Monday, March 27, 2023

Clark Avenue Worth: Digital Media Options: Damaged deSPAC, MBO Provide

One other fast thought — hat tip to Writser once more for pointing me on this route — Digital Media Options (DMS) ($135MM market cap) is a “technology-enabled digital efficiency promoting options” firm that got here public in July 2020 via a SPAC, Leo Holdings Corp (LHC).  From what I can collect, DMS will get allotted advertising spend from their purchasers, runs a digital marketing campaign after which delivers heat leads or precise clients to their consumer relying on the association.  DMS will get paid a share of that buyer’s lifetime worth (“LTV”) based mostly on the promoting consumer’s fashions.  Whereas this is not a fantastic enterprise, DMS is cyclical based mostly on advertising spend (having a down yr in 2022), it would not appear to be a rip-off or overvalued science truthful mission like different deSPACs of current classic, DMS is extra a marginal-to-average enterprise with potential long-term tailwinds.

Like nearly each different deSPAC, DMS got here to the market with inflated expectations, they initially guided to $78MM EBITDA in 2021, however solely delivered $58MM.  DMS began 2022 with flat steerage of $55-60MM EBITDA, however now solely count on $30-35MM as a result of wage inflation hitting their price construction (500+ staff), advertising budgets getting slashed and LTV fashions being adjusted down of their core auto insurance coverage market (Allstate and State Farm are two of their largest clients).  Administration expects to return to development in 2023.

DMS is founder led, the corporate was began in 2012, the three co-founders are nonetheless within the c-suite right now and personal 35.8% of DMS via their “Prism Knowledge LLC” funding automobile. In 2016, DMS took on a PE funding from Clairvest, who nonetheless owns 27.5% of DMS, and rounding out the highest 3 holders is Lion Capital at 11.6% possession, Lion was the sponsor of the SPAC.  In whole, these three corporations personal 75% of DMS, the remaining 25% has little or no institutional possession and is probably going held by retail holders who had been caught up within the SPAC mania.

Essentially no difference between A and B shares

On Monday 9/8, through Prism Knowledge, administration made a non-binding provide to accumulate all the publicly traded Class A shares for $2.50/share, a 121% premium from the place the inventory closed the earlier Friday.  In their letter, they point out that Clairvest and Lion “are more likely to conform to take part” alongside Prism, leaving solely 25% of shares needing to be bought, or about $40MM.  The provide is just not topic to a financing situation (necessary in right now’s market), however DMS does have $26MM money on its steadiness sheet and Prism has $50MM in pre-committed financing from B. Riley (RILY) to finish the transaction.  

The provide values the minority curiosity at someplace round ~10x probably trough EBITDA, once more administration expects to return to development in 2023 (they’re the most effective positioned to know if there’s certainly an inflection) so this could possibly be an opportune time for them to take it non-public once more.  In August 2021, the corporate introduced they had been exploring strategic alternate options, on the final two convention calls, CEO Joe Marinucci (the signatory on the Prism provide letter), has acknowledged they had been “hoping to have an replace right now” relating to strategic alternate options, this provide is probably going the tip consequence.  Marinucci would know the place third events provides had been for the enterprise earlier than providing $2.50 to the board, that is seemingly the most effective provide and the unbiased board members will take it given there are not any vocal or vital minority shareholders.

Shares closed right now at $1.94/share, a 28% unfold to the Prism provide.  Sure, there’s vital draw back given the place DMS traded earlier than the provide, however there are not any shareholders to place up a struggle and sure that is the most effective provide after the corporate ran a course of.  In any other case, I believe the unfold is broad as a result of it’s a low float former SPAC.  I purchased a smallish place.  Given the variety of deSPACs, I anticipate this being the same fruitful searching floor because the “damaged/busted biotechs”, please ship me any others that sound or really feel like this one.

Disclosure: I personal shares of DMS

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