TSQ - Townsquare Media Inc

[nikhil25]

This one has been discussed in other places (mostly the Ask Packer thread), but I think it deserves its own home.

 

Here's the VIC write-up: https://www.valueinvestorsclub.com/idea/TOWNSQUARE_MEDIA_INC/138460

[lemsinge]

I learned about this company in recent months. With this pullback, I will probably begin a position. The "fears" around its debt are overplayed in my opinion. Also a strong name in its communities.

[kab60]

I bought some. I hope/somewhat expect them to sell the live event biz and focus on their core biz which is chugging along nicely. If they delever and institute a divy later in the year I think it should do nicely. Throws off a ton of cash, and with the shareholder base capital allocation should be fine.

[valuedontlie]

I really like terrestrial radio broadcast companies (they generate a ton of cash and need virtually no capex).

 

I've looked at TSQ a few times in the past but management seems to be in no hurry to pay down debt. They have been taking on more debt to make acquisitions. Since they've come public a few years ago, net debt is up while EBITDA is flat... Sort of a head-scratcher.

 

While it is super cheap (as most old-line radio companies are... ETM), they are super-levered and these sorts of names get pummeled in a down market. I remember in 2008-2010 timeframe you could buy up any of these radio companies at 1-2x FCF (if the debt didn't scare you off).

 

Thoughts on leverage and capital allocation?

[kab60]

Those are very valid concerns, and I've also stayed away due to the high leverage, but while a lot of these stocks cratered, their business model is fairly resilent (and proved to be crazy good investments for those picking them up on the cheap). With this much leverage you don't wan't Ebitda to shrink but grow, and their core business seems pretty healthy (nothing fancy but you're not really paying for that).

 

I don't like their live entertainment business and I also think the inherent instability compared to the core radio biz punishes the multiple, but I see that as an opportunity. With the CEO change and listening to the latest call it seems they're looking to sell it (or at least some of it).

 

They also expect leverage to come down into the mid 4s at the end of 2018 through a combination of cash generated and increased Ebitda. If you're into dividends and catalysts, it also seems they'll introduce that in H2 2018, so they seem pretty comfortable with where they're going. I'd probably prefer further debt paydown and/or a fat sharebuyback, but a dividend might attract retail investors and help lift the share price so who cares.

 

So, historical capital allocation looks somewhat weak, but debt paydown and dividends you can't really mess up, and these guys have large ownership stakes, so they should get it right going forward.

[kab60]

Released results yesterday which were pretty much as expected. Core radio biz seems quiet strong. They instituted a dividend which was earlier than I expected, and they're still targeting net leverage of 4x in the midterm while they're scaling down entertainment/live events. I would've preferred share buybacks and the sale of entertainment/live events, but I suppose buyers aren't exactly lining up, and they seem open to the idea, since they're penalized for that part of their business. Doesn't really make anyone excited, but around here I think it's just too cheap for a business with a very proven model throwing off tons of cash.

[Foreign Tuffett]

Capital allocation here has been really poor here, right? They spent $75 million on an operator of carnival rides, which seems like a drastically different business than operating small town radio stations. It's also capex intensive, something they really didn't need given their capital structure. I'm a little puzzled by their initiation of a dividend instead of more focus on deleveraging.

 

They have an awkward co-CEO structure. 

 

 

[kab60]

I agree with with everything you wrote. They did a bunch of stupid stuff. But they seem to have realized that and taken the right actions. Dividends, debt paydown and small radio bolt ons should derisk capital allocation going forward.

[kab60]

I think this is a pretty fat pitch. If I had a hedge fund, I could

put together 30 impressive slides. But who cares.  Around 30 pct FCF yield. Debt trades around par. 10K delayed due to auditors fighting over impairtments of past bad M&A. Who cares. Radio, dead you say. Well, they have two subscription businesses. If I had a hedge fund I could put together slides ala EVI or PAR and explain why this might be huge. But it already is. Townsquare Ignite and Townsquare Interactive both on par to do 100m rev @ 33 pct margins - subscription baby. To add a couple of radio broadcasters - ETM, Cumulus - are distressed. Might be able to do a sweetheart deal. Probably also biggest risk. They should focus on their core, organic growth and debt paydown. Really impressive what they have built so far.

[valueinvestor]

I think this is a pretty fat pitch. If I had a hedge fund, I could

put together 30 impressive slides. But who cares.  Around 30 pct FCF yield. Debt trades around par. 10K delayed due to auditors fighting over impairtments of past bad M&A. Who cares. Radio, dead you say. Well, they have two subscription businesses. If I had a hedge fund I could put together slides ala EVI or PAR and explain why this might be huge. But it already is. Townsquare Ignite and Townsquare Interactive both on par to do 100m rev @ 33 pct margins - subscription baby. To add a couple of radio broadcasters - ETM, Cumulus - are distressed. Might be able to do a sweetheart deal. Probably also biggest risk. They should focus on their core, organic growth and debt paydown. Really impressive what they have built so far.

 

Any chance you've tried their TownSquare Digital Advertising business? I'm in the same industry, and I can tell you that not one digital advertising agency is the same. If the investment thesis is dependent on a growth of TSQ Interactive and Digital - then I would not invest until you are fully comfortable with their offerings. Not to say this is not a fat pitch, but many times it could be the opposite.

 

Lastly, how did you get to a 30% FCF yield? Did you include the debt in your calculations?

[kab60]

I think this is a pretty fat pitch. If I had a hedge fund, I could

put together 30 impressive slides. But who cares.  Around 30 pct FCF yield. Debt trades around par. 10K delayed due to auditors fighting over impairtments of past bad M&A. Who cares. Radio, dead you say. Well, they have two subscription businesses. If I had a hedge fund I could put together slides ala EVI or PAR and explain why this might be huge. But it already is. Townsquare Ignite and Townsquare Interactive both on par to do 100m rev @ 33 pct margins - subscription baby. To add a couple of radio broadcasters - ETM, Cumulus - are distressed. Might be able to do a sweetheart deal. Probably also biggest risk. They should focus on their core, organic growth and debt paydown. Really impressive what they have built so far.

 

Any chance you've tried their TownSquare Digital Advertising business? I'm in the same industry, and I can tell you that not one digital advertising agency is the same. If the investment thesis is dependent on a growth of TSQ Interactive and Digital - then I would not invest until you are fully comfortable with their offerings. Not to say this is not a fat pitch, but many times it could be the opposite.

 

Lastly, how did you get to a 30% FCF yield? Did you include the debt in your calculations?

FCF to equity. I am not in the industry, but their growth in Ignite and Interactive is public, after they started to break it out.

[valueinvestor]

I think this is a pretty fat pitch. If I had a hedge fund, I could

put together 30 impressive slides. But who cares.  Around 30 pct FCF yield. Debt trades around par. 10K delayed due to auditors fighting over impairtments of past bad M&A. Who cares. Radio, dead you say. Well, they have two subscription businesses. If I had a hedge fund I could put together slides ala EVI or PAR and explain why this might be huge. But it already is. Townsquare Ignite and Townsquare Interactive both on par to do 100m rev @ 33 pct margins - subscription baby. To add a couple of radio broadcasters - ETM, Cumulus - are distressed. Might be able to do a sweetheart deal. Probably also biggest risk. They should focus on their core, organic growth and debt paydown. Really impressive what they have built so far.

 

Any chance you've tried their TownSquare Digital Advertising business? I'm in the same industry, and I can tell you that not one digital advertising agency is the same. If the investment thesis is dependent on a growth of TSQ Interactive and Digital - then I would not invest until you are fully comfortable with their offerings. Not to say this is not a fat pitch, but many times it could be the opposite.

 

Lastly, how did you get to a 30% FCF yield? Did you include the debt in your calculations?

FCF to equity. I am not in the industry, but their growth in Ignite and Interactive is public, after they started to break it out.

 

Forgot to say thank you for the idea - it's quite interesting! I'm going to take a deeper look for sure.

[heth247]

I think this is a pretty fat pitch. If I had a hedge fund, I could

put together 30 impressive slides. But who cares.  Around 30 pct FCF yield. Debt trades around par. 10K delayed due to auditors fighting over impairtments of past bad M&A. Who cares. Radio, dead you say. Well, they have two subscription businesses. If I had a hedge fund I could put together slides ala EVI or PAR and explain why this might be huge. But it already is. Townsquare Ignite and Townsquare Interactive both on par to do 100m rev @ 33 pct margins - subscription baby. To add a couple of radio broadcasters - ETM, Cumulus - are distressed. Might be able to do a sweetheart deal. Probably also biggest risk. They should focus on their core, organic growth and debt paydown. Really impressive what they have built so far.

 

Any chance you've tried their TownSquare Digital Advertising business? I'm in the same industry, and I can tell you that not one digital advertising agency is the same. If the investment thesis is dependent on a growth of TSQ Interactive and Digital - then I would not invest until you are fully comfortable with their offerings. Not to say this is not a fat pitch, but many times it could be the opposite.

 

Lastly, how did you get to a 30% FCF yield? Did you include the debt in your calculations?

FCF to equity. I am not in the industry, but their growth in Ignite and Interactive is public, after they started to break it out.

 

Doesn't ETM have a much higher FCF yield than this one? In terms of metrics, ETM are similarly leveraged (about 5X LTM ebitda), and 3X interest coverage. ETM don't have debt due until 2024 but half of TSQ's debt is due 2022. Would you think TSQ's revenue decline will fare better than ETM in 2020 due to the Covid-19? Thanks.

[kab60]

ETM is distressed. High leverage in a declining business is lethal. Might be worth a punt as an option-like speculation (I did that in the fall with ETM), but the situations are very different. Townsquare is growing and bringing leverage down (4,65x at YE19) - driven by their digital solutions. They grew revenue and ebitda 7 and 14 pct in 2019. Townsquare Interactive is a subscription business for small businesses where they do homepages and SEO for some hundred dollars a month. Reviews so so but growth and margins is impressive. They will need to refi, but with bonds trading around par I don't expect it to be a problem. If they can lower the rate it would obviously increase FCF meaningfully.

[kab60]

Been pondering this all weekend. I think I was too optimistic. Their SMB customers will be hit short/midterm. It is cheap and would probably be fairly valued around 10, but considering the leverage and volatility in this environment there's probably better risk/rewards around. Around or below 3 would make the upside so much bigger that it might make sense to wait and see. I think their digital businesses, which should do 66m ebitda in 3 years (mid of guidance I believe), are overlooked, but perhaps this gets hammered when their 10-k is released and they take a large impairtment - despite it having no bearing on the future of the business. Again, sorry for the sloppy first thoughts.

[heth247]

Been pondering this all weekend. I think I was too optimistic. Their SMB customers will be hit short/midterm. It is cheap and would probably be fairly valued around 10, but considering the leverage and volatility in this environment there's probably better risk/rewards around. Around or below 3 would make the upside so much bigger that it might make sense to wait and see. I think their digital businesses, which should do 66m ebitda in 3 years (mid of guidance I believe), are overlooked, but perhaps this gets hammered when their 10-k is released and they take a large impairtment - despite it having no bearing on the future of the business. Again, sorry for the sloppy first thoughts.

 

Thanks for sharing your thoughts. I think they have better liquidity than ETM to survive the Covid-19 hit. But the equity is not cheap enough compared to ETM for a speculation play. And at this point, we are still not clear how bad their revenue will decline. They are still mostly radio.

[kab60]

They have better liquidity, but they are also in a much better spot. You can hardly compare their situations. ETM is declining with large leverage on top - TSQ is growing nicely (14 pct ebitda growth in 2019...) pre corona and delevering. While ETM is purely spec, I think TSQ is a solid longer term play. Considering the leverage, other opportunities out there and volatility I just speculate there might be a better opportunity to get long when they release their 10K with a large impairtment (but this last bit is obviously mostly speculation...). I'm long but only a small position and even that might change. Still pondering.