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SPACtrac Report - Forbes Global Media Holdings: An Iconic, Media Growth Company

Wednesday, March 2, 2022

Forbes Global Media Holdings: An Iconic, Media Growth Company

Michael Kupinski, Director of Research, Noble Capital Markets, Inc.

Refer to end of report for Analyst Certification & Disclosures

View all Noble Research on OPA/Forbes here

The Deal. Magnum Opus Acquisition Limited (OPA) will be merging with Forbes Global Media Holdings in a deal that will bring Forbes Media Group Holdings public. The deal, which values Forbes at an enterprise value of $630 million, net of tax benefits, will provide growth capital to expand its data mining analytics and to make content improvements.

The Target. Forbes is a leading source of business news and information that has operated for more than a century. Its brand is recognized internationally due its magazine, website, newsletters, conferences, and other businesses. The company plans to build on its iconic brand and broad reach to convert greater portions of its audience into loyal subscribers, growing recurring revenues.

The Market. Forbes has significantly increased its digital presence and appears well positioned to benefit from the growing digital market. With increasing internet connectivity, the global e-magazine market is expected to grow at 4% CAGR over the next 5 years to be a $5.4 billion market, according to Statista. Broadly, the global digital media market is expected to grow at an attractive 9% CAGR from 2019 to 2026.

The Finances. Forbes is expected to generate $211 million of revenue in 2022 and $237 million in 2023, with EBITDA margins above 25%, generating EBITDA of $53 million and $66 million, respectively. The company's balance sheet is expected to have $145 million in cash with virtually no debt, post transaction. As a result, the company will have significant financial flexibility to invest in its digital growth strategy, enhancing its long term growth prospects.

The Valuation. Near current levels, the OPA shares trade at 12.8 times Enterprise Value to expected 2022 EBITDA and 10.3 times EV to 2023 EBITDA estimates, which is a discount to Forbes' peer group. In addition, assuming a price target based on M&A transaction multiples, we arrive at a price target of $14.

Investment Overview

Renowned business magazine and media company, Forbes, plans to go public through a merger with Magnum Opus Acquisition Limited (NYSE: OPA), a special purpose acquisition company. The business combination is expected to be completed in the first quarter of 2022. While the company is recognized by its iconic magazine, the print magazine is a small portion of this company's diverse revenue streams, which include forbes.com, conferences, consulting, newsletters, brand extensions and e-commerce partnerships. In fact, the company has transformed its business, with digital revenues having surpassed its print revenues in 2013. As the company looks to go public, its goal is to position for the next digital evolution by investing to improve its audience data mining operations, improve its back-end technology infrastructure to offer AI learning and data science models, and generate increased recurring, digital subscription revenue.

The transaction. The transaction values Forbes at an implied pro-forma enterprise value of $685 million, $630 million net of tax benefits. Magnum Opus will provide $200 million (currently held in trust), and PIPE investors will provide an additional $400 million. Funding of the deal is outlined in Figure #1 Merger Funding. After the deal closes, Forbes’ existing shareholders will control 21.7% of the new company, while PIPE investors and Magnum Opus (OPA) shareholders will obtain 48.2% and 24.1% ownership, respectively. The remaining 6% of equity ownership will be allotted to Magnum Opus founder shares. The new company will trade on the New York Stock Exchange under the symbol, "FRBS."

Figure #1 Merger Funding


Source: Forbes' Investor Presentation

The finances. After transaction fees of $15 million, the post-merger balance sheet is expected to have $145 million in cash and no debt. The company will be able to utilize its financial flexibility to pursue its digital growth initiatives. Given its strong finances, we would not rule out the prospect of acquisitions. Acquisitions are expected to focus in the consumer area, media and to expand upon its brand extensions, discussed later in this report. 

Growing market. The global e-magazine, digital media, and digital advertising markets have grown and is expected to grow significantly. The Digital demand allowed the company to shift from a print centric business model toward a robust digitally focused, omnichannel enterprise. Its plans are to take the digital transition to the next level, adding data analytics and insights, expanding back-end, technology infrastructure with machine learning and data science modeling, all to unlock future revenue growth opportunities. We believe that the favorable digital ecosystem offers a significant tailwind to the company's growth initiatives.

An Iconic brand, growth focused company. The company has not been immune to the impact of the Covid pandemic, which adversely affected all advertising driven mediums. Revenues declined 12.2% from $210.6 million in 2019 to $184.9 million in 2020. Notably, the revenue decline was far better than many advertising mediums, which declined 20% (Broadcast TV) to as high as 40% (Radio). Adj. EBITDA declined 17% from $39.6 million in 2019 to $32.5 million in 2020. In our view, the decline in revenues and EBITDA offers a reset to the company's compelling revenue and cash flow growth trajectory. Based on management's forecast, revenues are expected to increase at an attractive 18% Compound Annual Growth Rate from 2020 to 2023 inclusive of its magazines and 21%, excluding magazines. Adjusted EBITDA is expected to increase at a compelling 25% plus CAGR in the comparable time frame. 

Striving for recurring revenues. Both the e-magazine and more broadly, the digital media and advertising markets provides future opportunities for the company's key revenue growth drivers. The company's Consumer segment, currently 38% of total company revenues, includes e-magazine revenues from Forbes' digital subscriptions, as well as newsletter subscription revenue. Forbes plans to leverage its strong brand, as well as its valuable audience insights across the company's diverse businesses, to improve user experience through customized content that fits the needs of the company's key audiences. The aim of the content improvements is to strengthen brand loyalty and convert higher portions of Forbes' audiences to paying subscribers, providing a stable. recurring revenue stream. The company will rely on key technologies to execute its strategy. These technologies include ForbesOne, the company's in-house data analytics platform, and Bertie, the company's publishing platform, which helps Forbes' journalists generate meaningful content that is tailored to specific audiences. 

Valuation may offer upside. OPA (the publicly traded SPAC) currently trades near $10 per share, which implies an Enterprise Value to projected 2022 EBITDA of 12.8 times and 10.3 times EV to 2023 EBITDA. If the shares traded more in line with EV/EBITDA multiples compared with its peers, the OPA shares would trade at $14, offering 40% upside near current levels. In addition, if the shares were to trade in line with strategic transaction multiples, or intrinsic value, the shares would trade at $18. Notably, our target price would be set at 80% of private transaction multiples, which would be $14. As such, we believe that both methodologies arrive at a similar price target of $14 (80% of transaction multiples and the current peer group average). The enterprise value calculation assumes 83 million fully diluted shares outstanding and reflects its anticipated cash balance of $145 million. We believe that the key catalyst toward higher stock valuations likely will be based upon the success of the company's subscription revenue strategy, given that stock valuations appear higher for subscription based businesses. 

Investment Highlights


  • Leverage the brand: With over a hundred years of history and an internationally recognized name, Forbes possesses a competitive advantage with its established brand. Forbes currently reaches over 150 million people worldwide in 77 countries through its content across several platforms including print, digital, and brand extensions.
  • Multi-channel opportunities: Modern channels and digital platforms are the main catalysts to grow audiences. By hosting content across multiple distribution channels, the company can expand traffic and escalate its global reach. For example, Forbes boasts over 81 million active users on its website, 42 million followers on social media, and 6 million print readers.
  • International market expansion: The company has launched new revenue streams through publication licensing agreements in more than 70 countries, as well as through international joint venture partnerships. Publication licenses can generate up to $500K per licensee, while Forbes' joint venture in China (Forbes China) generates a minimum of $800K in licensing fees and a 10% revenue share.
  • Subscription recurring revenue: The company is taking steps to grow its digital subscription base. Forbes' initiatives to enhance user engagement and consumer subscriptions can bring over $1,000 per ‘high value’ paying subscriber. Notably, management’s long-term target is to attract more than a million paid subscribers up from the current 23K.
  • e-Magazine growth: The global e-magazine industry is set to grow at an attractive 4% CAGR over the next five years to reach a total market size of $5.4 billion. As a leader in the industry, Forbes is poised to capitalize on the growing market by improving its audience data and creating meaningful content that will enhance brand loyalty and lead to expanding revenues.
  • Attractive financial flexibility: Upon completion of the deal, the pro forma balance sheet will have $145 million in cash. As such, the financial flexibility to fuel growth is a key component of Forbes’ strategy. Management believes the company is well-positioned to attract future M&A opportunities.
  • Robo-Investing tailwind: After acquiring a majority stake in the robo-trading and financial advisory platform, Q.ai, for $3.5 million, in 2019, Forbes unlocked a new revenue growth driver. According to United Fintech, retail investors accounted for 23% of all US equity trading in 2021, twice as much as in 2019. Additionally, the data and insights from Q.ai technology could be useful in providing consumer insights for other segments of the company.
 

Investment Risks

  • Increased competition in the digital media industry. Forbes is facing a competitive environment in the digital media space. Competitive pressures from other traditional media industries, such as Radio, Newspaper, and TV, which are pursuing aggressive digital growth strategies, could have adverse impacts on Forbes' ability to execute its growth strategy.
  • Brand recognition. Forbes’ brand is internationally recognized and one of the company's greatest assets. Any failure to maintain the reputation of the brand while the company expands, could adversely affect the company's revenue potential in the future.
  • Negative trends in the print magazine sector. Print publishing has experienced negative growth in recent years with the rise of digital media. The company's revenue growth could be challenged if digital revenues do not offset any potential negative trends to its print magazine revenues.
  • Challenges implementing growth strategies.  The company is entering new geographical markets and expanding its brand presence on novel platforms. Such growth strategies may face unexpected headwinds in the process, possibly affecting Forbes’ revenue growth.


Industry Overview

In the early part of the twentieth century, a new form of business journalism began growing in popularity, as the magazine industry rose to prominence. Many of today's most recognizable business and news magazine brands were established roughly a century ago: Forbes in 1917, Time in 1923, Business Week in 1929, and Newsweek in 1933. At the time that these magazines were founded, the popularity of magazines was steadily climbing in the United States. According to a report published in 1956 at the University of Illinois Press (entitled Magazines in the Twentieth Century), the combined circulation per issue of all U.S. magazines grew from 65 million in 1900 to 385 million in 1947, a compound annual growth rate of 4%. Over a similar period, magazine advertising revenue grew substantially. Gross national advertising in U.S. magazines increased from $25 million in 1915 to $622 million in 1955, a 9% compound annual growth rate.

The business magazines marketed themselves as a resource for relevant news that related to the economics of various industries. For example, a business magazine would often publish articles about a political issue through the lens of how it might affect various industries. These magazines would also give insights into economic trends, emerging businesses, successful management practices, and other features such as rankings. A couple of popular examples of featured rankings are Forbes’ list of the top 2,000 public companies, “the Global 2,000,” and BusinessWeek’s “Business School Rankings.” With a focus on all things industry, the business magazines became popular with management personnel and C-suite executives and still are today.


Figure 2 — Business Magazine Franchises

Source: Noble Capital Markets

Business magazines traditionally generated revenues in much the same way as newspaper publishers, through subscriptions and by selling advertising. With the similarities between magazines and newspapers, business magazines competed with business-focused newspapers such as the Wall Street Journal and the Investor's Business Daily. However, the competitive landscape changed with the internet and the competition is now broader, but so too are the opportunities.

Over the subsequent two decades since 2000, many industries had to adapt to an increasingly digital world. Magazine, newspaper, radio, and TV companies all began publishing content on their websites. What used to be siloed industries found themselves competing directly with each other for digital audiences. Moreover, new companies sprung up as digital content pure-plays. All of the traditional media companies now post videos and articles on websites and mobile apps, as well as send out e-newsletters and create podcasts, among other digital content offerings. In short, what has come to be known as digital media, is essentially a super-industry in which the traditional media companies now all compete. 

There are certainly similarities between the revenue models of digital media and traditional media, as both can rely on advertising and subscription revenues. There are many ways a company can generate digital media advertising revenue including website banner ads, pop-up ads, audio ads (through digital audio content like podcasts), and video ads, among others. Companies can also enter into affiliate marketing partnerships in which they make a commission off audiences buying third-party products after following a link posted on the company's website. There are also subscription-based revenue opportunities with digital media content. This often takes the form of a paywall, which allows only paying subscribers to access certain premium content on a website. Digital subscriptions can also be a means of monetizing content distributed as an e-newsletter. 

The dawn of social media has also had an effect on the media industry, as it allows media companies to capture larger audiences. Platforms such as Facebook, Instagram, LinkedIn, and Snapchat all have extensive reach and therefore have become marketing hot-spots. As it relates to the digital media industry, social media is essentially a competitive marketing landscape where companies attempt to build their brands and drive traffic to their websites and mobile apps. Figure #3 Social Media Spending, illustrates how social media ad spending has been and is expected to grow.


Figure #3 Social Media Spending

Source: Statista

Although there is steep competition for audiences in the digital media industry, the opportunities within the space are growing. Some of the drivers of the growth in digital media are increasing internet connectivity, faster internet speeds, and increasing numbers of mobile internet devices. These technological improvements are making digital content available to a growing number of people around the globe. As illustrated in Figure #4 Internet Connectivity, global smartphone connections were just over 3 billion in 2016 and are expected to grow to 5.5 billion by 2025. Over the next several years, internet data consumption is also expected to grow significantly, at more than 20% per year.


Figure #4 Internet Connectivity 


Source: PWC


With the ever-increasing internet connectivity around the globe, digital media revenues are expected to grow substantially in the coming years. The eMagazine industry in particular, is expected to grow at 4% CAGR from 2022 through 2026, according to Statista. By 2026, eMagazine global revenues are expected to be $5.4 billion, as illustrated in Figure #5 eMagazine Global Revenue. 

Figure #5 e-Magazine Global Revenue


Source: Statista

The growth of eMagazines is part of a larger trend of digital advertising and digital media, which is illustrated in Figure #6 Global Digital Media Market. According to researchandmarkets.com., the global digital advertising market, which includes ad revenue from mobile apps, digital TV, social media, mobile and desktop web, and others, is expected to grow at 9% CAGR from 2019 to 2026. The global digital content media market is expected to grow at 13% CAGR over the same time frame, according to PR Newswire. Digital content media includes movies, music, gaming, education, digital publication, and other forms of digital media. 

Figure #6 Global Digital Media Market


Source: Forbes Investor Presentation

The traditional media industries, including business-focused magazines, have had to adapt to an increasingly digital world. The new digital media industry, therefore, is fiercely competitive. Yet, it offers significant growth. It is incumbent upon media companies to grow digital content, establish brands, and maintain audience loyalty through the digital transformation. The media companies that are able to accomplish this are likely to be best positioned to capture favorable portions of the growing digital market.

Company Overview

Forbes Media Group, headquartered in New Jersey, is a leading source of business news and information through its magazine, website, and newsletters. Founded by B.C. Forbes and Walter Drey, the magazine's first issue was published in 1917. Over the past century, it has developed many iconic franchises, such as the Forbes 400, Forbes Billionaires List, Forbes 30 Under 30, and many others. It has developed into much more than a magazine with the launch of conferences, forbes.com, Forbes School of Business, Forbes Insights (a consulting service), and others. Figure #7 Forbes Timeline lists some of the highlights over the last hundred years.   

Figure #7 Forbes Timeline

Source:

Today, Forbes is an iconic brand that reaches millions through various digital and social media platforms, as well as through its print business. The company's digital ecosystem reaches about 150 million people, which includes 79 million monthly organic search views. Notably, Forbes' website is a top 50 global internet site with 3.5 billion annual page views. Forbes also boasts 42 million social media followers and 6 million readers of its printed content. The number of monthly active users for Forbes' content put the company alongside such media titans such as the Wall Street Journal, CNN Business, and Bloomberg. Figure #8 Competitive Position illustrates that in spite of significant competition, Forbes  ranks among the top in business-related news and information among its peers. ---------- page break ----------

Figure #8 Competitive Position