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Delivering More Than Just The Mail?
Is the Daily Mail & General Trust Plc Worth More On A Break Up?
Welcome to Value Situations issue #5, and the fourth of the “quick ideas” editions. This week’s newsletter delves into a sum-of-the-parts analysis of London-listed Daily Mail & General Trust Plc, a company that is much more than just a tabloid news and celebrity gossip publisher.
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All content on this website and in the newsletter, and all other communication and correspondence from its author, is for informational and educational purposes only and should not in any circumstances, whether express or implied, be considered to be advice of an investment, legal or any other nature. Please carry out your own research and due diligence.
[Author’s Note - this week’s newsletter was written up before this morning’s announcement of a possible re-organisation and take-private of the Daily Mail & General Trust Plc by its controlling shareholder Rothermere Continuation Limited. I’ll share thoughts separately on the proposed transaction in due course].
This week’s quick idea is a high level analysis of Daily Mail & General Trust Plc (“DMGT”), inspired by Alex Barker’s intriguing article in the FT that made an interesting case for a spin-off of its MailOnline (“MOL”) segment.
The FT article outlined a sensible case for spinning off MOL. While MOL was originally created as a “digital hedge” for DMGT’s traditional Daily Mail (“DM”) newspaper, it has grown into a large online platform that now conflicts with DM’s business model. In summary, the two segments represent a clash of old vs. new media businesses, with their common ownership under DMGT impeding both their respective strategies and growth prospects. MOL and DM have different audiences, mismatched editorial brands, and entirely different business models – MOL is a free online news and entertainment website with a focus on celebrity gossip targeting a younger audience, while DM is a politically conservative-learning tabloid newspaper catering to a middle-England readership.
At the core of the mismatch is DM’s digital strategy (branded as Mail+) which is similar to MOL but with paywalled articles, including some articles that are freely accessible on MOL. Furthermore, DM and MOL have a content sharing arrangement whereby MOL pays £10m annually to use DM content, for the purpose of driving some of MOL’s significant online traffic DM’s way. DM’s paywall model is clearly at odds with MOL’s free content model that generates revenue by monitising its website traffic with advertisers.
This muddled approach of some free, some paid shared content under similar but separate brands and editorials is confusing. The thinking therefore is that spinning off MOL could unlock significant value by allowing both DM and MOL to pursue their respective strategies under more focused management and without being hampered by the others’ strategic considerations.
Reading the FT article also prompted me to recall that Buzzfeed is currently in the process of going public via a SPAC transaction at a ~3.5x EV/sales valuation. As an online news site with a heavy celebrity slant, Buzzfeed is a useful comparable for MOL, and so an MOL spin-off at a similar EV/S multiple could potentially unlock significant value for DMGT shareholders.
DMGT Plc – The Current Position
Source: Value Situations analysis.
Share price at market close on Friday 9th July
DMGT is listed on the LSE, with a current EV of ~£2bn and a market cap of ~£2.3bn. On the face of it, it does not appear statistically cheap at ~2x LTM sales and ~18x LTM EBITDA for what many probably view as a largely legacy newsprint business (myself included prior to delving into this analysis).
However, such a perception is mistaken – DMGT is essentially a holdco for a diverse portfolio of businesses, with its traditional newspaper segment accounting for just ~40% of FY20 sales (excluding MOL, or ~50% including MOL). DMGT in fact comprises 3 main business segments as follows:
B2B Information Services, Events & Exhibitions – c. 50% of FY20 revenue
Consumer Media (Daily Mail, MailOnline) – c. 50% of FY20 revenue (DM ~38%, MOL ~12%)
DMG Ventures – venture capital arm that invests in early stage business in consumer-facing, media and information sectors (accounted for as JVs, associates and financial assets)
Learning of this disparate collection of businesses got me thinking that an unlocking of value might not end with just a spin-off of MOL alone, and so a deeper examination of its components seems like a worthwhile exercise.
DMGT SOTP Analysis
Given DMGT’s diverse collection of assets, a SOTP makes the most sense for valuing the equity, and my initial SOTP analysis suggests significant embedded value in DMGT’s portfolio, with upside of ~55% vs. the current share price.
I estimate DMGT’s EV at £3.8bn and its equity value at ~£3.7bn or ~£16/share vs. the current share price of ~£10.34:
Source: Value Situations analysis
Taking each segment in turn, I outline below how I valued each to arrive at a total EV of £3.8bn:
B2B Information Services, Events & Exhibitions
This segment actually consists of three separate (and again disparate) business units:
Insurance Risk – comprises RMS, a global market leader in catastrophe risk modelling; has developed a SaaS platform and is expanding into the high growth insurance risk management analytics market. RMS competes with larger players such as Verisk and CoreLogic.
To value this unit, I applied a 15x multiple to the unit’s LTM cash operating income (or Cash OI, a performance metric used by DMGT management and defined as EBITDA – capex).
This 15x multiple is derived from the average NTM EV/EBITDA multiple of 18.8x for a compset comprising Verisk Analytics, CoreLogic, HIS Markit and RELX, after applying a 20% discount to reflect RMS’s small company status relative to comps (e.g. Verisk is ~5x larger than RMS). I assume cash OI as a proxy for EBITDA in this instance given that DMGT does not disclose EBITDA by business unit.
Property Information – comprises two businesses, Landmark Information Group in the UK and Trepp LLC in the US.
Landmark is a proptech/legaltech/property agent business that provides data and professional services to the UK resi and commercial property markets, and claims to have the largest property and land data set in the UK. Trepp provides risk, valuation and data solutions for the commercial mortgage-backed securities market in the US, and analytics for commercial real estate investors and lenders. Given the wide range of services, this unit competes against a varied range of firms from estate agency firms such as Savills, to proptech firms such as CoreLogic, to financial data providers such as S&P Global and IHS Markit among others.
To value this unit, I followed the same approach as for the Insurance Risk unit, applying a compset-derived 14x multiple to the unit’s cash OI, again reflecting a small company discount of 20% on an average NTM EV/EBITDA multiple of 17.2x for the compset.
Given that this unit comprises two very different businesses in Landmark and Trepp, and for which separate EBITDA metrics are not disclosed, the 17.2x comp multiple is itself a weighted average multiple based on revenue split between Landmark and Trepp, and derived from their respective competitors’ average multiples, as follows:
Source: Koyfin data
Events & Exhibitions - DMG events is an organiser of B2B exhibitions and conferences with industry-leading events in the energy, construction, interiors, hotel, hospitality and leisure sectors. Comparable businesses in the UK include Tarsus Group (taken private by Charterhouse PE in 2019) and Informa Plc.
This unit was the most severely impact from COVID in that no events were able to occur due to travel restrictions and the lockdowns as a result of the pandemic. Therefore LTM metrics are somewhat meaningless for valuation purposes here.
I have opted for an EV/S method here rather than EV/EBITDA, given the variability in EBITDA and margins depending on the types of events held. To value the unit I have taken an average of the last three years sales pre-COVID (FY17-FY19) and applied a 20% discount to reflect some decline in events and exhibition attendance post-COVID to estimate PF sales of £94m.
I’ve then valued this unit at 5x PF sales, rounding up on a 20% small company discount to the 6x multiple for the compset, which comprises Informa Plc’s 5.4x NTM EV/S multiple, and the 6.7x sales paid by Charterhouse PE to take former small-cap Tarsus Group private in 2019.
Given that separate EBITDA and cash OI is not disclosed for the DM print and MOL segments, I’ve used the EV/S approach to value these separately for an assumed MOL spin-off.
Daily Mail & Print Business – this is perhaps the simplest component to value within the entire DMGT complex of assets, with peer Reach Plc (a publisher of a range of mainly print publications including the Daily Express, a direct competitor to the Daily Mail) trading at 1.5x NTM sales. Given its similar scale to DM, no discount is necessary to the multiple here and I apply the 1.5x multiple to DM’s LTM sales.
MailOnline – returning to the original thread that started this entire analysis, MOL can be valued by reference to Buzzfeed’s imminent SPAC deal to go public.
Buzzfeed is described as an online media company that focuses on publishing highly shareable content to increase virality. It has a heavy slant towards celebrity news and generates revenue from content and advertising, therefore making it a relevant benchmark for MOL. Buzzfeed currently has ~72m unique monthly visitors to its website, vs. ~39m for MOL in the UK alone (and noting MOL has a solid foothold in the US market), so the audience size is comparable.
Buzzfeed is going public via a SPAC transaction with 890 5th Avenue Partners, Inc. The overall deal is valued at $1.5bn, and includes Buzzfeed acquiring Complex Networks, a youth-oriented media outlet for $300m, implying Buzzfeed is worth $1.2bn, or ~3.7x FY20 sales. The combined $1.5bn valuation implies an overall EV/S multiple of 3.6x FY20 sales and 3x FY21E sales.
Using Buzzfeed’s standalone valuation as a benchmark, I value MOL at 3.7x LTM sales or ~£580m, which equates to ~29% of DMGT’s current EV and ~25% of its market cap.
New Scientist Magazine - DMGT acquired New Scientist magazine, a science publication, in March this year for ~£67m / 9.6x which I include as a separate item in the SOTP above. This will most likely be folded into the DM & Print segment going forward.
DMG Ventures Investments
In the latest reported results for H1 FY21, DMGT carries its various JV, associate and financial investment assets at ~£895m. Within this however, there is one big success story in Cazoo, an online used car retailing platform (similar to US-listed Carvana). DMGT invested £117m to date in Cazoo, which announced in March that it was going public on the NYSE via a SPAC transaction at a PF equity value of $8.1bn. The deal is expected to complete in Q3 this year and implies a ~$1.35bn / £986m value for DMGT’s ~16% stake on a fully diluted basis, representing a spectacular 8x multibagger for DMG Ventures.
In addition to Cazoo, in January this year it was also announced that another of DMG Ventures’ holdings, Taboola, which is a content discovery platform, was also going to list on the NYSE via yet another SPAC deal, which would value DMG’s small minority holding at £6m, or a ~3x MOIC since 2015.
Finally, other investments are valued at £38m in the SOTP, as per the balance sheet value in the H1 reported results.
Putting all these parts together, the aggregate EV based on the above SOTP analysis is £3.8bn or almost ~2x the current EV of ~£2bn.
In getting to an equity value, I make the usual adjustments in netting out debt and NCI, and adding back cash (notably DMGT is in a significant net cash position having disposed of its Hobsons EdTech division in March for £294m or ~29x cash OI).
[Note - one point to note is that throughout this analysis, I’ve looked at debt on a pre-IFRS 16 basis and ignore lease liabilities in the debt calculation as I believe this new lease accounting approach generally distorts operating profits and company accounts, and also makes comparisons vs. historic periods problematic for both financial statement and valuation analysis].
I also adjust for unallocated central costs incurred at the DMGT group level which are not reflected in the SOTP EV analysis. Taking LTM group costs of £36m, I capitalise these for deducting from the SOTP TEV by applying a 12x multiple to them, resulting in a £432m adjustment in getting to an implied equity value. This 12x multiple is derived from dividing the combined B2B and Consumer Media EVs (£1.5bn + £1.3bn) by their combined LTM cash OI of £228m (i.e. it is the implied operating EV/EBITDA multiple excluding the venture investments which do not form part of the operating business).
The result is an implied equity value of £3.7bn for DMGT, or ~£16 per share vs the current share price of ~£10.34 indicating ~55% upside. This analysis suggests the market has not fully appreciated the value of DMGT’s various component businesses, resulting in a ~36% discount to the underlying equity value for the group, or a ~0.6x P/B multiple on a SOTP NAV.
Invert, Always Invert
While the bottom-up SOTP analysis is essential to understanding the components of value, its also useful to look at it from the market’s perspective by following that great Munger maxim of “invert, always invert.” If we back out Cazoo and other investments, and assume a spin-off of MOL, the market is valuing the residual business, comprising the traditional news business and the consistently profitable and growing B2B segment at just 0.5x LTM sales and 4.8x my “guesstimated” cash OI excluding MOL:
Source: Value Situations analysis
In the above analysis, given MOL’s separate EBITDA or cash OI is not disclosed, I apply a 20% EBITDA margin (based off Buzzfeed’s projected EBITDA margin) to MOL’s LTM sales to get an implied MOL cash OI of £31m. I then deduct this from total LTM cash OI of £228m to work back to the implied 5.5x residual business multiple. While this is a rough analysis, it clearly suggests the market is undervaluing the B2B segment, despite it accounting for the largest share of DMGT’s overall LTM sales (~43%, vs. DM print news segment at ~40% of LTM sales).
The catch here is that there is no hard catalyst on the horizon, with management insisting to date on operating as a holdco for a diverse range of businesses. Perhaps then the market view is that some kid of mini-conglomerate discount to underlying value is warranted. Should the discount persist, I could see this becoming a possible activist situation.
Nevertheless, management do have form in monetising high value assets, notably the EdTech education business sold for 29x in March this year. Furthermore, the imminent Cazoo SPAC deal should see a significant realisation of cash proceeds for DMGT shareholders in time. Lastly, it’s also possible that off the back of a successful Buzzfeed listing, DMGT management may be tempted to finally spin-off MOL to unlock its value.
While this isn’t a rigorous analysis, I think it’s enough to support a thesis that DMGT is a clear value situation, with perhaps the key question being how or when will management act to unlock the value of what is a very interesting and eclectic portfolio of assets.
DMGT’s equity is clearly underpinned by high value digital content and information assets in MOL, Cazoo and the B2B information businesses, but is valued like an “e-cigar butt” at just ~0.6x SOTP NAV.
Another way of looking at it is that the current EV of ~£2bn covers the B2B and core DM news & print segments under my SOTP analysis, and you effectively get MOL, Cazoo, and the rest of the venture portfolio for free.
This is a situation I may return to again.