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+69% Return Prompts IAC Exit, Continue to Hold MTCH

IAC/InterActiveCorp. (IAC) has completed the distribution of its 80.7% stake in Match Group, Inc. (MTCH) aftermarket on June 30, 2020, resulting in the boost to MTCH's free float (which precludes a potential inclusion on the S&P 500 Index) and the continued execution of IAC's "anti-conglomerate" philosophy when it comes to its investments. We're booking our strong profits in IAC and we recommend investors to continue to hold MTCH for long-term benefits.

What's Happened? The Edge Intelligence...
Through the distribution, IAC transferred its 80.7% ownership in MTCH directly into the hands of shareholders, meaning for every one share owned, IAC shareholders received 2.1584 shares of MTCH aftermarket on June 30, 2020.

Nearly in-line with our expectations, IAC (Parent) opened at $102.65, hit a high of $110.73, and eventually settled at $107 (compared to our technical split price of $100.04). Meanwhile, MTCH (Spinoff) opened at $106, hit a high of $107.43 and ended the trading day at $105.67 (compared to our technical split price of $98.61).

The Edge View...
IAC: Given IAC's Spinoff of its 80.7% stake in MTCH, we were positive on both companies considering that the distribution would assist IAC in lowering the “conglomerate discount” its valuation was subject to due to being heavily invested in MTCH. IAC has used this Spinoff to bolster its own balance sheet by transferring its entire debt to MTCH and receiving a cash consideration of $2.9bn. The separation permits IAC to build scale for its other businesses without concern for MTCH’s growth and drive further shareholder value with its remaining portfolio.

We believe IAC's digital media company Dotdash is the next strategic investment for growth prospects (bought in 2012). It is the first privately-held company in IAC’s portfolio to reach profitability with EBITDA margins of ~17% in FY19. Therefore, we believe that following MTCH’s distribution, IAC will be able to focus on its remaining portfolio in order to create value, starting with Dotdash.

MTCH: The split of MTCH from IAC has helped enhanced its trading liquidity due to its now-higher free float and the elimination of its previous dual-class structure. This in turn allows big institutions who have a free-float limitation when investing in companies to be able to buy shares. Likewise, this also makes MTCH eligible for inclusion in the S&P 500 Index, allowing S&P 500 funds to buy shares as well, all of which will provide a boost to its stock price in the ensuing index buying. While no announcement by the S&P Dow Jones Indices has been made of MTCH’s inclusion from its first day of listing yesterday, we expect an update to be made shortly. MTCH is a current constituent of the Russell 3000 Index and is listed on the NASDAQ.

Though the transaction has resulted in an increase to MTCH's leverage ratio to 4.2x (up from 1.2x pre-transaction), its strong operating margins and healthy free cash flow generating ability helps the company to comfortably shoulder the increased debt. Furthermore, MTCH has seen meaningful growth in its other businesses apart from Tinder (the primary driver of core revenues, contributing ~56%). For instance, OkCupid has made huge strides by achieving 8 consecutive quarters of ~10% Y-o-Y revenue growth. Additionally, another brand Hinge became a leading app in North American and UK markets and is estimated to be a revenue contributor from FY20E.

Management Changes...
Alongside the Spinoff, MTCH also took this opportunity to make some changes to the board of directors. Two board members have stepped down (Mark Stein and Gregg Winiarski), while four new members take seats: Stephen Bailey (ExecOnlineCEO), Melissa Brenner (NBA EVP of Ditigal Media), Wendi Murdoch (investor/entrepeneur), and Ryan Reynolds (actor, owner of Aviation Gin and MintMobile).