J2 Global Spin-offs (Consensus) Notes
April 29, 2021 Update
- J2 announced that it will spin off its Cloud Fax Business.
- The company said its dependence on this segment of its business as a revenue generator could become a liability as more governments and businesses adopt digital signature technology, which would minimize the need for cloud-based fax systems. Consensus will focus on expanding cloud fax services in the health care industry where these tools are already widely used.
- Remainco will keep the J2 name. From the press release:
J2 will continue its strategy of building a leading internet platform focused on key verticals, including technology & gaming, shopping, health, cybersecurity and SMB. J2 provides trusted content and applications; has a leading programmatic acquisition system; and an established track record of growth. Pro forma for the transaction, J2 is expected to have revenue of between $1.297-$1.334 billion in 2021 (per prior guidance) and a run-rate Adjusted EBITDA margin of approximately 35%1. At the closing of the transaction, J2 is expected to have moderate leverage, providing the financial flexibility to support its growth with organic investment and M&A.
- The spin-off will be named Consensus. From the press release.
Consensus intends to leverage its position as a leading provider of secure data exchange, focused primarily on the healthcare sector, to create an end-to-end solution addressing healthcare interoperability. The business will primarily comprise the Cloud Fax business that is currently part of the Cloud Services division of the company. The Cloud Fax business that Consensus will own is embedded in the healthcare ecosystem and is well positioned to capitalize on the large and growing market opportunity to provide interoperability among disparate systems and workflows, thereby increasing worker productivity, reducing costs, and delivering better patient care. Pro forma for the transaction, Consensus is expected to have revenue of between $333-$342 million in 2021 (per prior guidance) and a run-rate Adjusted EBITDA margin of approximately 55%1. Its financial strategy will be to deploy its strong free cash flow in support of its organic investment plans and de-levering.
- The spin-off will take place by Q3 2021. That’s a pretty quick turnaround.
- J2 intends to distribute at least 80.1% of the outstanding Consensus shares to J2 shareholders on a pro rata basis in a distribution intended to be tax-free to J2 and its shareholders. At the time of the spin-off, J2 intends to retain up to a 19.9% interest in Consensus and divest that interest over time in a tax-efficient manner.
- Looks like Consensus will be the “badco”. From the JCOM’s most recent 10-k risk factor:
Our cloud fax services constitute a significant percentage of our revenue.Currently, cloud fax revenue constitutes approximately 22% of our consolidated revenues. The success of our business is therefore dependent upon the continued use of fax as a messaging medium and/or our ability to diversify our service offerings and derive more revenue from other services, such as cybersecurity, SMB enablement solutions and services related to our Digital Media business. If the demand for cloud fax decreases, and we are unable to replace lost revenues from decreased usage or cancellation of our cloud fax services with a proportional increase in our customer base or with revenues from our other services, our business, financial condition, operating results and cash flows could be materially and adversely affected.We believe that one of the attractive features of our eFax® and similar products is that fax signatures are a generally accepted method of executing contracts and a method of transmitting confidential information in a secure manner especially in the healthcare field in the United States. There are ongoing efforts by governmental and non-governmental entities to create a universally accepted method for electronically signing documents. Widespread adoption of so-called “digital signatures” could reduce demand for our fax services and, as a result, could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
- 23% of revenue in 2019. $1,373BN of revenue. So eFax evenue was $316MM.
- 20% of revenue in 2020. $1.49BN of revenue. So eFax revenue was $298MM. Decline of 6%.
- Some thoughts:
- Looks like spin-off is going to be levered up.
- Could be a challenging situation. High leverage with declining revenue.
- Could be interesting at the right price.