Description

An activist investor won de facto control of LSYN last October and initiated a strategic review process set to conclude no later than March 31st, 2020, or about 2 months from now. Based on the flurry of deal activity in the podcast industry over the past few years, I think the most likely outcome is an outright sale of the business to a much larger strategic buyer at some point in 2020 (or 2021 at the latest). Based on recent deal comps, I think LSYN could trade for $4.50 - $5.50 per share in a takeout (40% - 70% higher than today). Absent a sale, I still believe the stock is an attractive value trading at 9.4x Adj. EBITDA – Capex (see my adjustments explained below). Downside is protected as the business is overcapitalized with net cash of about $0.30 per share, very sticky hosting revenue, and a strong strategic positioning in the rapidly consolidating podcasting industry. 

Why does this opportunity exist?

I like small-caps that come with simple theses. Last written up almost 2 years ago on VIC, LSYN is still under-the-radar, as it trades OTC, lacks any major sell-side analyst coverage and is almost never mentioned in major business publications (WSJ, Barron’s, et al) when discussing the incredible growth of the podcasting industry. M&A in the podcast industry was brought back in the news last week when it was announced Spotify (SPOT) would be purchasing Bill Simmons’s The Ringer podcast network for an undisclosed sum ( Feb 5, 2020 - Spotify is buying The Ringer to boost its sports podcast content). Typically, investors go hunting for the next M&A target, but by all that I can tell LSYN appears to be off investor’s radars. With a market cap of ~$95M, its free float is much lower given many shares are held by insiders, activists and other long-term holders. LSYN is not a regular at micro-cap conferences and hasn’t done much outreach to get their story out to investors. For background on the name I would suggest taking a look at the first VIC writeup from lordbeaverbrook on 1/23/18. My write-up here is going to focus on events that have taken place within the last year – a value-minded activist investor gaining control and quietly launching a strategic review.

 What happened in 2019?

In summary the game-changing event of 2019 was that the value-destructing CEO (Chris Spencer) and CFO (John Busshaus) lost control. Both men had a history of lining their pockets at shareholder’s expense, as well as securities violations at past public companies they were involved with. Spencer was an absentee owner – staying in Florida while the business was run out of Pittsburgh. Their affiliation with LSYN scared away investors who I otherwise believe would love this nice little free cash flow spewing business.

In early Jan 2019 Camac filed their initial 13D which you can read here. "The Reporting Persons intend to review their investments in the Issuer on a periodic basis and may from time to time engage in communications and discussions with management and the Board of Directors of the Issuer (the "Board") and other stockholders of the Issuer concerning, among other things, Board composition and corporate governance, appropriate compensation levels of management and the Board, and the proper utilization of cash flow."

By April 2019 – Camac escalated their campaign and initiated a process to call for a special meeting. They proposed to remove all 4 existing directors and add 5 independent nominees. (You can read their press release here)

“It is long-past time for meaningful improvements at Libsyn,” said Eric Shahinian, the founder and managing member of Camac. “The current board of directors and management team have consistently lined their own pockets at the expense of stockholders. From outsized executive pay, to massive stockholder dilution to poor capital allocation, there is simply no excuse for the current state of Libsyn. Recent actions by the board and management to further increase their own compensation and continue to dilute stockholders will not be tolerated. We are committed to improving Libsyn for the benefit of all stockholders.”

According to a filing from June 12, 2019 – Camac made the case that management was not acting in the best interest of all shareholders. “Since Libsyn’s spin-out from FAB Universal Corp., Libsyn’s board of directors has authorized the issuance of over 10 million new shares to insiders for no financial consideration. Libsyn’s stockholders will have been diluted by 49% if these shares fully vest.”

“In 2019, Christopher J. Spencer, Libsyn’s chief executive officer, is slated to receive a $400,000 salary and an $800,000 bonus, and John Busshaus, Libsyn’s chief financial officer, is slated to receive a $350,000 salary and a $700,000 bonus. This amounts to over 59% of Libsyn’s 2018 income.”

“Libsyn’s board of directors approved massive share awards to Messrs. Spencer and Busshaus that were conditioned on the achievement of certain milestones, Camac believes that Libsyn’s board of directors has recently taken a number of troubling actions to permit the vesting of one of these awards where Libsyn management had not met the applicable performance threshold and extending the time to achieve the thresholds for other awards.”

While gearing up for a vote at the annual meeting in the fall – the activists had a stroke of good luck for them (bad luck for ownership) when the hammer came down from the SEC against management. The wrongdoing was associated with FAB, the former parent company out of which Libsyn was a spinoff back in June 2016. No wrongdoing was found with Libsyn.

 “According to the SEC’s complaint, between 2012 and 2013, Mr. Spencer and Mr. Busshaus the former Chief Executive Officer and former Chief Financial Officer of FAB, respectively, negligently used a series of misrepresentations about the capabilities and growth prospects of a central component of FAB’s business in China, namely FAB’s multi-media kiosk business. At the time, Mr. Spencer and Mr. Busshaus believed they were acting properly in receiving and reviewing information provided by FAB’s accounting and financial personnel located in China and relying upon this information prior to making these representations, and have accepted the SEC’s offer of settlement without admitting or denying the allegations or findings contained in the complaint. The settlement is not expected to prevent Mr. Spencer or Mr. Busshaus from serving as an officer or director of a public company, although Mr. Busshaus, who holds an inactive CPA license, has agreed to a suspension from appearing or practicing as an accountant before the SEC, for which he can apply for reinstatement in two years. The order suspending Mr. Busshaus from appearing or practicing as an accountant before the SEC is expected to be entered after the court enters judgment in this matter.”

So the Libsyn CFO resigns amid SEC complaint (October 4, 2019), and facing almost certain defeat at the annual meeting, management settled with the activists.

Here were the big takeaways from the settlement (link to SEC filings here): 1) The CEO/Chairman roles were to be split, 2) Camac’s CEO/CIO and a separate independent director appointed to the board, 3) Camac’s CEO appointed to chair the compensation committee, 4) Camac’s CEO to chair newly formed strategic review committee, 4) LSYN and Camac to work on identifying an additional independent director that would replace a legacy director, and 5) 300,000 in equity awards linked to a NASDAQ uplisting are cancelled.

I think the most important issue in the settlement was that LSYN would hire an investment bank to solicit offers for the company, with a deadline of March 30, 2020: “For the avoidance of doubt, the Committee is explicitly authorized to conduct, with the assistance of its advisors, a market check to determine whether a buyer exists for the Company in a transaction that the Committee is willing to recommend to the Board.”

“The Review Committee and the Financial Advisor will work in good faith to provide an appropriate recommendation to the Board…by March 31, 2020…The Company will promptly disclose publicly the recommendation of the Review Committee,”

While I strongly believe Spotify would be the BEST buyer for Libsyn, the company would be a prized asset for MULTIPLE large media/tech players who want to make a splash in podcasting.

Spotify’s Comments on Podcasting

For anyone not familiar with Spotify – I would recommend checking out the VIC writeup by WinBrun from October 2019. In a nutshell, Spotify is trying to shift more of its users’ listening hours over to podcasts to lower their royalty payments to the major music labels. SPOT pays royalties for recorded music on a per stream basis (variable costs) while podcasts are fixed. To quote WinBrun (emphasis mine): 

“Original audio entertainment also holds a lot of potential for Spot, beginning with Podcasting. In 2019, Spot has spent around $500mm acquiring three podcasting companies (two producers and one UGC publishing platform). Podcasting listening hours are growing around the world, and with a large installed base of customers, and the infrastructure to merchandise, market and personalize podcasting for users, Spot is well-positioned to become one of the leading podcasting platforms in the world. Spot has said that 60mm people listen to a podcast every week in the US, and Spot podcast users spend almost twice the amount of time on the platform, and they spend more time listening to music. If Spot can deploy the merchandising and personalization capabilities that made the music streaming experience so good for podcasts, it should sustain a leading competitive position in podcasting.  There are not many global media platforms that can capture hours per day of consumer time.”  

         “In success, Podcasting can materially improve Spot’s economics. Spot can generate more operating leverage on the fixed content investment into podcasting content because it will not have to pay per stream royalties, which could benefit margins long-term. Spot can also own the underlying rights in original podcasting IP, which it may leverage through licensing. Increasingly, film and tv companies are adapting IP based on popular podcasts due to the large built-in fan bases. Podcasting is the first major move into non-music audio for Spot; other areas could include audiobooks and spoken-word games. Spotify has publicly said that non-music audio could eventually make-up 20% of the listening hours on the platform. I think 2020 may be the year when Spot’s podcasting ambitions, and the potential benefits to its economics, start to become recognized by the market.”

Recent M&A comps highlight potential upside

Here is a brief run-down of what Spotify has been bought. I’ll quote passages from the website Music Business Worldwide from August, 2019. (SPOTIFY HAS ACQUIRED THREE PODCAST COMPANIES THIS YEAR. TOTAL COST: $404M.)

1. Gimlet Media (February 2019). Price: $195M – NY-based Gimlet is the creator of podcasts such as Startup, Crimetown and The Pitch. It was founded in 2014 by Alex Blumberg and Matt Lieber.  In its SEC filing last week, Spotify said this buyout would allow it “to leverage Gimlet’s in-depth knowledge of original content production and podcast monetization”. 

2.  PARCAST (April 2019) Price: $55M – Parcast was founded in 2016 and has launched 18 premium podcast series including Serial Killers, Unsolved Murders, Cults and Conspiracy Theories and the studio’s first fiction series, Mind’s Eye. Spotify said that the acquisition would enable it “to bolster [our] content portfolio and utilize Parcast’s writers, producers, and researchers in the production of high-quality content”.

While Spotify-Gimlet got the most press attention – the best comp for Libsyn is Spotify-Anchor, a fellow hosting service.

3.  Anchor FM (February 2019) Price: €136m ($154m) – Anchor is an online platform which enables users to both create and distribute podcast content. Spotify said the Anchor buyout would allow it “to leverage Anchor’s creator-focused platform to accelerate the Group’s path to becoming the world’s leading audio platform”.

Why does it help to own a hosting platform?

I think this article from Fast Company (May 2019) explains best Anchor’s attractiveness (Anchor is Spotify’s best bet to beat Apple for control of your ears) 

“But if Spotify is going to achieve Ek’s mission to make our ears as valuable as our eyes, the acquisition to watch is the one that’s received the least attention: Anchor.

Since officially launching in 2016, Anchor has become the number-one podcast platform in the world. The company’s mission to “democratize audio” has led it to powering more than 15% of all podcasts on the market, according to podcast analytics company Chartable. Anchor has also tripled the number of podcasts that make money through advertising since it launched Anchor Sponsorships last year. So it’s little wonder how Anchor caught Spotify’s eye……

Anchor’s success in attracting so many amateur podcast creators is what led Spotify to be interested in buying them (for north of $100 million). “Acquiring Anchor was a strategic decision for us because Anchor has completely reimagined the path to audio creation, enabling a wide distribution of podcasts to a global audience,” says Sten Garmark, Spotify’s VP of product. “We believe that Spotify and Anchor can enable a new generation of creators to create, find an audience, and monetize.”

I take small issue with the claim Anchor was the #1 hosting platform globally. To paraphrase Obi-Wan Kenobi, some truths depend on one’s point of view. I would take a look at Chartable’s attempt at measuring market share (The top podcast hosting platforms in 2018)

If you ask “Which hosting services are powering the most podcasts in the entire directory?” – Anchor is slightly bigger than Libysn.

“Which hosting services power podcasts in the Top 400 overall chart in the US?” Libsyn wins

“Which hosting services are powering podcasts published in the last 6 months?” Anchor pulls away (2018) which likely means Anchor was winning with NEW podcasters.

But since many podcasts are started, and quickly abandoned, if you look at podcasts created in the last 6 months with 10 or more episodes – Libsyn wins again.

The purpose of this exercise was to show that while the market is very fragmented, Libsyn is clearly a major player and I would argue at LEAST as much of a market leader as Anchor.

I think SPOT would get a lot of value from having the macro-level data for the whole podcasting industry; something that only small handful of companies such as Libsyn would be able to provide. This lack of data was eluded to by the CEO Daniel Ek on the Q4-19 call.

Daniel Eck (2/5/2020) – “It's really hard to get accurate third-party measurements of where you stand in podcasting. But generally speaking, what we can say is that, we're taking market share pretty much in all territories that we're in. Internationally, by some third-party estimates we're now number one in many, many of those markets already. So we're very pleased with that development. In the U.S. it's tricky to get accurate measures. So I can't really say the exact numbers, but we feel good about that we're taking market share for sure.”

LYSN is awash with data. I wouldn’t be surprised if they have a better view of what everyone is listening to than almost any other company out there. Frequently among the most cited sources of industry data, they even host an official podcast called “The Feed” where they discuss industry news, updates and best practices.

In June 2019 – the website Resonate Recordings interviewed Rob Walch, Libsyn VP of Podcaster Relations (and Podcasting Hall of Fame inductee 2016), to explain why they matter. (Again, emphasis mine)

“To say that the world of podcasting would not be what it is or where it is today without Libsyn would be an understatement. Seriously. Libsyn has been here from the beginning and has had its hand in nearly everything the podcasting industry has done over the last almost 15 years. They are touted as the world’s largest podcast network and are the preferred hosting platform for a growing number of podcasters worldwide. But let’s take a second to touch on that. They don’t only host the novice and new podcasts, but also the big ones. Like BIG, big ones. Respected and renowned podcastdom favorites like Joe Rogan and Marc Maron host with Libsyn. Libsyn is known for its reliability and how in many ways it sets the bar for all things related to podcast hosting. It’s no wonder then why they were the preferred launch partner when directories Spotify, Google and Pandora were looking to step into the podcasting space.“

“And contrary to other platforms’ claims, we host more active podcasts than anyone else because we measure how many of our podcasts have released a new episode within the last 90 days. We have more downloads than any other service; more than NPR, Serial and Wondery combined and doubled. In 2017, roughly 30% of the downloads globally across Apple Podcasts were from shows were hosted on Libsyn and currently we have 28% of the top 400 shows in Apple. We have more US unique monthly users download from our service than people who access Pandora or Spotify in the US.”

Thoughts on Financials & Valuation

So enough words – below is how I lay out Libsyn’s historical financials (Adjusted EBITDA – Capex) and took a rough estimate of Q4-19 which hasn’t reported yet (company usually reports Q4 in March). Note I made no estimate for 2020 as I want to be conservative, so I tend to look at things on a trailing basis. 

While I normally don’t focus on Adj. EBITDA, here are the adjustments which I feel are more than fair to add back to 2019 LSYN earnings. 1) Added back $610K in litigation costs Libsyn agreed to reimburse Camac for the activist campaign. 2) Added back $1.5M in bonuses for senior management for 2019 because executive comp was ABSURDLY high for a company of this size with absentee owners. As mentioned above, I really think Libsyn will be acquired so a LOT of G&A spend can be removed from the P&L from the right acquirer. Take note that LSYN has Gross Margins +80% so this would be very accretive for many, and 3) added back D&A (+$2.9M) and subtracted Capex (-$500K) because the former was materially higher than the latter, thereby making Free Cash Flow appear low if you only look at Net Income.

At $3.21 with approx. 29.7M diluted shares outstanding, LSYN has a market cap of approx. $95.4M today. With $15.7M of cash, and $7.1M of debt, that’s about $8.6M in net debt (with no credit for cash generated during Q4-19), which gives you an Enterprise Value of approx. $86.8M today. In the table below for 2019 I have Adj. EBITDA – Capex of $7.7M on the low end assuming high management salaries, and $9.2M stripping out $1.5M of management bonuses. By this measure, LSYN is trading at approx. 9.4x EV/Adj. EBITDA – Capex. I believe this is not expensive for an asset-light, FCF generating company with very sticky hosting revenue and strong strategic value in a nascent growth industry.

As mentioned above – Anchor was acquired by Spotify for approx. $154M in 2019. At that Enterprise Value, LSYN would trade at $5.47 per share (+70% from today). Let’s haircut that valuation even more to $125M EV and that still gets you a stock price of $4.50 or +40% from current price.

Recent insider buying suggests LSYN is still attractive at current prices

Camac reached its settlement in October 2019; after which they said in the filings they retained an investment bank to advise on the strategic review in November 2019. I assume once the blackout period for insiders was lifted, I took it as a strong positive that the newest Camac-affiliated board members purchased approximately $626,000 of shares in the open market between November 25th – December 6th. These are material purchases given LSYN is so illiquid it typically trades less than $100,000 a day. I think it is very bullish that executives closest to the situation found shares very attractive at the $3.00 to $3.20 range; the stock still trades at $3.21 today so you can buy alongside the Board.

Catalyst

An activist investor won de facto control of LSYN last October and initiated a strategic review process set to conclude no later than March 31st, 2020, or about 2 months from now.