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IAC's Latest Spinoff Is Attracting a High Price Tag

GuruFocus.com
·4 min read

- By Margaret Moran

On Tuesday morning, IAC/InterActiveCorp (NASDAQ:IAC) announced that it intends to go through with spinning off its full stake in video software company Vimeo, a move that it has been pondering in recent quarters. Following the announcement, shares of IAC jumped more than 16% throughout the day to close at $183.73 before pulling back slightly the following day.


IAC's Latest Spinoff Is Attracting a High Price Tag
IAC's Latest Spinoff Is Attracting a High Price Tag

The terms of the deal

The value of the Vimeo spinoff has yet to be determined. It was estimated to be worth around $2.75 billion in early November, when it raised $150 million in equity from Thrive Capital and GIC.

The parent company is taking advantage of the high valuations that the market is currently placing on software as a service (SaaS) stocks. Vimeo started out focousing on streaming entertainment, especially from independent filmmakers, but it has since pivoted its plan to provide video services for businesses using the SaaS model.

IAC's CEO Joey Levin had the following to say about the move:

"The combination of Vimeo's remarkable growth, solid leadership position, and enormous market opportunity have made clear its future. It's time for Vimeo to spread its wings and become a great independent public company."

IAC expects to close the deal by the second quarter of 2021. The transaction will take the form of a reclassification of shares and will mark IAC's 11th spinoff, following hot on the heels of its separation from Match Group Inc. (MTCH) in August.

Sellers' market

Given that Vimeo operates in a hot market, shares of IAC spiked following the announcement of its impending spinoff. However, is there truly value to be found in the move for cautious investors, or is Mr. Market getting a little too optimistic?

IAC is able to make so many spinoffs for the same reason it was able to make so many acquisitions in the first place: it keeps the operations of its various component companies separate. The company tends to spin off the components that are showing substantial growth, focusing its capital investments instead on those that have high promise but have yet to unlock their true potential.

The combination upside and downside to this strategy, at least for investors, is that the companies that IAC spins off will typically garner a sky-high valuation from the market. This could potentially be a boon for short-term investors who get in and out at the right points, but long-term investors may find that they paid too high a price. Just like when housing prices are high, we can call the current environment for SaaS stocks a "seller's market," in which those who are selling can be generally expected to come out on the better end of the deal compared to those who are buying.

Valuation

The valuation of $2.75 billion for Vimeo would indicate that it represents approximately 17% of IAC's current market valuation of $15.51 billion, thought that would only be if both Vimeo and its parent company were trading at their intrinsic values.

During the recently reported third quarter of 2020, Vimeo brought in revenue of $75.1 million, while the operating loss was $3.3 million and adjusted Ebitda was $3.4 million, marking its first ever quarter of positive adjusted Ebitda. Overall, IAC's revenue came in at $788.4 million, while the operating loss was $128.6 million and adjusted Ebitda was $35.2 million. Vimeo thus represented around 9% of IAC's revenue, 2% of its operating loss and 9% of its adjusted Ebitda. Based on these numbers, it seems the company is expecting the market to grant Vimeo nearly twice the valuation that it grants to IAC.

Granted, Vimeo did achieve 44% revenue growth and 21% subscriber growth year-over-year compared to IAC's broader 12% revenue growth. Investors with a long-term horizon who have conducted their due diligence and believe Vimeo has the potential to keep this growth up may thus be interested in the stock, as IAC's current valuation is lower than what the market could be willing to give Vimeo in the future.

On the other hand, IAC is making this spinoff in a seller's market, which allows it to take advantage of the opportunity to bring in a large amount of investment dollars to the spinoff. Investors should remain aware of this in their analysis.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.