Description

Investment Thesis

We are long Blucora (“BCOR” or the “Company”) and see compelling upside (>50%) over the next 6-12 months given cheap valuation and significant activist pressure on the current board and management team to create value prior to next year’s proxy window. The current iteration of BCOR is a financial services provider of tax-focused wealth management services and tax prep software through two disparate businesses: 1) TaxAct (#3 player in DIY online tax prep) and 2) Avantax (#1 tax-focused wealth management/RIA provider). In our view, either management executes in 2H21 and the stock works or they formally explore strategic alternatives resulting in a sale of the entire Company or one or both of the two segments within the next 12 months. Significant NOLs would likely offset any gain on sale impact under the scenario of selling the individual businesses separately.

Current Capitalization

Diluted shares: 49.4M

Market cap: $795M

Net debt: $320M

EV: $1,115M

Current Situation

Blucora was targeted by an activist investor earlier this year in a contested proxy fight that was focused on limited if any synergies between the two businesses and a call to explore strategic alternatives as a result. See the following link for details around the activist campaign (https://www.businesswire.com/news/home/20210225005645/en/).

While the activist was unsuccessful in winning board seats during the proxy fight, it appears that they are not going away and remain engaged with the Company given the recent public letter issued following BCOR’s 2Q21 results after which the stock declined another 6%. See the following link for recent letter (https://www.businesswire.com/news/home/20210809005404/en/).

Given the Company’s stock price is flat on the year (after being down nearly 40% in 2020) and at the same levels as during the proxy fight, we think the writing is on the wall for management and they need to create value in the near-term to avoid another proxy fight again in 2022.

Private equity firms Golden Gate (~1.5%) and P2 Capital Partners (~4.8%) each own stakes in Blucora currently with Golden Gate having already put in a bid to acquire the wealth management/RIA business in April of this year (https://news.bloomberglaw.com/mergers-and-acquisitions/golden-gate-said-to-propose-deal-for-blucoras-wealth-business?utm_source=rss&utm_medium=MRNW&utm_campaign=00000178-f123-d83a-a77f-f97fcb460000).

Finally, CEO Chris Walters is highly incentivized to sell the Company given a ~$8.5M change of control as well as ~$6M of equity grants that vest over the next two years. He also is likely concerned around potentially losing his job in another proxy fight given the sequence of events that allowed him to assume the BCOR CEO role in the first place.

Valuation

Blucora is trading at a severely discounted multiple across all valuation measures. When compared to wealth management/RIA peers or other software assets it is apparent that BCOR trading at ~8.4x and ~7.7x FY21/22 EBITDA is an attractive opportunity particularly given the potential for a take-out in the near-term.

While one can argue various multiple ranges, the peer trading comps (let alone private market valuation multiples) support the multiples used in the below SOTP analysis. Our base case is a mid-$20s stock in a take-out but there is a non-zero change that the actual number could be materially higher given the massive corporate infrastructure drag would just go away in a take-out as both PE and strategics would rip out that cost. Further, the Company has ~$250M of NOLs that would likely offset any gain on sale if they chose to sell the individual businesses separately.

Conclusion

BCOR is an attractive asset given its cheap valuation and substantial activist pressure that should result in a likely value creating event over the next 6-12 months. A sale of the entire company at a significant premium to the current share price represents the best risk-adjusted outcome for shareholders. While BCOR is a near universally hated stock given its history, we believe this is the opportunity particularly with current valuation / activist setup limiting downside risk.

Risks

• Management/board refuse to explore strategic alternatives
• Management does another large RIA acquisition

• Avantax advisor attrition accelerates

Catalyst

• Formal strategic alternatives announcement
• Sale of Company or one and/or both segments 
• Large buyback given attractive valuation that would probably quell some of the activist pressure