Description

Want to party like its 2007?  How often do value investors consider buying an IPO from an astute Private Equity seller?  I think paying 12.4x EV/last year’s pre-tax for very predictable earnings with small growth potential means that the base case is ok.  Downside (2008-09) the company should still be profitable.  Upside: any take-out should happen north of $30 for a 50% premium; at least two public companies have managements with incentives to try.

Business description

Emerald Expositions Events, Inc. ("Emerald") operates more than 50 trade shows in the US.  31 of these are in the TSNN US Top 250 tradeshows by size.  Examples are:

http://www.asdonline.com/lv/about/show-overview.shtml 

http://www.nynow.com/exhibitors/why-exhibit/

http://www.interbike.com/

http://www.outdoorretailer.com/

Exhibitors pay the company on average $50 per square foot for the few days of a tradeshow, for the privilege of setting up a booth in a large venue and the opportunity to meet tens of thousands of focused buyers.  Booth space contributes 74% of revenues; sponsorship and registration fees the rest.  

N.B. This write-up precedes the IPO, so both actionability and valuation will obviously vary.     

The pitch

1.  Trade show operators are good businesses because:

• Very high barriers to entry.  There is typically one show that is the must attend event in any industry vertical.  Exhibitors and buyers reap a form of economies of scale by congregating at one event, not several.  
• The product creates real value, far exceeding its cost.  Sourcing, innovation, learning, price discovery, recruitment - all happen at tradeshows, in ways that are hard to replicate by other media.  High ROI for attendees and exhibitors alike is evidenced by the crowd consistently turning up.  Yet Emerald's revenues are a fraction - about one third - of exhibitors' total costs (which includes labor, booth decoration, travel and lodging).  This margin opportunity is why for-profit tradeshow operators can prosper in the US, despite not being the most common ownership model (trade associations are the more prevalent, and I admit, sustainable structures).  Well motivated, efficient operators focus on maximizing customer ROI by creating more connections, better experiences and wasting less of their time.          
• Negative capital requirements.  
• exhibitors reserve booths months, sometimes years, in advance.  Deferred income transforms the business, creating negative working capital.
• venue real estate is rented for the few days of a trade show, not owned.  Bargaining power of suppliers is weak, because at least some venue owners do not maximize profits.  These have different incentives: e.g attracting a trade show crowd to a certain city.
• capex light.  
• So, very high returns on capital.
• Predictability.  Because booths are paid in advance, no-shows are rare.  Strong tradeshows often hit 100% venue capacity.  Even into multi-year recessions, slots are maintained by many exhibitors.      
• Resilience.  There is little to substitute for face-to-face interaction at some point in the selling process for many verticals.  This can vary from show-floor transactions, innovation monitoring, education, to networking.  So even when temporary factors like terrorist attacks, epidemics or natural disasters interrupt an event, bounce back by attendees is typically strong.  
• Organic growth for leading tradeshows is typically limited.  But it can happen, depending on the vertical.  When it does, network effects apply, and growth requires no additional capital.
• Retention rates are high.  Most high quality events have 75-95% customer retention.

2.  An allocation at this IPO is valuable because:

• Not buying an exit, but an entry.  
• private equity seller retains 77% ownership after IPO; two thirds of the shares offered repay company debt.
• first pure play US listed trade show operator.  Public comps are listed in London.  UK institutional demand for public equity in this space has exceeded supply for most of the past decade, evidenced by three companies (UBM, Informa and Tarsus) all announcing large acquisitions relative to their size and subsequently funding them with well-subscribed rights issues.  Emerald is the largest operator in the largest geography for tradeshows (US >5x #2 China) with industry leading margins, so will attract significant international investor demand even before the US investor community warms to the sector.
• Priced at relatively small premium to construction cost.  Cumulative undiscounted cash flows for Onex's acquisitions since 2013 total $1.48 billion.  

Comps

Recent private market US transactions 

• $972 million: Advanstar (MAGIC etc) by UBM: October 2014.
• $1.56 billion: Penton Media by Informa: September 2016.

Conclusions from comps

1.     This industry has good profit margins across the board.  Rivalry – in the traditional competitive sense - between firms is low, because there is little overlap between the industry verticals of their shows.  For example, Emerald's Interbike show is held in Mandalay Bay Convention Center, Las Vegas in September.  There is no competitive rivalry from UBM’s Project show (part of MAGIC fashion) held at the same location in August.  Completely different crowds.

2.     Industry profits are resilient even in major recessions.

3.     Emerald  has industry leading margins, partly due to geographic focus on US - where most comps also achieve higher margins that their consolidated global results.

4.     Emerald IPO is priced at a discount.  Only ITE has a similar valuation.  ITE should have a much higher discount rate because it is a small company that earns almost all of its profits in Russia, Kazakhstan, Azerbaijan and Uzbekistan with significant exposure to the oil industry.

*though rivalry definitely exists between these firms when bidding for trade show assets. 

The risks

• M&A capital cycle in the industry turns. 
• Absolute valuation.  Header price is top end of current pricing guidance, which might not be actionable.  
• Structural change in retail industry.  Buyer attendees at many Emerald events are wholesale buyers representing retailers: a crowd experiencing dramatic change right now.   
• Management incentives and capital allocation.

Catalyst

 IPO due 27th April 2017