This article by MOI Global instructor John Lewis is excerpted from a letter of Osmium Partners, based in Greenbrae, California.
Leaf Group Ltd., is an online digital media company composed of two service offerings: Content & Media (C&M) and Marketplaces. C&M publishes and distributes content, accumulating a library of articles, videos, and blogs across their properties such as eHow.com and Livestrong.com. They also operate two leading artist marketplaces, Society6 and Saatchi Art, which provides the global community of artist with an online commerce platform. Leaf Group’s current market capitalization is approximately $199 million. (LEAF is a holding across all funds.)
In March, our activist position led to a successful outcome of Leaf agreeing to hire a banker and explore the sale of the company.
“Before we jump into the Q&A, I’ll provide a brief update. As many of you know, April was an eventful month for Leaf Group. On April 15, we announced that the company had commenced a comprehensive review of strategic alternatives. The process is ongoing, and we will not be making further announcements until the Board has approved the course of action requiring disclosure. On April 16, Osmium unilaterally terminated their potential proxy contest with the company.”
-CEO of Leaf May 8th 2019
There was no need to fight a proxy contest, as we received overwhelming support from large shareholders to sell the company versus to continue to issue stock to buy small tuck in acquisitions. We believe Leaf’s management’s ability to execute is poor at best and they have not earned the right to try to juggle new businesses given their track record. Our opinion is based on far below industry growth rates and far below industry profit margins. However, Leaf guided to full year + adjusted EBITDA (ex-proxy cost and legal advisors).
Leaf disclosed in their 10Q in 1Q19, they spent $700,000 in 1Q19 fighting us gearing up for the proxy contest with legal, financial, and proxy printing costs. Osmium’s total cost in fighting Leaf was less than 3.5% of the $700K the company spent. We wrote two public letters, submitted 3 directors’ applications, and had SEC filings.
Leaf Media comps: IAC, JCOM, FUTR.L trade between 4-5x sales
Leaf reaches 64 million monthly users and is under monetizing traffic plus high synergies.
1. Saatchi is one of the largest marketplace for emerging artists with 600,000 works of art between $500 to $50,000. Leaf paid $17 million for the business and revenue has increased 3x since 2013. Leaf paid 9x sales for this business. We are modeling 2-4x and this includes The Other Art Fair as well.
2. Society6: we think is worth between 1-2x times sales (comps are in the 4-6x sales, with one outlier Redbubble which we own at around .9x sales). Typically a change of control premium is +30 to +40%.
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Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Past Osmium performance is not indicative of future results. Osmium takes concentrated positions. Osmium Partners disclaims any obligation to update this letter. A portion of the Partnership’s assets may from time to time be invested in securities that have limited liquidity. The Partnership’s investment strategy is to make concentrated investments in what it views as its best ideas. The Offering Memorandum and Limited Partnership Agreement offers a comprehensive overview of the risk factors involved in investing with Osmium Partners. The information contained herein is provided for informational purposes only. This is not an offer to sell, or a solicitation to buy, limited partnership interests in Osmium. An investment in Osmium is not suitable for all investors. Graphs/charts are provided for illustrative purposes only and should not be relied on to form an investment decision. Stocks mentioned in the newsletter do not constitute a recommendation to buy or sell the individual securities.
About The Author: John Lewis
Mr. John Hartnett Lewis co-founded Osmium Partners, LLC in 2002 and serves as its Chief Investment Officer and Managing Partner. Mr. Lewis served as a Director of Research at Retzer Capital. He was an Equity Research Analyst at Heartland Advisors, Inc. from March 1999 to January 2001. He served as the President of the University of San Francisco MBA Investment Group, where he managed a small portion of the school's endowment fund. Mr. Lewis served as a Director of Spark Networks, Inc. since July 2, 2014 until November 2, 2017. He served as a Director of Intersections Inc. since October 2015 until August 8, 2017. Mr. Lewis is a Guest Columnist for TheStreet.com. He received an M.B.A. from the University of San Francisco in 1999 and a B.A. from the University of Maryland in 1996.
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