Recently, United Online (Nasdaq: UNTD ) announced that it would spin off its FTD floral network to shareholders. Management even left open the possibility of further spinoffs from the parent business. After digging through the numbers, I'm buying shares and adding the stock to my Special Situations portfolio on the next market day.
United Online has three segments:
- FTD floral network -- acquired in 2008 and sells flowers to consumers, competing with 1-800-Flowers (Nasdaq: FLWS ) .
- Content and media -- provides online nostalgia services through Facebook (Nasdaq: FB ) and online loyalty marketing programs.
- Communications -- provides Internet service through brands including Juno and NetZero, competing with players such as AOL (NYSE: AOL ) and AT&T (NYSE: T ) .
FTD has held its own relatively well over the last few years, consistently growing revenue and generating cash. I estimate EBITDA at $90 million over the last four quarters. It's facing increasing pressures from mass marketers, such as grocery stores, that sell flowers. Still, the segment has managed to grow average order volume.
The other two segments are declining fairly quickly. Like AOL's dial-up business, United's communications segment is suffering from the customer transition to broadband and to national players such as AT&T. Still, the business does throw off cash. And the nostalgia business competes with free services such as Facebook, all the while relying on the success of Facebook.
I like the decision to spin off the FTD business because that business could actually move from behind the shadow of the parent and receive the valuation it deserves. United bought FTD in 2008 at eight times EBITDA, valuing the enterprise at $800 million. Strikingly, that's more than United's enterprise value of $589 million today, despite the performance of FTD.
Now, the details of the spinoff are unclear at this point. However, I expect that all United's debt will go with FTD, leaving the parent with no debt. FTD has the wherewithal to handle it.
However, I wouldn't be surprised to see management saddle FTD with more debt and give the proceeds to the parent company. That would be an unfortunate decision. Investors will heavily discount that cash, since management hasn't been the best steward of shareholder capital, and investors could reasonably expect the parent company to make another ill-fated acquisition, lowering the price they would be willing to pay for shares and decreasing the benefits of the spinoff substantially.
Here's how I figured the potential value of United following the spinoff, using trailing EBITDA of $90 million for FTD and $44 million for the parent stub and assuming that the $111 million in cash on the balance sheet goes to the parent:
EBITDA Multiple for FTD
Implied Equity Price per Share
EBITDA Multiple for Parent Stub
Implied Equity Price per Share
I use an upside multiple of eight for FTD based on the 2008 transaction and six as the low end, because that's the market valuation for 1-800-Flowers. FTD is clearly a superior business to that rival. For the parent a multiple of five is aggressive, while four is below what the combined United trades at now (4.4). In total, I think we can see 50% upside from here.
There's also the unclear value of a 75-patent portfolio for the parent company. Management has said that it is trying to sell or license the patents in some value-creating transaction. So there may be some upside there.
The next market day I will add $750 in shares to my Special Situations portfolio. If I see other details I like on the filing of the official SEC documents, then I will consider adding more to the position.
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