Friday, September 16, 2022

Digital Media Solutions: Broken deSPAC, MBO Offer

Another quick idea -- hat tip to Writser again for pointing me in this direction -- Digital Media Solutions (DMS) ($135MM market cap) is a "technology-enabled digital performance advertising solutions" company that came public in July 2020 through a SPAC, Leo Holdings Corp (LHC).  From what I can gather, DMS gets allocated marketing spend from their clients, runs a digital campaign and then delivers warm leads or actual customers to their client depending on the arrangement.  DMS gets paid a percentage of that customer's lifetime value ("LTV") based on the advertising client's models.  While this isn't a great business, DMS is cyclical based on marketing spend (having a down year in 2022), it doesn't seem to be a scam or puffed up science fair project like other deSPACs of recent vintage, DMS is more a marginal-to-average business with potential long-term tailwinds.

Like just about every other deSPAC, DMS came to the market with inflated expectations, they originally guided to $78MM EBITDA in 2021, but only delivered $58MM.  DMS started 2022 with flat guidance of $55-60MM EBITDA, but now only expect $30-35MM due to wage inflation hitting their cost structure (500+ employees), marketing budgets getting slashed and LTV models being adjusted down in their core auto insurance market (Allstate and State Farm are two of their largest customers).  Management expects to return to growth in 2023.

DMS is founder led, the company was started in 2012, the three co-founders are still in the c-suite today and own 35.8% of DMS through their "Prism Data LLC" investment vehicle. In 2016, DMS took on a PE investment from Clairvest, who still owns 27.5% of DMS, and rounding out the top 3 holders is Lion Capital at 11.6% ownership, Lion was the sponsor of the SPAC.  In total, these three firms own 75% of DMS, the remaining 25% has very little institutional ownership and is likely held by retail holders who were caught up in the SPAC mania.
Essentially no difference between A and B shares
On Monday 9/8, via Prism Data, management made a non-binding offer to acquire all of the publicly traded Class A shares for $2.50/share, a 121% premium from where the stock closed the previous Friday.  In their letter, they indicate that Clairvest and Lion "are likely to agree to participate" alongside Prism, leaving only 25% of shares needing to be purchased, or about $40MM.  The offer is not subject to a financing condition (important in today's market), but DMS does have $26MM cash on its balance sheet and Prism has $50MM in pre-committed financing from B. Riley (RILY) to complete the transaction.  

The offer values the minority interest at somewhere around ~10x potentially trough EBITDA, again management expects to return to growth in 2023 (they're the best positioned to know if there is indeed an inflection) so this could be an opportune time for them to take it private again.  In August 2021, the company announced they were exploring strategic alternatives, on the last two conference calls, CEO Joe Marinucci (the signatory on the Prism offer letter), has stated they were "hoping to have an update today" regarding strategic alternatives, this offer is likely the end result.  Marinucci would know where third parties offers were for the business before offering $2.50 to the board, this is likely the best offer and the independent board members will take it given there are no vocal or significant minority shareholders.

Shares closed today at $1.94/share, a 28% spread to the Prism offer.  Yes, there is significant downside given where DMS traded before the offer, but there are no shareholders to put up a fight and likely this is the best offer after the company ran a process.  Otherwise, I think the spread is wide because it is a low float former SPAC.  I bought a smallish position.  Given the number of deSPACs, I anticipate this being a similar fruitful hunting ground as the "broken/busted biotechs", please send me any others that sound or feel like this one.

Disclosure: I own shares of DMS

17 comments:

  1. I like this idea! Will see if anything comes up in it. Makes me wish I'd held onto my Clairvest, which used to be more gaming-focused, if I recall correctly. And makes me think, again, that Riley is perfect for these times, grabbing little ugly opportunistic minnows created by market dislocations. Plus they have their liquidations arm, which is probably going to get busier going forward.

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    1. Good to hear that the infamous ADL likes the idea. If it now blows up we're all in it together. The next potential busted SPAC merger: Purple: https://www.sec.gov/Archives/edgar/data/1409751/000119312522246696/d404454dex991.htm .

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    2. Haha don't follow the lead of someone who's been catching the falling knife of DHC so thoroughly that it's sliced through my toes.

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  2. Why didn't they buy shares on the market when they were trading for $1.16?

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    1. Fair, but they were probably running a process so likely blacked out from being able to buy shares personally.

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  3. $SKYH, $PL are potentially interesting busted SPACs. Many of the SPACs that are getting blown out are fairly speculative “Well financed business plans.” But I think these two have potential. No position yet in either but I’m interested.

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  4. so many questions.
    1). Why didnt they just buyback shares at $1.20?
    2). DMS has $6 /sh of debt. Private equity usually buys debt-lite cos and makes them debt-heavy. Here we have the opposite. Why?
    3) $2.50? That's quite a premium. Are we sure this isnt another "Taking TSLA private, Funding secured" Elon Musk moment?

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    1. They were likely blacked out from being able to buy shares. They do have debt, potentially getting close to a debt covenant. This isn't an LBO in a traditional PE sense, they cashed out during the SPAC transaction and are now reversing it at a much lower price. There's not going to be additional debt put on DMS.

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  5. Since they are in-control why not restructure in the public markets? Why lever the company up with $1.00 more than the cost of staying public?

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    1. They're just being opportunistic, the stock is down a ton, a lot recently, they potentially have a view that 2023 is going to be a bounce back year, they founded the business, know it better than public market investors, etc. Just an opportunistic takeout.

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  6. On the topic of SPACs... Any thoughts on LSEA? Looks extremely cheap quantitatively and insiders have been making purchases. I've not purchased any of this so far though I've looked at it two or three times...

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    1. Thanks, I remember looking at that one at the time of deSPAC, I'll add it back to my watchlist although I probably have enough housing exposure already.

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    2. One more idea for the "interesting/untouchable list" is STG. It's a very small, declining-revenue, lightly-traded, volatile Chinese online education company that's down 97% from its high (4 years ago!) and has had its auditor flagged by the PCAOB in the ongoing China-US battle. Under GAAP, it has negative equity. if it were a salamander, it would be neon blue and orange, announcing to the world "I am so poisonous you don't dare take a bite."

      That said:
      The negative equity comes from deferred revenue
      They basically, like most of the Chinese educational sphere, went from land-grab to survival mode, cutting expenditures (especially marketing) and seem to be in OK shape
      They are focused on graduate/professional stuff, so are not in the same boat as the "cram schools" that fell from grace
      They hold conference calls and offer what at initial pass seems like decent disclosure
      They recently announced a special dividend and indicated a potential interest in more
      They trade at a normalized PE of around 1

      I am still trying to get a sense of dilution and how the alleged buyback plays into it, whether the deferred revenue can/will start trending up, what the economics of the new study cohort is, and whether the recent step-change in profitability is sustainable. But I think it's potentially extraordinarily cheap, and there's certainly not much competition in terms of analyzing it.

      Keep in mind that I still hold DHC (and SQFTW, though that's held up well in the face of the collapse of the underlying; interesting how option value is the "risk" component in some securities and the "anchor" component in others), so my instincts might be very off!

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  7. IB is lending out almost all my shares and is paying me ~30% annualized net. Juicy!

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  8. Anyone have experience with how warrants are priced and handled? Given how much theta is left, isn't there a chance these are undervalued and will be taken out at a premium to current prices?

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    1. The formula for the take-out price is given in the warrant agreement: https://www.bamsec.com/filing/119312520195157/2?cik=1725134&hl=25743:29109&hl_id=vjwcftmwp

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