OCP sells its 50% stake in Cohort

Oceania Capital Partners (ASX:OCP) which was profiled here in July has just completed the disposal of its 50% stake in Cohort, a digital media and lead generation business. This stake was originally acquired in October 2014 for $6m from the two founders.

Cohort’s sale was announced (PDF) in September and the transaction was completed today. The buyer is Pureprofile Ltd (ASX:PPL), which is a publicly listed company as well.

The purchase price for the entire company (OCP’s 50% stake and the 50% stake that was still held by the founders) was:

• $15m in cash
• $3m in PPL shares
• Additionally, a two-tranche earn-out has been agreed upon, which is based on Cohort’s fiscal year 2017 (to June 30, 2017) EBITDA:
  • Tranche 1: $4m in PPL shares if EBITDA of $4m or greater is reached
  • Tranche 2: A maximum consideration of $15m, which could be a mix of cash (up to $10m maximum) and PPL shares. The calculation is based on the EBITDA that is reached in FY2017. There are also targets for revenue growth, profit growth and lead quality that need to be achieved for this tranche specifically.

OCP should now have received $7.5m in cash and $1.5m in PPL shares. It looks very likely that the first earn-out tranche will be reached as well, because Cohort’s EBITDA in FY2016 was $3.7m and Pureprofile also mentioned that Cohort will show double digit EBITDA growth in the first quarter of FY2017 (PDF). This would mean that OCP can look forward to another $2m consideration in PPL shares, which would be paid in Q4 of 2017.

The second tranche is impossible to determine exactly, because there are qualitative hurdles like lead quality and we don’t know the growth rate for FY2017. In fiscal 2016 Cohort grew EBITDA by 138%. All we know is that in Q1 of FY2017 they showed double digit EBITDA growth. Let’s say they manage to grow EBITDA by 20% in FY2017. That would give them $4.44m in EBITDA, which – when you plug this number into the formula – would lead to a total consideration of $2.2m of which OCP would get 50% or $1.1m. If Cohort really manages to shoot the lights out, it could lead to a substantial consideration. EBITDA of $6m would generate a $12m consideration (OCP’s share: $6m) for example.

Overall, I’m very happy with this sale. Cohort was a part of OCP that I didn’t like very much, because lead generation is an area where aggressive operators can show a lot of growth, but that can also lead to penalties from partners like Google or government entities (privacy watchdogs). A very competitive area without barriers to entry will inevitably lead some companies to overreach and come under scrutiny. That can lead to repercussions for all the companies operating in that space. There are a lot of things going on in advertising and big data that I view as unsustainable. Many companies are selling user data collected by surveys and by cookies placed through advertising. A whole marketplace has emerged in this stuff, so other companies can fine tune their advertising based on real information provided by people. I think a crackdown by many countries on data collection and data trade is inevitable, but it will probably take a huge scandal to set things in motion.

OCP will still hold an interest in PPL shares of course, but this stake will be a lot more liquid than a 50% stake in an unlisted company. I am happy they have cashed out with a decent profit and can now evaluate their remaining investment as a minority owner of a public business.

The market has also reacted favorably to this transaction. OCP is now trading at $2.30, but volume is very limited. I tried estimating the NAV for OCP, adjusting for the likely Cohort proceeds and a rough estimate for the earnings generated so far this year. My best guess is that OCP is now trading around a 15-20% discount, which looks more reasonable than the 38% discount at the time of the original post. Shares are up 28% since then and are up 62% from the date of my purchase.

Disclosure: long Oceania Capital Partners