Nielsen Holdings Spin-Off Quick Summary – December 3, 2019
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On November 7th, 2019, in conjunction with the Company’s third quarter earnings release, Nielsen announced that they had completed their strategic review of their business, and would spin-off their Global Connect business. The spin-off transaction is expected to be tax-free and is targeted to be completed in the second half of 2020, with management stating that the transaction should be completed within nine to twelve months.
Why the Spin-off?
In the case of Nielsen, this spin-off was driven by a combination of a weaker retail environment and a push by activist investor Elliott Management to generate more value for shareholders. In 2018, Elliott took a sizeable stake Nielsen and immediately requested a strategic review of the business, in which Nielsen should consider selling itself. The strategic review was completed a few days ago, and, while Nielsen ultimately decided against selling itself, they concluded that they will spin-off their Global Connect business. Considering the remainder of Nielsen’s business, Global Media, is a much faster growing and higher margin business, this transaction is likely to be value-additive for Nielsen shareholders.
Nielsen Global Connect provides consumer packaged goods manufacturers and retailers with accurate, actionable information and a complete picture of the complex and changing marketplace that brands need in order to innovate and grow their businesses. Nielsen Global Connect provides data and builds tools that use predictive models to turn observations in the marketplace into business decisions and winning solutions. The business’s data and insights, combined with the only open, cloud native measurement and analytics platform that democratizes the power of data, continue to provide an essential foundation that makes markets possible in the rapidly evolving world of commerce. With Nielsen Global Connect’s set of guiding truths, businesses have the tools to create new opportunities.
The Global Connect segment used to be a gem of the Nielsen portfolio, providing key insights into retailers and CPG firms. Recently, due to the slaughter of retail businesses by Amazon and the need by these CPG firms to cut expenses, Global Connect has struggled, with revenues falling YoY every year since 2015. Management has guided to further declines in the segment in 2019, which is a troubling sign for a business that only has ~low-teens EBITDA margins.
From a cyclicality perspective, the analytics business would tend to do worse in a downturn, especially after considering that Nielsen Global Connect analytics are not considered mission-critical for these businesses in the same way that the Global Media segment is.
The industry as a whole is considered rather healthy, as enhanced data analytics has been a strong trend for companies over the past few years. However, the end market that Global Connect predominantly operates in is in a period of considerable turmoil due to e-commerce threats, forcing them to stringently cut costs. These secular headwinds have had immense pressure on the Global Connect business, hurting them for the past few years now. The operational strategy that Global Connect management is promoting as their turnaround play essentially revolves around diversifying end markets a bit, pushing into omnichannel and e-commerce analytics in an effort to shield themselves a bit from a slower retail end market.
Most of the competitors within the retail and CPG analytics space are smaller, niche players that are not public, making it difficult to get information on them. The other share takers in this space are actually the in-house marketing departments for retailers and CPG companies. Depending on what the company’s strategy looks like, it may be more cost effective for them to simply hire a few data scientists versus outsourcing the work to a company, such as Nielsen’s Global Connect segment.
Global Connect’s largest customers are large CPG and retail companies. Some examples of larger customers for them are Nestle, Kraft-Heinz, Kroger, Coca-Cola, Target, and others. Although the business does not appear to have large concentrations in their revenues by one or two customers, the issues that are plaguing the majority of the CPG and retail industries are digging into Global Connect’s top line as well.
Quality of Business
Margins are low, revenues are declining, and the CPG/retail industries that Global Connect focuses on as end markets are in a secular decline. However, a data analytics business has good economics as it is not very capital intensive. Collecting data is not very costly, and the business has operating leverage as adding an additional subscriber has zero incremental cost. However, the SG&A that Global Connect has to spend to acquire new customers is what generally compresses margins, especially as top line slows. If the company can put together a solid strategy to attack new markets in omnichannel and e-commerce, in addition to solidifying relationships with existing customers, there could be a very solid runway for growth and margin expansion out of this business. However, I’m not optimistic.
Since the transaction announcement was so recent, management has not divulged specifics about what the new capital structure for Global Connect will look like, as they have likely not assessed the financing yet. According to the press release about the spin-off, Global Connect is expected to carry a yet-to-be-determined amount of debt, much of which will be used by Nielsen to de-lever its own balance sheet. Gross debt stands at $8.5BN and NLSN’s debt/adj. EBITDA is 4.38x.
Management has not yet been announced for the spin-off, with current NLSN management only commenting so far to say that they have officially begun a search for a Chief Executive for the Global Connect business, considering both internal and external candidates.
Potential for Indiscriminate Selling
The spin-off (Global Connect) is a much less attractive business than Global Watch. Nielson is currently in the S&P 500 index, but it is highly unlikely that the spin-off will be included in the Index. As such, I would expect heavy selling pressure once the transaction is complete.
Although there is not yet enough financial information released yet about the Global Connect business to do a more thorough valuation review, our initial estimate is that the spin-off deserves to trade at 6.0x EBITDA, a significant discount to NLSN’s current 9.2x multiple. We would expect NLSN’s multiple to expand once the spin-off is complete. If the spin-off does trade at a 6.0x EV/EBITDA multiple, the company will be valued at an enterprise value of ~$2.4BN.