United Online (UNTD) is very much like the company we just analyzed, Nacco Industries (NC). It is a company with distinct businesses that have very little synergy. As a result, it is spinning off its most profitable business to unlock value.
United operates three distinct business segments:
- FTD is “a provider of floral, gift and related products and services to consumers and retail florists, as well as to other retail locations offering floral, gift and related products and services under the FTD and Interflora brands.”
- Content & Media segment provides online nostalgia products and services (Memory Lane,Classmates, schoolFeed, StayFriends, and Trombi) and online loyalty marketing services (MyPoints).
- Communications provides “Internet access, email, Internet security, and web hosting services” under the names NetZero Inc and Juno.
The company is spinning of FTD. Investors are going to receive one share of FTD for every one share of United. They are targeting the completion of the spin-off in the first quarter of 2012. Also, they “are concurrently exploring strategic alternatives for our Communications and Content & Media businesses.”
United trades at $5.52/share with a market capitalization of $500 million. Let’s break down the value of FTD, Content & Media, and Communication segments to see what they might trade for after the spin-off.
FTD is United’s biggest and most profitable business. Unlike some of its competitors like 1-800-Flowers, it only processes floral and gift related orders through the internet and telephone. It does “not maintain significant physical inventory and generally” does “not bear the cost of warehousing our consumer product offerings, and it generally receives “payment from consumers before paying florists or other third parties to fulfill product orders”. Thus, it has very good cash flow.
Revenue for the first 2 quarters of 2012 was up 2.6 percent to $284 million and income from operations was up 8% to $46 million. Income from operations is on target for over $81 million for the fiscal year. Based on this, let’s calculate the net income and free cash flow for 2012 if it were a separate company.
Because FTD is a recognized brand name, and it is a growing business, it will easily trade for more than 10 times FCF. If you add to the fact that United has over $111 million in cash and cash equivalent, FTD should have a valuation of around $500 million. So, if you are buying United at the current price, you are getting Content & Media, and Communication segments for free.
Content & Media
Content & Media is a declining business. Revenue for the first 2 quarters decreased almost 20% to 77 million and income from operations decreased almost 30% to $14 million. The best option for United is to sell the business to a strategic buyer. The hope is that they could get $50 million to $100 million. It is entirely possible since they just bought SchoolFeed “for $7.5 million in cash upon closing and a maximum of $27.5 million of contingent consideration payments payable upon the achievement of certain performance objectives.”
Communications is also a declining business. Revenue for the first 2 quarters decreased almost 20% to $53.6 million and income from operations decreased almost 42% to $18.9 million. Customers are switching from dial-up interent connections to high-speed or broadband connections. The number of paying customers is just .7 million, a decrease of 20% year over year. They have started offering “NetZero Wireless 4G mobile broadband”, but who knows if that will have any success. The best option is that a competitor that offers high-speed internet will pick it up with the hopes of converting its customers. Again, the valuation for this is somewhere between $50 million to $100 million.
United is undervalued. The valuation of FTD alone is equal to the valuation of the company. Communication and Content & Media are worth anywhere between $1 to $2 a share. HypeZero will wait until the shares go below $5/share to buy to get a better discount because management has been inept at running the company.