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Diller's Track Record Too Good to Ignore

After a series of successful separations which have maximized value (at a CAGR of 17% compared to the S&P 500’s +10% to date), media and internet holding company IAC/InterActiveCorp (IAC) is back again with another Spinoff of its most valuable asset, Match Group, Inc. (MTCH). The distribution will help reduce IAC's conglomerate discount and clean its balance sheet, while MTCH will benefit from an increased free float, the elimination of its dual-class structure, and potential index inclusion.

The Edge View...
IAC: The distribution will help reduce IAC/InterActiveCorp’s (IAC) conglomerate discount, currently applied due to its 80.7% and 84.1% stakes in MTCH and ANGI Home Services, Inc. (ANGI), respectively. Besides having already carved out MTCH via an IPO in November 2015 and that stock generating value (+390% returns compared to the SPX’s +60%), we believe it makes sense for IAC to create even further value through Spinning the rest of its stake. IAC is known for its investments/acquisitions in smaller technology companies and building on them until they can operate independently. The transaction will allow IAC to clean its balance sheet by transferring all debt (~$1.9bn) to the Spinoff and end up holding $2.9bn in cash, which will allow IAC to follow its legacy of continual inorganic expansion by investing in growth areas without burdening itself with debt. Additionally, we believe IAC will be able focus on building the scale of its other businesses and drive further shareholder value.

MTCH: Match Group, Inc. (MTCH) will benefit from enhanced trading liquidity due to a higher float and will eliminate voting control, which makes it eligible for inclusion in the SPX Index. Consequently, there is an index play with a significant anticipated total buying of 6.8% were it to list on the index. Post-Spin, MTCH’s total net-debt will be $3.5bn, resulting in a leverage ratio of 4.2x, up from the current 1.2x. However, with a strong adjusted EBITDA margin of 38% and free cash flows of $620m in FY19, we believe MTCH will comfortably shoulder this debt obligation, as evident by its historical track record of deleveraging. Additionally, Barry Diller’s potential holding of ~5% in MTCH after the distribution is another key positive, which will enable the company to constantly pursue value for its shareholders. In hindsight, Mr. Diller has maintained a stake in some of his Spun-off entities like Expedia Group, Inc. (EXPE), benefiting from its share price returns of +369% compared to the SPX return of +169% to date.