Description

Dynata (aka Research Now) 1L trading in the ~59 context is an asymmetric set-up on a “good biz w/ a bad balance sheet”. Agent is Goldman Sachs and easy to get connected to the datasite (1L / 2L and private equity owned). This is the type of situation I’m fond of given 1) heads win (up ~70%+ assuming 12-month hold) which assumes 2L / sponsor support the biz w/ A&E deal + debt paydown (lower probability but still v much an option) and 2) tails win big (up 125%+ in base and ~170%+ in upside case) in a likely out-of-court restructuring where 1L receives new debt claim (likely worth in excess of ~75 pts vs ~59 current) +  free equity (likely worth in excess of 50 addition pts over next 12-24 months). As noted below, biz is unique (prominent in space, industry is growing not declining, highly FCF generative as limited capex) and currently has a powerful (and free) option around M&A activity (~20% of top-line in normal environment and likely closer to ~35% of earnings power) that has been cut by >50% during the M&A slowdown in 2023 … as M&A comes back, this is a $25-$50MM earnings power free option (not underwriting in base case).

Cap structure is pretty simple: ~$1Bln of debt inclusive of revolver (at ~59, creating the biz inside of $600MM), 2L is ~$250MM + ~$50MM of earn-out notes from prior acquisitions also junior (maybe sorted out at discount through restructuring / tbd) and sponsor equity capital w/ ~$200 – $250MM of equity left in the biz (older investment and some dividends over the years) = ~$1.5 – $1.55Bln TEV (1L at ~59 creates inside of $600MM).

After suffering through a difficult 2023 stretch, the biz has tailwinds behind its back and is likely a sale to a larger strategic or PE fund on the back end (rumors in past that support values in excess of the 2L which would support a 125%+ upside outcome assuming equity has value. The majority of Dynata’s biz is tied to CPG advertising that is largely resilient but 2023 faced cyclical pressures that are abating = should be a low single digit growing market through-cycle. Dynata has relatively small political exposure (every other year benefit) and 2024 will be a nice tailwind. Most importantly, ~20% of the biz is tied to M&A activity (think PE firms / consulting firms, etc) which is extremely high margin – portion of 2022 and all of 2023 were a disaster in terms of M&A volumes, and this is a free and powerful option (likely worth $25- $50MM of earnings power once normalized) = free option.

Biz snap = imho, “good biz” w/ reason to exist that’s mainly facing cyclical headwinds (not structural): Dynata, combo of Research Now (Court Square) + Survey Sampling (HGGC). Three biz segments: a) majority driven by CPG doing surveys through Dynata proprietary platform (new product intros and ad budgets drive up / down), b) ~20% of biz tied to M&A activity (working w/ PE firms) which is essentially at the lows and c) ~5% political (every other year, benefits the biz).

Historically a pretty good (not great) biz generating ~$175+ of EBITDA with limited capex (mostly software-related) of ~$20-30MM = attractive FCF profile. Biz was rumored to be on the sale block early COVID at ~$2.5Bln price tag and more recently in 2022 w/ hopes of a ~10x multiple ($1.75Bln aspiration). Feedback from strategics (handful of players including Cint, Prodigy, Neilsen, Ipsos, Yougov, etc) was we like the asset but need more clarity on interest rate environment and industry stabilization.

Why the opportunity: Given 1L / 2L floating rate structure, interest expense exploded on the biz compressing FCF profile of the biz. Additionally, M&A portion of biz (call it ~50MM of earnings power) went to minimal levels in 2023 as interest rates muddied the system. Lastly, 1L matures end of 2024 and 2L end of 2025 (maturity wall is the hammer). Fast forward to Feb 1, 2024 coupon payment, company (working w/ Houlihan) elected to pay partial interest payment on the 1L and no payment on 2L as discussions underway on what the new capital structure should look like. 1L traded off from mid-70s into the 50s as the structure is littered w/ CLOs who also perceive partial payment as default (so punting the 1L), creating the opportunity. Opportunity in the high 50s is asymmetric.

Scenarios: As noted above, 2 scenarios on how this plays out:

Scenario where 2L / sponsors support the biz and write a $100MM - $200MM check to pay down the 1L (likely a lower probability given the quantum of the check required). In this scenario, 1L likely trades up to ~90+ (depending on terms of the A&E) as receiving 10 – 20 pts of cash and junior capital support (factoring in ~11 points of coupon assuming constant terms on security + ~31 pts of OID = 42 pts / ~59 = ~70%+ upside.

More likely scenarios is 1L focused on an out-of-court restructuring (or quick pre-pack) that restructures the biz around the 1L holders. Given $150MM of cash EBITDA is defendable, my guess is ~70-80+ pts of take-back new debt claim (my guess is $750-$800MM of debt particularly as CLOs will be more inclined to take more of a debt claim). Rational, at $150MM cash EBTIDA, likely still generates $40 - $50MM of FCF (assuming $75MMish interest, ~$25MM capex and minimal taxes). Accordingly, buying the 1L at ~59 is well inside of the performing debt claim likely to receive on the back end (~11-21 pts of cushion at ~59 purchase price). Additionally, will receive free equity = not difficult to assume 10 – 20 pts of value tied to the equity (implies 100-200MM value given the 40-50MM FCF profile of the biz), but my guess is there’s likely $450 - 500+MM of equity value into a sale (which implies another ~45 – 50+ pts of value). Factoring in the debt claim (call it ~75) and equity value into sale (~47.5+) not to mention the ongoing coupon on the debt claim, path to ~122+ + 11 pts coupon (1-yr hold) = 125%+ upside (133.5 / 59).

Divergent view: Market is bracing for biz fundamentals to be lousy, my guess is market thinks this biz goes to $100-125MM of EBITDA. My work suggests 1) mgmt. removed $40MM of costs in 2H 2023 so cost structure in good spot, 2) political year in 2024 likely adds ~1$5-$25MM of earnings power (its mathematical) and 3) free option on M&A (get this for free and don’t have to underwrite to win = but when M&A engine turns back on , likely $25 - 50MM of earnings power as free option). As a result, our view is the biz might be on a trajectory closer to 150-175MM in 2024E (and get the M&A / ~25 - 50MM earnings power for “free”). Applying a 7x multiple (or ~8x unleveraged FCF w/ ~25MM capex) implies ~$1.225Bln of enterprise value (which ties to the math above on the ~125%+ return profile in a restructuring).

Interesting set-up as buying the 1L  at ~59 is likely ~11 – 21 points of cushion on the take-back debt claim (assume 70-80 pts of value) and also could argue equity is at least another 20 points of value (i.e. implies $950 - $1Bln enterprise value or 5.5x on 175MM EBITDA. M-term, as the biz benefits from M&A engine recovery, possibility the biz can do ~200MM of EBITDA into a sale process … not sure what type of multiple this is worth, but assuming ~7.5x (kinda in-line w/ Ipsos and other strategics current currencies), implies possibility of ~1.5Bln upside case (which would imply something closer to ~170% upside to ~59 entry (~75 pts debt claim + 11 pts 1-yr coupon + 70+ pts of equity value). Also think there are multiple strategics (not to mention couple PE firms / including Bain-backed portfolio cos in this space) who would be interested in looking at this w/ more modest price expectations from the new owners.

Lastly, like the CLO transfer of risk dynamics … arguably buying this 15 pts cheaper given the technical overhang of CLOs needing to move on from the situation …

Catalyst

Clarity in next 30-60 days on which path it moves down

Clarity on biz performance in 2024 (core biz + political) = base case is path to 150-175MM EBITDA

Free option on M&A engine starting to come back again (upside case) = 25 - 50MM EBITDA free option