Street Capitalist: Event Driven Value Investments

One of the first posts I wrote on this blog was a study from a previous break up, Cendant. The companies which split ended up being quite profitable for any early investors. There are many times when certain properties are neglected during these situations created grossly undervalued securities. Here’s one for us to look out for in the future-

Today IAC/Interactive Corp (NASDAQ:IACI) announced that it would break up the company. Barry Diller is an extremely sharp media dealmaker. I remember first learning about him when I read through Bruce Wasserstein’s Big Deal. This is going to be a good idea because the management structure will be more simplified and companies will have the freedom they need to create value. A number of the properties within IACI really didn’t mesh besides an involvement with the internet (CollegeHumor and Interval, for example), so splitting them apart makes sense.
Let’s try to examine the preliminary details of this deal. This analysis will be qualitative, closer to the actual break up date I’ll have a more in depth financial analysis. For now, this will at least get IAC on your radar screen.

The company will be broken into 5 pieces.
1.IAC
Key Companies: Ask.com, Citysearch.com, Evite.com, Math.com, CollegeHumor.com
CEO: Barry Diller
IAC will definitely be interesting for a few reasons. One, Barry Diller has chosen to be this group’s CEO. Since the company’s head is choosing to go with IAC, it’s safe to assume he sees it as having a prosperous future. It has one of the smallest operating incomes out of the group, and the companies are all involved in the internet. Ask.com is interesting because as a search engine it isn’t as popular as Google or Yahoo, but it has been gaining ground. They seem aggressive about this and have taken to advertising on television.

2.Home Shopping Network
Key Companies: HSN, Frontgate, Garnet Hill
CEO: Mindy Grossman
HSN has the biggest revenues out of the whole group, coming in at $2.09 billion. Brand-wise, HSN is pretty popular, the channel is still on cable television. However, HSN is a retailer which is a pretty tough business. Especially at the moment.

3.Ticketmaster
Key Companies: Ticketmaster domestic and international
CEO: Sean Moriarty
This company has the highest operating income out of the group. I have to say that Ticketmaster is the one company I’m probably most interested in. They seem to hold a vice grip on large concerts and are able to tack on large “convenience fees”. These fees apply to all tickets, even if you choose to purchase online. Brand-wise, I’d say Ticketmaster is just as big, if not better than HSN, but I think it’s moat is larger. Ticketmaster has fewer competitors in the larger concert market which is still popular. If you follow the music industry, you’d see that many artists, like Madonna, are working on making new deals that involve live performances since they make more money off of live shows than record sales (which are declining anyway).

4.Lending Tree
Key Companies: Lendingtree.com, Realestate.com
CEO: C.D. Davies
Lending Tree would be my least favorite out of all the businesses. LendingTree.com connects individuals with mortgage lenders, a horrible market at the moment. RealEstate.com allows you to find new homes to purchase. Another bad place to be right now. Most don’t forecast the housing problems to last forever though, so pessimism could create an undervalued company here. Still, I find the other companies more compelling. Most people I know are still doing their house shopping off-line for the most part. LendingTree was also the only company to have an operating loss ( $14.5 million) also making it more undesirable.

5.Interval International
Key Companies: Interval, CondoDirect
CEO: Craig Nash
This company is mainly involved in timeshares and vacation rental properties. The tourism industry hasn’t been too bad so far. Some major hotel acquisitions went down this year, but this line of business is a bit different. Still, a play on tourism/vacations. Revenues and operating income are positive, it’s possible that investors may pay more attention to the other companies making this neglected and undervalued.

Out of all the properties, I like Ticketmaster the most. IAC has great potential but I believe it’s really speculative. It’s helpful that Barry Diller will be leading the company– usually this is an indicator of which company is likely to perform the best post-break up, but many of the smaller companies within the new IAC are websites which received seed funding (think: vimeo, brightcove). This makes IAC have a good deal of uncertainty because some of these will turn out to be duds; the video sites in the portfolio are at a major disadvantage over players like YouTube.

Overall though, I think value investors should watch this situation unfold, we may find some nicely undervalued securities come out of this.