Long IAC / Short MTCH
Recommendation: Buy 1 share of IAC for every 2.37 MTCH shares sold short
April 8, 2020
IAC Price: $190.87
IAC Market Cap: $16.2BN
MTCH Price: $70.18
MTCH Market Cap: $19.8BN
“IAC post MTCH” Buy Price: $24.54
MTCH Interest Expense: $5.48
MTCH Distribution: $3.00
“IAC post MTCH” Target Price: $49.06
This idea is pretty simple. I’m recommending buying InterActiveCorp (IAC) and shorting Match Group (MTCH). For every 100 shares that you buy, I’m recommending shorting 2.37 shares of Match. This works out to an expected return of 48.6% on your net investment over the next four months.
IAC is a holding company that has a collection of internet assets (media and marketplaces). The most valuable assets are its stake in Match and its stake in ANGI Homeservices (ANGI). Per IAC’s 10-k, it owns 80.7% of MTCH and 84.10% of ANGI. It also owns a collection of other assets but let’s ignore those for now.
Based on current prices of MTCH and ANGI, the implied valuation of IAC’s remaining assets is negative $1.7BN. That is interesting, but oftentimes, holding companies trade at a discount to their sum of the part valuation. Generally there needs to be a catalyst to unlock this value.
With IAC, we have an imminent catalyst. IAC has already announced that it plans to spin off MTCH to shareholders in Q2 2020. MTCH recently confirmed that “We continue to make strides toward our separation from IAC. We still expect the separation to close sometime in Q2, though timing could be impacted by the current pandemic.”
As a result of this planned transaction, there is an opportunity to buy IAC and short MTCH because the price of IAC is far too low relative to MTCH.
The spin-off transaction looks fairly complex, but here is how I’m thinking about it.
IAC currently owns 228.2MM shares of MTCH. As the plan currently stands, IAC is going to “trade” 29MM shares of MTCH to MTCH which the company will retire. IAC will also “pay” MTCH $223MM for stock options.
In exchange, MTCH is going to:
- Assume $1.7BN of IAC Debt
- Pay IAC $700MM of cash
- Pay IAC $52MM for NOLs
- Pay IAC $120MM for IAC owned real estate
Per the presentation, IAC will own 199MM shares of MTCH which they will distribute to their shareholders at the time of the spin-off. IAC has 85MM shares outstanding, so every IAC shareholder was expected to receive 2.35 shares of MTCH at the time of the spin-off. IAC just published an updated note saying that the distribution ratio currently stands at 2.37.
Investors who short 2.37 shares of MTCH for every 1 IAC share that they own are able to synthetically buy IAC post MTCH spin-off.
Effectively, you are paying $24.54 for “IAC post MTCH”. See the math below.
What will “IAC post MTCH” be worth?
Mgmt estimated that IAC will have $2.9BN of cash. However, IAC recently bought Care.com for $500MM. IAC’s latest guidance is that it will have at least $2.3BN of net cash.
Further, IAC owns 84.1% of ANGI. At ANGI’s current price, that stake is worth $1.9BN.
If we just give “IAC post MTCH” credit for only its net cash and its stake in ANGI, it’s worth $4.2BN or $49 per share.
However, IAC has other valuable assets (see the list below) in addition to Care.com which it just acquired for $500MM.
See below a summary of Q4 2019 segments with growth rates and profitability.
While there is a lot of value in IAC’s remaining portfolio, I will just highlight a couple areas.
Most of the video segment revenue comes from Vimeo. Vimeo is a video platform for more niche content, focused on businesses and individual content creators. I personally use Vimeo to post my live call replays and believe the product is excellent. It’s also sticky.
On its platform, Vimeo charges a monthly subscription to creators at a low price point, with retention over 80%. In 2019, revenue at Vimeo grew 23%. While Vimeo isn’t profitable right now, IAC is investing in the business (it could be profitable if needed). Sell side analysts estimated Vimeo was worth a $1BN as of February 2018. At the time, IAC CEO, Joey Levin said, “”Vimeo is probably the biggest non-public opportunity inside of IAC right now.” To be conservative, we can assume Vimeo is still only worth $1.0BN despite growing 23% in 2019 and recently acquiring Magisto for a reported $200MM.
Vimeo as a video provider appears to be very well positioned for the current environment. IAC published an investor update on April 6, 2020.
In the update, CEO, Joey Levin, writes, “Demand for Vimeo’s video tools – from our livestreaming solutions for enterprises and organizations to our creation products for individuals and small businesses – has spiked considerably. In March we hit gross bookings figures we didn’t otherwise expect to hit until sometime in 2021. More people are working, learning, training, communicating and worshipping remotely, and video is the tool to get it done.”
Dotdash is a portfolio of digital publishing brands providing expert information and inspiration in select vertical content categories to over 90 million users each month.
The business consists of:
The portfolio of assets is performing incredibly well. In 2019, revenue grew 39% while operating income grew by 29%.
Dotdash’s strategy is summarized nicely in the Q4 2019 shareholder letter:
‘“Freshest, fastest, fewest” is our mantra as each of our sites is focused on publishing high-quality, constantly-updated fresh content, on sites that load faster than any competitors’, and feature the fewest ads to ensure a first-class user experience and excellent returns for advertisers.’
This 5 minute interview by the CEO of Dotdash really brings Dotdash’s strategy to life. I highly recommend watching.
This is also a great 7 minute interview that is worth watching. It paints a rosy picture of Dotdash’s future, but it also explains how valuable it is to be under the IAC umbrella.
In IAC’s recent April shareholder letter, it noted the following about Dotdash,
“Dotdash: Although advertisers are generally pulling back spend, Dotdash content is helping people manage issues like health, investing, personal finance, education, and cooking at home. Traffic is up, driven by both consumer need for the content and the reality of increased usage as people stay home and spend more time on devices, though not enough to offset declining ad rates. It will take time for advertising budgets to normalize, but that also looks likely to winnow the competitive field. We’re already making overtures to and receiving inquiries from other publications to consider transactions that previously seemed impossible.”
What’s the business worth?
I think a 12x operating income multiple is conservative.
In 2019, Dotdash generated $29MM. So we can conservatively assume the business is worth $290MM.
Venture Capital Investments
I’m not going to spend too much time on these, but as of IAC’s most recent 10-k, it has “long-term investments” valued at $353MM on its balance sheet. While IAC isn’t primarily focused on making VC investments, it has had success doing so. Here is commentary from IAC’s Q3 2019 shareholder letter.
“In the fourth quarter we also sold 4.6 million shares of Pinterest. We don’t like counting our chickens, but this one’s now hatched. In aggregate, we invested $3 million in Pinterest and returned almost $160 million to IAC. We’re not projecting a pattern here – while we’d love to do it again, we still don’t view small minority investments at very early stage companies as a core focus of IAC. We’re continuing to hone our bets to areas where we believe we can make a meaningful difference or learn something, and we’d prefer to keep the rest in cash.”
While IAC has other assets including its real estate and applications business, I’m not going to spend any time on them because you don’t need to believe that they have any value to make this trade profitable.
Adding It All Up
Using the valuations that I’ve discussed above yields a fair value for “IAC post MTCH” of $6.3BN or $74 per share.
IAC’s Strong History of Value Creation
The above math is not lost on IAC.
In its recent April 2020 update, it wrote the following:
“Meanwhile, at IAC’s current stock price, our market capitalization is $14.5 billion – that’s about $30 million higher than the value of our 80% interest in MTCH leaving aside the rest of our businesses and cash. In the separation, we currently expect that an IAC shareholder would receive 2.37 shares of MTCH (worth $144 per IAC share at today’s prices) ; subtracting that amount from the current IAC stock price would imply that the “stub” is worth $25 per share. At this price, backing out our anticipated cash balance and the value of our ANGI stake at current prices, the remaining assets of New IAC would be trading at an implied negative $2 billion value. We expect that will work itself out over time.”
If this anomaly remains after the MTCH spin-off, I would expect IAC to aggressively buy back stock consistent with its history.
IAC Has Historically Bought Back Its Stock
It’s important to remember that IAC has historically been an excellent capital allocator and performed very well following previous spin-offs as detailed in IAC’s Q3 2019 shareholder letter and as shown below.
Underwriting The Trade (Expected Return)
I expect “IAC post MTCH” to trade at a minimum price of $49. This price gives IAC credit for its net cash and its stake in ANGI. It ignores all IAC’s other assets.
Currently, the cost to borrow MTCH to short it is 15%, however, I’m assuming that the cost to borrow MTCH increases to 25%. If we assume the spin-off is delayed (even though IAC and MTCH still say it is targeted for Q2 2020) and doesn’t take place until July 31, 2020, we will have to pay interest for 115 days.
This works out to interest payments of $5.48 per share of MTCH shorted.
One other important point: MTCH shareholders will receive a $3 per share distribution at the time of the spin-off. Those who are short MTCH will be responsible for covering that distribution.
The interest cost to short MTCH would have to increase to 100% for this trade to break even. Also, I believe my assumed “IAC post MTCH” share price assumption of $49.06 is very conservative. I think it’s more realistic that “IAC post MTCH” will trade between $49 and $74, increasing the expected return of the trade.
MTCH is currently hard to borrow. However, I was able to short it relatively easily through Schwab.
- MTCH spin-off gets delayed.
- I think it’s fairly likely that the spin-off gets delayed due to the pandemic. That is why I’ve assumed a spin-off takes place at the end of July 2020 even though IAC/MTCH are targeting the end of Q2 2020. Nonetheless, IAC has spun off many companies in its history and they are anxious to complete this transaction and move on to IAC’s next stage. Further, IAC recently wrote, “Our largest business, MTCH, has seen a relatively limited impact to date as the desire for love endures.”
- The spin-off would have to get delayed until July 2021 for this trade to break even. If the spin-off was delayed indefinitely or cancelled, we could likely unwind the trade at a minimal loss or profit given that IAC is trading at a negative implied value relative to its stake in MTCH and ANGI.
- Cost of borrow MTCH skyrockets.
- As discussed above, the cost to borrow MTCH would have to increase to 100% for this trade to break even.
- Distribution Ratio Changes
- We don’t know what the ultimate distribution ratio of MTCH shares per share of IAC will be as it depends on a number of factors shown on page 12 of this slide deck. However, many of the factors move in opposite directions as prices change. For example, the lower the share price of MTCH, the more shares IAC will have to forfeit. However, MTCH is assuming the fair market value of notes (loans) that IAC has issued that are exchangeable into IAC stock. The lower the value of IAC stock, the lower the fair market value of those notes. MTCH is also assuming stock IAC options. The lower the value of IAC stock, the lower the value of those options. As IAC and MTCH stock will likely move up and down together, IAC investor relations doesn’t expect the distribution ratio to change much. At the time of the announcement (December 19, 2019), the distribution ratio was 2.35 shares of MTCH per share. As of April 6, 2020, the distribution ratio is 2.37. The distribution hasn’t changed much despite IAC and MTCH selling off significantly.
- MTCH Legal Liability
- In February 2020, Kerrisdale Capital published a report in which it argued that Match Group faces an underappreciated legal liability because it deliberately exposed non-paying users to fraudsters because it encouraged them to become paying users. I will continue to investigate this risk, but legal risk/trials usually take years to play out. As such, I’m not too concerned about it in the near future. Further, while IAC could have some exposure, MTCH should bear the majority of it so we are well positioned so being short MTCH is good.
- Kerrisdale Capital has published at least one other bearish report based on underappreciated legal liabilities. In January 2019, Kerrisdale published a bearish report on Qualcomm arguing that “ignoring the legal risk is patently ridiculous.” Since the report, the Qualcomm is up 47%, outperforming the S&P 500 by 44%. While one bad call doesn’t mean Kerrisdale is wrong on MTCH, I’m comfortable with my recommendation as my recommendation .
I think a long IAC / short MTCH trade is unusually attractive in the current environment as it’s expected to generate a significant total return and very high internal rate of return. I also believe the risk to the trade is low given I’m assigning minimal value to IAC after it completes the MTCH spin-off.
Rich Howe, owner of Stock Spin-off Investing (“SSOI”), is long IAC and short MTCH. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.