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Osmium Partners Demands Action At Spark Networks To Maximize Shareholder Value

4. On July 14, 2010, we spoke with EasyDate’s Chairman whose company just went public with the stated goal to fund acquisitions and international growth as they attempt to win more of a global market worth an estimated £1bn. Given that Piper Jaffray (“PJC”) has been running a process on behalf of the Special Committee for the past four months to consider all strategic alternatives including the sale of Spark, we were shocked to learn that EasyDate has never been contacted. By failing to contact a legitimate partner or acquirer, our fear is that PJC is not effectively canvassing or seeking strategic alternatives from all potential buyers/partners.

In a recent proxy fight with Vitacost (Nasdaq: VITC), GHP filed an investor presentation with the SEC on May 26, 2010, discussing “the opportunity cost of shareholder inaction”, which reflects that the peer market multiple for an internet vitamin retailer was 17.7x EBITDA, and that Vitacost was undervalued by 82% given a long list of poor corporate governance issues.

The “Opportunity Cost” of Shareholder Inaction

  • Vitacost currently trades at a significant discount to its peers based on a Firm Value / CY2010E EBITDA trading multiple (8.9x vs. peer median multiple of 17.7x)
  • Assuming Vitacost were to trade at the median peer multiple of 17.7x, that would imply a share price of $17.47, which is 82.2% higher than the closing share price of $9.59 on May 24, 2010
                       
($ in millions)

 

Company

Share Price

Market Capitalization

Firm Value

CY2009A- 10E Rev Growth

CY2010E EBITDA

Firm Value / CY2010E EBITDA

Amazon $ 122.12 $ 54,425.4 $ 50,091.8 35.0 % $ 2,598.0 19.3x
Vistaprint $ 44.71 $ 1,955.5 $ 1,860.5 25.5 % $ 156.6 11.9x
Blue Nile $ 47.11 $ 683.3 $ 659.9 15.2 % $ 32.4 20.4x
Vitamin Shoppe $ 23.44 $ 632.4 $ 777.0 10.3 % $ 79.1 9.8x
Drugstore.com     $ 3.16     $ 334.3     $ 318.4       16.3 %     $ 18.0     17.7x  
Median $ 683.3 $ 777.0 16.3 % $ 79.1 17.7x
Average           $ 11,606.2     $ 10,741.5       20.5 %     $ 576.8     15.8x  
Vitacost     $ 9.59     $ 263.6     $ 237.4       23.7 %     $ 26.6     8.9x  
 
            Vitacost
CY’10E EBITDA $ 26.6
Median Peer Multiple 17.7x  
Implied Firm Value $ 471.2
Less: Debt ($9.6 )
Plus: Cash and ST investments 44.3
Plus: Option Strike Proceeds   12.3  
Equity Value $ 518.2
Total Fully Diluted Shares Out   29.7  
Implied Share Price $ 17.47
Premium to current (%)       82.2 %
Source: GHP / SEC filing.

We replicated this methodology below to show investors the “opportunity cost” to them created by Spark’s current management team and board failing to focus on shareholder value.

Company     Share Price     Market Capitalization     Firm Value     Firm Value/ LTM     EBITDAS Margin
EBITDAS     Revenue
Ancestry.com $18.53 $787 $756 10.2x 3.2x 32 %
EasyDate Holdings £0.66 £49 £40 32.1x 4.7x 15 %
Health Grades $8.12 $242 $218 14.7x 3.7x 25 %
Travelzoo $15.68 $258 $226 11.8x 2.2x 18 %
Meetic     €21.80     €497     €456     10.9x     2.9x     27 %
Median                       11.8x     3.2x     25 %
                                       
Spark Networks     $3.35     $70     $62     5.9x     1.4x     24 %
 
            Spark
LTM Adjusted EBITDAS $10.4
Median Peer Multiple 11.8x  
Implied Firm Value $122.0
Plus: Cash $6.8
Plus: Real Estate Proceeds $1.6  
Equity Value $130.3
Fully-Diluted Shares   20.9  
Implied Share Price $6.24
Premium to Current         86.2 %
 

Alternatively, the value of Spark could be determined from the perspective of a strategic acquirer.  Given Spark’s bloated cost structure, high management compensation and public company costs, as well as potential marketing budget synergies, we believe a strategic acquirer could realize large synergies with relative ease.

 
                 

Spark

Reported EBITDA

$10.4

Plus: Public Company Costs

$1.0

Plus: Management Team Costs

$3.5

Plus: Excess Headcount Costs

$3.1

 

Adjusted EBITDA

$18.0

Multiple

8.0x

 

Implied Firm Value

$143.7

Plus: Cash

$6.8

Plus: Real Estate Proceeds

$1.6

 

Equity Value

$152.0

Fully-Diluted Shares

20.9

Implied Share Price

$7.28

Premium to Current

   

117.2

%

 

Source: Capital IQ and Company Press Releases.  Most current EasyDate financials as of 12/31/09.  Spark Networks revenue per employee is $280K vs. peer group of $590K.  For the analysis above, we assumed $440K in revenue per employee.

 

In addition to the lack of a full and fair sale process, we believe that Spark’s corporate financial performance has been poor for several years. Under this management’s leadership, net income plummeted from $9.0mn in 2007, to $4.8mn in 2008, and then to a loss of $6.4mn in 2009. This is hardly the performance one would expect or desire from leaders holding one of the best online dating brands in the industry.

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