Activist Yelp review is worth hearing out

Angi

23/05/2023 18:33

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Jennifer Saba
       NEW YORK, May 23 (Reuters Breakingviews) - Yelp  YELP.N 
has garnered another bad review – though this one may have some
golden advice. Half a decade after another rabble-rousing
shareholder launched a campaign at the $2 billion local review
website, activist TCS Capital now wants Yelp to find a buyer or
merger partner. Top of the list is Barry Diller’s
home-improvement shop Angi  ANGI.O , itself a recent creation of
consolidation. While potential cost savings amid a tough market
argue for a combination, a proposed $70 a share deal price might
be a stretch too far. 
    TCS President Eric Semler wrote a letter to Yelp Chair Diane
Irvine on Tuesday chock-full of disappointment and concern.
Yelp’s stock price is down more than 30% in five years and the
company trades at nearly 6 times analysts’ predicted EBITDA for
the next 12 months, according to Refinitiv. That is much worse
than less-profitable Angi, which is valued at around 13 times
EBITDA.  
    Nonetheless, Yelp has grown revenue, which it gets mainly
from advertising, for six consecutive quarters. In the first
three months of this year, revenue rose 13% to $312 million – a
much higher growth rate than Alphabet’s  GOOGL.O  Google and
Meta Platforms  META.O  achieved. The trouble is that Yelp is a
pipsqueak compared to Facebook or Google, where many people also
go to get digital local advice and reviews. That is true of the
$1.6 billion Angi, controlled by Diller’s IAC, as well. Given
the risks of being a small fish in a big pond, the best outcome
might be to join up, cut costs in marketing and sales to juice
profit, and try to make the best of it.
    But TCS’s $70-a-share valuation aspiration for Yelp is
absurdly high, at more than double the company’s undisturbed
share price on Monday. Take Yelp’s anticipated operating profit
of some $138 million in 2024, according to Refinitiv data, then
add an estimated $200 million in potential cost savings gleaned
from slicing 10% of Yelp and Angi’s selling, general and
administrative costs of nearly $2 billion. Once taxed at a
standard 21%, the implied return on invested capital of only 6%
looks light.
    The devil may be in the details though. TCS is familiar with
Angi: Semler won a seat on the board in 2016 and pushed for a
sale with IAC’s Home Advisor. He clearly knows the business, and
a lower price could make a deal work. While Yelp boss Jeremy
Stoppelman has dueled with activists before, he may well find it
hard to duck this review.
    Follow @jennifersaba on Twitter
         
    CONTEXT NEWS 
    Activist investor TCS Capital Management sent a letter to
Yelp Chair Diane Irvine on May 23 demanding the company explore
a sale or merger with rival Angi, among other potential buyers.
Yelp is a review website founded in 2004. Angi connects
home-service professionals with consumers and is controlled by
Barry Diller’s IAC. 
    TCS holds more than 4% of Yelp’s shares. Fund President Eric
Semler wrote that Yelp is “shockingly undervalued” and could be
sold for at least $70 per share, a 115% premium to Yelp’s
undisturbed price on Monday. 
    “Yelp maintains an active dialogue with our shareholders and
values constructive feedback on our business and ways to create
value,” a spokesperson said in a statement. 

 (Editing by Jonathan Guilford and Sharon Lam)
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