The Corporate Restructuring Report-Cogint Inc (COGT) & Red Violet Inc. (RDVT)
On March 26, 2018, Cogint Inc. (COGT) completed the spin off of its risk management business into a separate public company, Red Violet (RDVT). The parent retained the digital marketing business (Fluent). The spin-off, announced on September 7, 2017, was taxable. The spin-off makes sense given lack of synergy between the two businesses and provides RDVT with direct access to equity and debt capital markets to fund its growth strategies. COGT (ex. RDVT) will be better able to deploy its cash flows for M&A and share repurchases.
COGT is a play on the rapidly growing digital marketing industry, targeting its larest and fastest growing sub segment, performance-based advertising (accounts for ~65% of total digital ad spend). Advertisers prefer highROI provided by performance-based campaigns given their effective and deterministic targeting of consumers. The entry in international markets should provide fillip to the topline. We see high possibility of bolt-on acquisitions given that Fluent is likely to generae more than $12 million in free cash flow annually. We note that COGT (ex RDVT) is trading at a total enterprise value of $265 million, farlower than the $415 million assigned to Fluent (as per the BlueFocus merger which is now cancelled.
We view RDVT as a pure-play data and analytics company serving the risk management industry. The risk analytics software market is large and is positioned to grow at a CAGR of 15.3% till 2022. RDVT grew revenues by ~100% YOY in FY17 and we expect the company to continue to grow faster than the industry average. We expect operating leverage to drive margins as business gains scale. Management has opined that gross margins could be as high as 70% to 90% over the long term. Manaement team has experience in scaling similar businesses in the past, which is a positive in our view. We caution investors that RDVT remains a speculative play given its limited operating history.
Of the two, we prefer COGT (ex RDVT) owing to more upside as well as history and continuity of business operations. In our view, both COGT (ex RDVT) and RDT are undervalued.
Red Violet focuses on data fusion and analytics, providing cloud-based, mission-critical analytics and information solutions to enterprises with use cases including fraud detection, risk mitigation, due diligence and marketing. Through its platform, CORE?, the company uncovers the relevance of disparate data points utilizing its analytical capabilities to provide real-time and insightful views of people, businesses, assets and their interrelationships. The company markets its solutions primarily through two brands: idiCORE?, which is an investigative solution used to address a variety of organizational challenges; and FOREWARN?, which is an app-based solution tailored for the real estate industry.
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