DGIT - DG FastChannel

[ericd1]

DGIT - DG FastChannel provides electronic delivery of advertisements, programs and video news releases to broadcasters, online publishers and other media outlets. They have developed a strong centralized delivery system delivering digital media to over 30,000 media outlets from 5,000 advertisers. DG was responsible for delivering 80% of this year’s Super Bowl ads. Of the top 100 ad agencies in the U.S. 96, use DG’s services. Sales and profits have been growing ~35% over the last three years.

 

I've had DGIT on my watch list since around the first of the year waiting for a pull-back, which hasn't happened. It seems a bit pricey, however they recently started working with Goldman Sachs to solicit a sale in the $1B range. That's ~20% premium to today's share price.

 

http://www.bloomberg.com/news/2011-06-16/dg-fastchannel-may-seek-1-billion-in-sale-as-goldman-sachs-solicits-bids.html?cmpid=yhoo

 

I like the moat they are building (another recent acquisition continues their expansion--MediaMind (MDMD) and with the potential sale I'm thinking about picking up a few shares.

 

My question is when a company puts itself up for sale, like DGIT (growing, profitable and moat) what's the chances of them obtaining an offer?  I see that as the potential catalyst for a price jump and a reason to get off the fence.

 

Appreciate your comments

 

 

 

[ericd1]

I wanted to bring this back to see if anyone can respond to my question in the post above. How likely is a company offering itself for sale to accomplish the task?

 

Looks like there's a little more exposure on DIITs plans in the article below. The high short interest suggests some investors don't think a sale is likely. Stock down 4% today

 

http://seekingalpha.com/article/282186-6-highly-undervalued-takeover-lbo-targets-being-bought-by-smart-money?source=yahoo

[enoch01]

Thread bump.

 

Meruelo withdrew from a proxy fight AND bought more shares.  I think something is up.  High short interest, leverage, borderline inept management - what's not to like?

[17thstcapital]

I've built a decent sized position in this one over the last month - own the stock and upside calls in case there's a transaction in the near-term.  I'm no fan of this business or this management team but I see little downside (famous last words) here in the $6-7/sh price range.  Even if they come at the low end of their 2013 guidance, I think you're creating this business at a significantly below market multiple.  Plus, they were recently given covenant relief from their lenders which gives them a good runway in the near-term.  I don't see any distressed trading in their loan, which is indicated around par.  The significant insider buying is the icing on the cake for me.

 

What's the stock worth? Well, assuming a very conservative 5x for the crappy TV business and whatever multiple you are comfortable with for the growing internet business (some think 15-20x is doable), the #s start becoming very interesting here.  But I'm not a tech/media expert and so I could be completely delusional and this stock never rerates and there's never a transaction.  But the risk/reward seems very compelling to me.  Let's see.......

[ItsAValueTrap]

I really don't think that they have a moat (as in, a sustainable competitive advantage).  Their main product is software / a technology platform.  This is a software/tech company.

 

You can deliver video content over a computer network (like DG) or by shipping a physical tape.  As the Internet gets faster, the industry will likely move more and more towards online delivery.  Whenever you ship a physical tape, the parties need to buy a VTR from Sony Broadcast.  Sony Broadcast virtually has a monopoly for tape-based delivery since Sony's VTRs have become the de facto industry standard.

 

2- I don't think it's a good idea for them to buy a post production facility.  The most valuable asset in a post facility are the people.  A well-managed post facility can be profitable (as long as you don't do VFX for Hollywood movies).  A poorly-managed one will lose money.  The problem with people is that you can't own them.  They can go find some investors and start their own post facility (and they will carry their clients and their reputation with them; it's the key employees who have a reputation, not the post facility).  Or they can just go work for somebody else.

 

One of their editors can go off and start their own post production business for <$150k-$1.5M.  (The capital cost depends on the type of post work being done.)

 

Them buying MIJO is a dumb move.

 

3- In general, I hate stocks related to the film/TV industry.  For whatever reason, they rarely make money for investors.

http://glennchan.wordpress.com/2012/10/13/filmtv-productiontechnology-stocks/

 

4- Buying DG:

 

Presumably they have a very good software platform.  (I've never used it myself though... I only know about tape-based delivery.)  A company that makes playout servers could be interested in buying them... they might think that there are synergies from product integration.  I have no idea what the purchase price would be.  $2-50M is plausible to me if it were unprofitable (because it would cost a lot to try to duplicate the software).  A 5-10X multiple on profits would also be plausible to me.  Of course maybe somebody will get crazy and pay a higher multiple.

 

I think most buyers would be pretty disinterested in the other random assets that DG has.

[Cunninghamew]

Just wanted to say congrats 17th Street...

 

Not only did you get the timing right on when the Online EBITDA & revs would offset the TV decline, but you got wonderful news today. They say good things happen to cheap stocks.

 

It looks like you have more room to run. I cant believe the pre-market quotes are as low as they are. Total enterprise value about a week or two ago was $618 mm (I think net debt was like $338mm). Now they are going to sell the TV biz and pay down the entire debt posistion. Pre-market trading puts the marketcap at $405mm and now the co will have a net cash posistion, so EV is considerably lower. The market is not even awarding a 10x multiple to the online biz.

 

Good news all around congrats

[17thstcapital]

Thanks sir. It's a good outcome - sometimes you get lucky!

 

But I'm not a seller yet (in fact, I plan to add) as I think the market is not fully pricing the package correctly. Based on my model, I get to ~15 at an 8x EBITDA multiple and I've been very conservative with my overhead allocations. At 12x, its a ~19 stock. I can keep going but you get the idea.  These are not aggressive multiples for a high growth company in a pretty sweet spot in the ad category.  Now, I couldn't tell you if DGIT's online business is better than its competitors - that's way beyond my paygrade - but it has demonstrated nice top line and EBITDA growth and management is pretty confident about its prospects given the guidance that they laid out for the year.

 

Let's see what happens. Maybe I'll end up looking foolish for not punting.....

[krazeenyc]

I was (super) lucky enough to buy this under 8 days b4 earnings. While there certainly is upside (a lot in fact if things work out), I sold the remainder of my position (sold 40% post earnings) today.  I just can't figure out where they stand vs their competitors.  Unfortunately this was a small position for me (wasn't knowledgeable enough regarding the space to buy a larger position than 1%  or hold on past today).  congrats to you 17th st.

[ok22]

17th street:

 

I also get a range of valuations that are higher than the current price and like you I am also holding for reads like similar reasons.  Like you not a big fan of the team and governance drama here and wary of business risk long term so holding my nose and holding the stock.  However I get a range of anywhere from $13-$25/share depending on what you believe about the online business standalone.  My cost basis is much worse than yours around $10 as my concern for TV decline kept me away.  I bought on earnings release when I thought TV numbers seemed to be more stable than i a long while and also online showing proof of growth.  Better late than never :)

 

What are you assigning as overhead and capex for the online business standalone?

 

Taking recent Q and recent projections and my own guess-timates for full year 2013 from Q call and earnings, I am getting:

 

Annualized 2013-ish EBITDA for online standalone of about $30m-$40m before overhead

Overhead = ???

I = $0 fr online

T = 40% ???

DA=Capex = ??? How much of the $20-30m is online going forward?

Trying to get to a free cash flow run rate for online standalone and then of course what is the growth rate for online?

 

Care to share your estimates/numbers that lead you to the $15-$18+ range?

 

My wide range is due to the wide range of numbers that could be plugged in for the ??? numbers and for the online growth rate.

 

Obviously deal may not close or the 2 big shareholders could dump all their stock and I will look silly for holding although latter might be a reason to buy more.

 

All your thoughts on this would be much appreciated.

 

ok22

 

[ok22]

Did not mean to only ask 17th street to respond.  All others with views on my question should free to chime in as well.

 

Thanks.

 

ok22.

[vpagano]

525MM deal - D $339MM - $3(27.75MM s/o) (the dividend payout) = $102.75MM extra cash.

 

E=(~$38MM(onlineEBITDA Forecasted)*10(?) + $102.75MM) / 27.99 MM s/o =  $17.24 + $3 dividend.

 

Obviously very sensitive to EBITDA multiple for the online business, where should that be comp'd to?

 

FD: own a few shares

 

[17thstcapital]

Assumptions that I'm using

 

- $30mm for pre OH EBITDA for online in 2013

- $9.5mm overhead for online in 2013

- online overhead is roughly 35% of total current overhead

- $38mm for pre OH EBITDA in 2014

- $10mm overhead for online in 2014

- Net net: EBITDA for online in 2014 is $28mm

 

A multiple of 10x on $28mm gets me to a stock price of ~$17 today.  12x gets me ~$19. 

 

Any preserved NOLs are gravy.

 

I think my segment EBITDA and overhead assumptions are conservative but this dopey management - who shockingly gave no guidance on yesterday's call - has surprised us to the downside before. 

 

Also, I think 10-12x for a low capex/high growth business is not unreasonable.

 

I added to my position yesterday. Let's see what happens.

[ok22]

17th street:  Dopey is being very kind.

 

Thanks for your response.

[ok22]

17thst:  what do you think now?  hold the online company after the deal or sell before or after the dividend? 

 

With the transaction closing for $485 fully funded they have the extra $40 million but the press release indicates the dividend will still be $3/sh.  The extra $40 million of cash seems to mostly going toward the large management transaction bonuses.  Scott G. retiring/leaving etc.

 

Assuming you have been holding through now?

 

Thx.

 

ok22