When chronically underperforming media company Leaf Group Ltd. announced a “strategic review” to consider selling all or part of itself in April 2019, certain buyers were licking their chops. But in the end, dinner was never served.
According to a potential strategic buyer, the company broke many normal rules of conduct in a sale process, effectively ruling out the possibility of doing a deal of any kind. The would-be bidder had expressed interest in some of Leaf’s assets prior to the review process, but when the apparent opportunity to conduct due diligence came about, Leaf Group declined to disclose detailed financial information about individual divisions.
There was, in theory, an opportunity to make a bid, but the company gave the person just one week’s notice of a final deadline. There weren’t any chances to meet senior management to discuss details or access to a so-called data room, which normally serves to provide potential buyers with critical information that isn’t given to the public, the person said.
CorpGov separately interviewed multiple technology, media and telecom (TMT) bankers not involved with Leaf Group who said a review process normally involves a letter announcing a deadline of many weeks if not months in advance. Potential buyers need time not only to examine the business, but arrange financing to back their offers.
The review ended in May of this year, when the company said it had “assessed an exhaustive range of alternatives” but determined its “current business strategy as an independent company is the best path forward.” That announcement came just two days after the company’s annual shareholder meeting, leaving frustrated shareholders with little formal recourse until 2021.
Leaf Group’s senior management, particularly CEO Sean Moriarty, is at loggerheads with an unusually large group of unhappy shareholders accounting for more-than 40% of the outstanding shares. The group has made valid points about the company’s underperformance, including the fact that the stock price has been roughly cut in half since Mr. Moriarty took the helm in 2014. Leaf Group didn’t respond to a request for comment while a spokesman for the shareholder group declined to comment.
A second person close to the company said Mr. Moriarty has shown a lack of interest in selling parts of the business in the past. The person said a bid for certain assets was presented to Mr. Moriarty earlier in his tenure and prior to the recent review, but it vanished without any indication of serious consideration.
It is common for media-industry companies to have controlling shareholders such as John Malone with Liberty Media or the Murdoch Family with Fox and News Corp. assets. The second person said that Mr. Moriarty appeared to operate similarly to such media moguls, even though he owns a small stake in the business.
There are other signs of corporate governance concerns at Leaf Group. Since April, four directors have resigned from the board, including Lanny Baker, who oversaw the strategic review process.
And, as the investor group points out, both members of the compensation committee worked with Mr. Moriarty at Ticketmaster. Such close connections understandably raise eyebrows at a company that has underperformed the market and peers so dramatically.
Even a cursory look at the company’s financials suggests the company is undervalued. Leaf had only about $11 million of debt as of June 30 and the company trades at just 0.5 times 2021 estimated revenue, according to Sentieo, an AI-based research platform.
Some of Leaf’s businesses have thrived during the pandemic. Society6 Group, for instance, saw revenue rise to $36 million in the June quarter from $16 million a year earlier. That division alone, assuming a $200 million run rate and a multiple of two times sales, could conservatively be worth $400 million. The entire company has a market capitalization of just $120 million.
Mr. Moriarty has had ample time to execute on the company’s strategy as an independent business. Barring a miraculous and sudden recovery at Leaf, it may soon be time for him to make like a tree.
John Jannarone, Editor-in-Chief