By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Conversant

Conversant reports second quarter results

On August 6th, Conversant Inc (NASDAQ:CNVR) reported second quarter results. Company generates significant amounts of free cash flow and aggressively repurchases shares. During the first quarter of 2014, Blue Harbour Group, an activist fund, accumulated a 4.4% stake in the company. We believe that these developments warrant a closer look at the company.

Company profile

Conversant Inc (NASDAQ:CNVR) is the leader in personalized digital marketing. Conversant helps the world’s biggest companies grow by creating personalized experiences that deliver higher returns for brands and greater satisfaction for people. Company offers a fully integrated personalization platform, personalized media programs and the world’s largest affiliate marketing network – all fueled by a deep understanding of what motivates people to engage, connect and buy. In February 2014, company changed its name to Conversant Inc. Conversant unites digital marketing leaders launched or acquired by ValueClick since 1998.

Blue Harbour Group accumulates stake

Blue Harbour Group is an activist hedge fund and is managed by Cliffton Robbins. Blue Harbour is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more “active” activist investors who might engage in proxy fights, etc.). The fund acquired 1.76 million shares (2.8% of shares outstanding) during fourth quarter of 2013, and in first quarter of 2014 increased its stake to 2.88 million shares (4.4% of shares outstanding). As of the end of the first quarter, the holding represented a 4.4% position in Blue Harbour Group’s portfolio. Over next two weeks, the latest quarterly holdings report should be filed. With strong free cash flow generation it is possible that the fund will report a further increase in its position which will, in turn, attract media attention and help push the share price higher.

Valuation

Based on a recent share price, Conversant Inc (NASDAQ:CNVR) had maket capitalization of $1.6 billion and a similar enterprise value. Adjusted EBITDA for the first six months of 2014 equaled $90 million and the company is currently valued at an EV/EBITDA multiple of x8.68 (annualized H1 2014 results). Conversant generates a strong free cash flow: it equaled $89 million during first six months of 2014. This provides shareholder with a 11.2% Free Cash Flow yield (annualized H1 2014 results). Company actively repurchases its stock. During last 6 months it spent $81 million on share repurchases and approximately $19 million more in July, bringing the total amount returned to shareholders year-to-date through buybacks to $100 million. Concurrently with the announcement of the second quarter results, company’s board of directors approved an additional $150 million buyback program. It is reasonable to assume that a recent collapse of the merger between advertising giants Omnicom Group and Publicis make M&A deals in the sector more probable. Conversant might attract the attention of one of traditional players, for example. Attractive valuation, aggressive share repurchases, presence of an activist shareholder and possibility of a takeover make Conversant an interesting investment case.

Tags: