysis between 2011 and 2015.  For 2015 tax, I couldn't do a straight linear annualization for either revenues or operating income as the business is most likely front loaded into the first half of the year, so I took six months results  /  (2014 six months / 2014 total).  This way, I pro-rate the results according to seasonality.

Sales % 12/31/201112/31/201212/31/201312/31/201412/31/2015
Op Income12/31/201112/31/201212/31/201312/31/201412/31/2015Growth
Op Income %12/31/201112/31/201212/31/201312/31/201412/31/2015
Op Income /Sales12/31/201112/31/201212/31/201312/31/201412/31/2015

First thing to note is the growth in tax.  This is a definitive growth business, obscured by the results in search.  Seeing this makes me a little more comfortable in taking the assumed growth rate in EBITDA as presented by management.

Next, I note that while search is basically unpredictable, and will likely command little value if sold, Ecommerce isn't as unpredictable.  According to their 10K, their Ecommerce business sounds as if it's a mini Overstock.com:

Monoprice has built a well-respected brand by delivering products with quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 6,900 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device.

I'm going to be conservative and value Monoprice at a multiple of between .25 and .5 x revenue of $141M.  The midpoint is $53M.

For search, sales have dropped back to 2011 levels.  If I was really conservative, I'd value search at zero.  Let's use .25 x revenue of $220M = $55M.

Tying it all together

At a 12% Re, I get $779M +$53M + $55M = $887M, less expected debt on acquisition of $425M = $462M.  IV increases commensurate with debt repayment. 

Post acquisition, assuming price doesn't change from here, market cap ends up being $475M.  I don't see much if any margin of safey based on the above assumptions. What's interesting though, is what happens if price gets down to $6 (or below).  See the following long term monthly chart for key support levels:

At $6, and assuming share count stays relatively constant at 42M shares, I get a market cap of $252M, vs. adjusted IV of $462M per above post acquisition, an almost 55% margin of safety.  Do I think it can get to $6?  No idea, but having done the analysis above, I'm preparing myself for any eventuality.

As an aside, I need to now run the same analysis using 1/2 management's expected growth of 8%, and at Re = 15% to see whether I still have a margin of safety at between $6 and $8.

Closing comments:

The above is in no way, shape or form a recommendation to buy/sell.  It should not be construed as advice whatsoever.  It's just me being curious.

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