RILY - B. Riley

[ratiman]

B. Riley is an investment bank run by Bryant Riley that was created through a reverse merger in 2014 with Great American Group, an liquidation/appraisal business that B. Riley took public via SPAC a few years earlier (corporate synergies!). That business (which liquidates things like Target Canada, Radio Shack, oil services firms, etc) is actually going to do pretty well in the next few years. As Amazon decimates American retail, lots of mall shops will go bankrupt, and GAG will liquidate them. It has about 25% of the liquidation market.

 

That's a decent market, but not the reason to buy the stock. Currently B. Riley is in process of buying United Online, the internet access business. B. Riley is actually getting a good deal, for $48M it is getting an internet business that generated $29M of ebitda last year. Pretty good deal. As UOL is located in the same neighborhood as B. Riley, Riley believes that it can reduce the public company and corporate costs and significantly increase the value of UOL, which is probably true. Despite being in terminal decline, management of UOL received $5M in stock options last year. The DCF for UOL is around $60M, but if corporate costs can be cut, it could be worth quite a bit more. There are also tax assets that are worth $20-$30M, if they can be transferred.

 

B. Riley recently sold about 2.4M shares @ $9.50 to fund the UOL purchase, and it currently has about 19M shares outstanding, for $190M market cap @ $10. The last capital raise was at $5 in 2014, so B. Riley has done a good job of rewarding investors. Bryant Riley owns 20% of the bank and purchased about 150,000 shares in the capital raise. RILY will probably start paying out dividends from the UOL cash flow. I suspect Bryant Riley is cash poor and stock rich so he probably wants dividends from RILY to generate income without diluting his ownership.

 

Buying UOL and financing half the purchase essentially levers up B. Riley and turns it into an income stock. It now has two relatively consistent, income producing businesses and on top of that a merchant bank.

 

Here is the valuation:

 

Great American: $160M

 

Great American is a combination appraisal/liquidation business. The appraisal business is highly consistent and generates about $8M ebitda. The liquidation business is lumpy. Last year the two businesses combined for $20M of ebitda. With more retail bankruptcies ahead, it could generate more. It's not easy to value but as a relatively low-capital, consistent business, I'll put an 8x multiple on last years ebitda and say it's worth $160M.

 

B. Riley bank and asset manager: $40M

 

The bank is underperforming lately but it's probably worth $40M, that's about 1.33x tangible capital. $750M of AUM in BRAM.

 

UOL  $60M + corporate and public company savings.

 

Tax assets: $20-$30M from UOL

 

SOTP: $280M/19 = $14.73

 

Return: $14.73/$9.87 => 49%

 

 

That might be a generous valuation but I don't think SOTP is the best way to look at it. RILY is trading at about 4x forward ebitda with large tax assets. It will be generating a ton of cash. Free cash flow yield should be like above 20%. As RILY intends to do more deals like GAG and UOL, it could compound nicely.

 

[doughishere]

They sure amend their annual reports a lot....just saying.

[ratiman]

Some interesting things going on here. JC Cannell came out against the UNTD deal as a UNTD shareholder (he is also a RILY shareholder). UNTD has traded over the $11 share price, indicating that there might be another bidder. And UNTD announced that former bidders were no longer barred from approaching the company to discuss a new deal. (BTW, it is impossible to find out how UNTD is performing. The earnings report and 10Q make it pretty much impossible to find out what the business is actually making. The only people who know are RILY and UNTD management).

 

RILY traded up on the deal but then down on the new offering as the buyers flipped their $9.50 stock for a quick profit and now the market is afraid there might be no deal. Here is how I see the stock right now:

 

 

80%: Deal goes through and RILY gets a steal, as the UNTD price (and Cannell) seem to indicate. RILY goes to $12 as deal gets done.

 

10%: Deal doesn't go through and RILY trades down to $8, is worth about $10.

 

10%: RILY offers slightly higher bid to get deal done.

 

The expected value here is tilted towards buying Riley. I would say the chance of a deal is around 80% because if there were other bidders, they would have already shown up. UNTD has been for sale for a long time. However, the rumors of a broken deal have modestly driven down the price of Riley, which is good news. You get a better price on RILY and RILY is getting a good deal on United, win win. I think Riley is a good buy here at $9.50.

[ratiman]

13D by JC Cannell

 

https://www.sec.gov/Archives/edgar/data/1058854/000105885416000085/exhibit_99.htm

[whatdadil9]

Updated thoughts on this one?

 

You mentioned it was levered?

 

How do you get there? What PF capitalization are you using for RILY net of UNTD deal. What is your assumption for EBITDA?

 

From the 2q Call it sounds like they can generate prob 45mm EBITDA annually if not more. Perhaps retail closings will be somewhat of the norm for the foreseable future. They also mentioned that they are doing work for more healthy companies too. I think given this is turning into a 'teledyne" of sorts I think SOTP may be the wrong way to look at it and perhaps value on FCF is the right way. Curious to hear updated thoughts. Bryant attracted some pretty big boss shareholders. Lloyd miller is NO dumby.

[whatdadil9]

I am trying to figure out how you are calculating at 5x ebitda... What is ebitda? What are you using for UNTD and what are you using for the core biz?

 

today the EV is 235mm ... hard to see how they do 40mm of EBITDA but I would appreciate any help bridging..

[JayGatsby]

Is anyone else tracking the RILY merger with FBRC? Would be curious of other's views on valuation. Seems like a good value to me, but part of that is based on the liquidation segment which remains to be seen. On the last conference call they said there were 200 stores (MC Sports and Family Christian) under liquidation in Q1 and 1000 under liquidation in Q2 (Gander Mountain is ~$800m of good inventory but they're in a JV with all the big liquidators so it will be interesting to see what margins they spit out). It's not a great business because there's no recurring revenue, but it will be interesting to see how they do in a stronger quarter. There was an episode of The Profit where Lemonis liquidated a kitchen supply store before restocking it with what they wanted (similar as what he's doing now at Gander). Some of the inventory the price didn't matter, they couldn't even give it away. Point being, some of these crappy clothing retailers seem similar. Also curious to see how United Online trends over time. I was hoping Q1 would point more toward $30m of declining ebitda versus $25.

 

I really like the deals they've been doing, so I'm happy to buy it at a fair price. Great American was a terrific deal. I owned Great American back when they did the deal and it was basically valuing the liquidation segment at almost nothing. United Online seems like a great deal based on a ~1x purchase price after cash and tax assets. FBRC it looks like they're getting the operating business basically for free net of cash and tax assets. Neither is an incredible business but the prices are right.

 

Post those two deals they'll be sitting on ~$150m of cash, so how they use that cash will be a big influencer of future value. I was hoping they'd do a big repurchase right after close to eliminate the dilution from the FBRC shares, but RILY announced a small special dividend pre-close. As ratiman correctly predicted B Riley doesn't seem big on repurchase.

[JayGatsby]

One more quick update here. Today RILY announced the acquisition of Wunderlich Securities: https://seekingalpha.com/pr/16837500-b-riley-financial-acquire-wunderlich-securities

 

Taking the numbers in the press release:

Purchase price: $67M

LTM EBITDA: 12M

Synergies: $10 - $15M including FBR

Valuation: Assuming that $5M of synergies come from Wunderlich they're paying $67M for $17M of EBITDA (w/ minimal capex), or ~4x. A big chunk of Wunderlich seems to be tied to their $10B of AUM, which should make earnings more recurring than the capital markets functions.

[JayGatsby]

Small merger situation in CALL: https://seekingalpha.com/article/4128396-small-risk-arbitrage

 

~10% IRR if you assume 6 months to close. Not a great spread, but I also can't see what would derail the acquisition. There's no financing risk, nobody seems to be opposing the deal, it's priced at a fairly large spread to the price before announcement (downside as well), and the deal is small enough that it won't be a regulatory issue.

 

 

[JayGatsby]

Between a strong year of retail liquidations and a blowout year for equity capital markets, RILY's Q4 is pretty insane (current share price is ~$40): https://www.prnewswire.com/news-releases/b-riley-financial-releases-guidance-for-fourth-quarter-and-full-year-2020-301195006.html

 

Partly driven by investment gains. Unclear how repeatable it all is. With these bigger stimulus checks maybe it's a decent play if the spac bonanza continues. They're good operators so at least you don't have to worry about them squandering the gains.

[valuedontlie]

They view the business in "recurring" and "episodic" divisions -- whenever the episodic side of the business is surging, they tend to reinvest those "bonus" profits into new ventures, operating businesses, control situations, JVs, etc. which is how they've grown and added so many cash streams without destroying leverage ratios...

 

I believe in 2021 they'll complete the acquisition of National Holdings for a tiny sum of money. This could have a huge impact for RILY though as it would ~2x the revenue base in the capital markets business and add ~30% to total revenue. They'll be able to operate the business profitably too. This acquisition would have a big fat $0 cost to it (negative EV and they already own ~50%) while adding $200m per year in revenue...

[JayGatsby]

That's interesting. I hadn't really paid much attention to National Holdings. I just assumed they were profitable, but didn't realize they were another FBR (lots of revenue, no profit even with a massive ECM boom). Do you know what drove National Holdings up in November? Looks like RILY has made a few offers at $2.75 and they get rejected.

[banellie]

Partly driven by investment gains. Unclear how repeatable it all is. With these bigger stimulus checks maybe it's a decent play if the spac bonanza continues. They're good operators so at least you don't have to worry about them squandering the gains.

 

I believe that as long as the Fed continues its loose monetary policy, companies becoming publicly tradable should continue to be higher than average.  I am not saying they will always have a banner quarter like the last one, but the business segment should continue to thrive in this environment.  This pandemic has almost created the perfect business environment for them.

 

How long can RILY's rapid growth continue do you think?  It sure seems like to me this company could continue to reinvest their profits for a long time to come.  So far, Bryant has done a great job at allocating capital, so I would hope that would continue.  Do you have any thoughts on just how big this company may be able to become? 

 

In terms of valuation, what kind of multiple do you think the company should get?  Is it best to put a higher multiple on their recurring business segments, and for their more episodic businesses use a lower multiple?  Or how are you valuing it?  It appears that this company is massively undervalued, but I haven't done much research on this name either yet, but it sure seems like I should start.

[JayGatsby]

How long can RILY's rapid growth continue do you think?  It sure seems like to me this company could continue to reinvest their profits for a long time to come.  So far, Bryant

The companies they own are pretty diverse (capital markets, liquidations, retail/brands, internet isp, magicjack). So I dont think they're really constrained in where they can reinvest capital. That's just a function of there being good deals out there.

 

They've done great and reinvested, but I don't think it's really a rapid growth company. They've steadily reinvested cash, but in 2020 equity capital markets volume exploded immediately after liquidations exploded. So I don't really see those as true growth, as both are episodic in nature. They're good at seizing those opportunities though, as valudontlie said.

 

No idea on valuation. It just depends how long equity capital markets volume is strong. It could collapse in 2 weeks, it could go another year. If it collapses in 2 weeks, RILY is probably overvalued. If ECM goes another year, RILY is an easy double.

[valuedontlie]

That's interesting. I hadn't really paid much attention to National Holdings. I just assumed they were profitable, but didn't realize they were another FBR (lots of revenue, no profit even with a massive ECM boom). Do you know what drove National Holdings up in November? Looks like RILY has made a few offers at $2.75 and they get rejected.

 

I think NHLD took the "COVID hit" earlier this year, then RILY made an offer, then withdrew their offer after being rejected, then reengaged with another offer (latest at $2.75/sh). I think it's simply a matter of time as RILY and Dan Asher (another RILY shareholder) effectively control the company. Might be a takeunder from NHLD perspective but potentially adds a lot for RILY...

[JayGatsby]

I think NHLD took the "COVID hit" earlier this year, then RILY made an offer, then withdrew their offer after being rejected, then reengaged with another offer (latest at $2.75/sh). I think it's simply a matter of time as RILY and Dan Asher (another RILY shareholder) effectively control the company. Might be a takeunder from NHLD perspective but potentially adds a lot for RILY...

Good call here: https://ir.brileyfin.com/2021-01-11-B-Riley-Financial-to-Acquire-National-Holdings

 

$45M market cap * 45% = $20m cash outflow

 

With $230M of LTM revenue added, RILY should do really well here. Looks like National's AUM/person is way lower than RILY's which I guess is why their margins historically have been basically nothing. If RILY can get up to their existing 30% margin it's a home run.

[JayGatsby]

Thoughts on the equity issuance? Doesn't make a lot of sense unless they have an acquisition in mind. They don't need cash for anything else

[movys]

Thoughts on the equity issuance? Doesn't make a lot of sense unless they have an acquisition in mind. They don't need cash for anything else

 

Yes.  This mgmt team does not issue equity without good reason, especially given the incredible Q4 numbers they released at the same time.  This is one of the best run sub-$1B companies I have ever seen, and those at the helm have proved to be very savvy capital allocators.

[emt53]

Perhaps they have another acquisition in mind but it could also just be the robust opportunity set in front of them. They just did a couple acquisitions (NHLD, Lingo, brands), have some bonds that are callable in Feb (should just refi) and want to be able to put capital to work in a very robust environment via everyday activities (lending/investing). I think there is a big opportunity in liability mgmt -- the credit quality has improved materially from when these existing bonds were issued and they should be able to refi now at lower rates, just not sure when that happens exactly. Mgmt is participating in the offering which suggests the capital will be put to good use. Agree with movys, these are some of the savviest guys on the street.

[dwy000]

Given how good they are at capital allocation, could the current equity issuance just be management taking advantage of an inflated stock price to raise cash for leaner times?

[emt53]

Possible but doubt we would see them participating directly in that scenario. Bryant is already the largest shareholder and liquidity is an issue

[JayGatsby]

Given how good they are at capital allocation, could the current equity issuance just be management taking advantage of an inflated stock price to raise cash for leaner times?

I thought about that, but even assuming a decline across the board in operating and investing performance (which I mostly expect), it's still hard to make a case that shares are overvalued. The first 2 weeks of Jan have been good, they announced their 3rd spac, National will add both scale and some profit from the existing business, and they have the recent Justice and Lingo transactions. Plus they say insiders are buying.

[Broeb22]

Thoughts on the equity issuance? Doesn't make a lot of sense unless they have an acquisition in mind. They don't need cash for anything else

 

Yes.  This mgmt team does not issue equity without good reason, especially given the incredible Q4 numbers they released at the same time.  This is one of the best run sub-$1B companies I have ever seen, and those at the helm have proved to be very savvy capital allocators.

 

Can you give more detail on why you think this is one of the best-run sub-$1b companies you've ever seen? I'm new to this company and would love the elevator pitch.

[JayGatsby]

Can you give more detail on why you think this is one of the best-run sub-$1b companies you've ever seen? I'm new to this company and would love the elevator pitch.

On page 1 of the thread I posted about the deals they were doing back then. The deal were amazing on an economic basis and they executed even better than one would have hoped. They've done other deals along the way but FBR was really the one that changed the business.

 

Edit: This article was pretty good: https://seekingalpha.com/article/4395255-b-riley-financial-undiscovered-gem-impressive-5-year-growth-rates-trading-3x-ebitda-over-100

 

IMO it overestimates their near term (liquidations will decline in 2021 I'd guess, and equity cap markets issuance will decline at some point), but understates their deal making (doesn't factor in tax assets... FBR was basically free) and execution.