Emerald Exposition Events (EEX) has made its debut as a publicly traded company. The company has become the leader in B2B trade shows through a string of acquisitions, although it remains a relatively small player in a highly fragmented industry.

The dealmaking spree has created a sizable player, but added a lot of debt to the balance sheet as well. Being leveraged 4 times and operating with premium multiples, I am not that attracted to this cyclical player. That said, the role as a consolidator is interesting for investors over time, certainly if multiples compress and leverage comes down.

Trade Show Going On The Road

Emerald is a key operator of B2B trade shows in the US, with some of these events dating back 110 years. The company currently operates 50 of these shows, drawing over 500,000 global attendees and exhibitors.

The company claims that each trade show franchise is profitable thanks to its leading positions in the relevant industry verticals. This leadership position attracts quality and makes it the ¨must-attend¨ event for the respective industry. These shows are responsible for over 90% of sales reported by Emerald, with the remainder of revenues generated from digital media, print publication and other market services provided by the company.

Most of the shows focus on gift, home & general merchandise, categories that represent nearly 40% of the shows hosted. Sports makes up a fifth of revenues, and other key categories include design & construction, technology, and jewelry, among others.

Despite the increased usage of online business and online communication, trade shows remain among the most effective ways for lead generation with customers, suppliers, market research and brand building.

The company claims that the US market for B2B trades shows amounts to $13.5 billion, comprising 9,400 shows. This suggests that each show/event is responsible for an average of $1.4 million in sales. While the company only holds a 2% market share, Emerald´s shows are far bigger than the average, generating over $6 million in revenues. Other key players in the industry include Informa, UBM and Reed Exhibitions which combined hold an estimated 7% of the market.

Note that Emerald is essentially the product of a string of acquisitions following a carve-out from Nielsen back in 2013. Since 2014 the company has made 13 acquisitions for a total sum of $530 million, backed by the sponsorship of Onex. By far the biggest purchase was that of George Little Management, a deal valued at $335 million.

The IPO, Leverage & Valuation

Emerald sold 10.3 million shares at $17 apiece, below the preliminary offering range of $18-$20 per share. Only 6.1 million shares were sold by the company itself, raising $104 million in gross proceeds, or probably close to $90-$95 million after taking into account IPO related costs.

There are 72.2 million shares outstanding following the offering, valuing equity of the firm at $1.23 billion at the IPO price. The actual valuation of the firm is quite a bit higher, as Emerald has taken on a lot of debt following its dealmaking spree. The company ended 2016 with net debt of $687 million, and net debt will fall to $600 million following completion of the public offering. Leverage will be a significant issue, as the company posted adjusted EBITDA of $152 million in 2016, for a near 4 times leverage ratio.

As a result of the many deals having taken place recently, it is hard to judge the company’s growth. The company posted sales of $323.7 million in 2016 with revenues up nearly 6%. The company claims that this growth was split pretty evenly between acquisitions and organic growth.

Operating earnings came in at $100.4 million, for very decent margins. Net earnings were a lot lower, as the company spent $51.4 million on interest expenses last year. With gross debt standing at around $700 million at the end of 2016, the effective cost of debt amounted to 7.0-7.5%. Using the IPO proceeds to reduce debt and perhaps refinance at 6%, pro forma interest costs could fall to $36 million a year, for profit before taxes of $64 million. After applying a 35% tax rate, that amounts to $42 million, close to $0.60 per share.

Fully Valued, Opportunities Lure On Sell-Offs

The risks for Emerald are pretty clear, and most of it relates to a steep $600 million net debt load, even after accounting for the IPO proceeds, with leverage standing at 4 times. That being said, cash flow generation is pretty solid. Earnings could come in at $42 million on a pro forma basis, and I have not accounted for continued growth this year in this estimate.

I’ll furthermore note that depreciation and amortization charges amounted to $40 million last year, while regular capital spending (not counting acquisitions) amounts to just a few million a year.

The other big risk is the tied to the economic cycle and to marketing budgets (broad definition) – these tend to get cut during harsh economic times. The company has furthermore grown very rapidly, and we do not have a lot of historical data to work with. Other key considerations include travel conditions relating to weather, diseases and price of plane tickets, all of which could potentially impact business travel.

On the bright side, the company is generating a lot of cash which supports the current leverage position and allows for bolt-on dealmaking going forward.

The issue is that the earnings power of the firm is relatively limited at $0.60 per share, with shares now trading at $19 per share, for a steep 30 times multiple. If we add back the net impact of D&A charges and very modest capital spending requirements, cash flow generation comes in closer to $1 per share. That makes the multiple look a bit more reasonable already.

That said, I am not eager to pay a 20 times cash flow multiple, or 30 times earnings multiple, for a business that remains highly leveraged and is quite cyclical. Still, retreats could certainly be interesting as the balance sheet deleverages over time amidst opportunities to acquire bolt-on shows at modest multiples going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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