Spark Networks Worth $6-7 Says Activist Investor

 

Spark Networks Inc. (LOV) is still considering a $3.10 per share offer from Great Hills Partners that has been drawing criticism from many shareholders, including 6.1% owner Osmium Parnters, which sent a letter to the board of directors expressing its outrage. Shareholders seem to agree with this belief with shares trading above the offer price at $3.50 per share.

 

Osmium Partners urged the special committee appointed by the board of directors to evaluate the Great Hills Partners buyout proposal to reject the offer and instead hire an investment bank to undertake an open and fair process. If done, the 6.1% shareholder believes that the firm could fetch a $6 to $7 per share offer from a strategic buyer.

 

“When GHP invested 5 years ago, the valuation equated to $6.95 a share or 11.2x current EBITDA, and after growing EBITDA significantly over that time frame GHP now expects to buy out fellow investors at a multiple of 5.2 times adjusted EBITDA,” said Osmium Partners Managing Partner John Lewis in a letter to the board.

 

Osmium believes that Spark Networks could attract a superior offer from a strategic buyer due to potential synergies, strong affinity brands, and an ability to raise the average revenue per user by cross-promoting with a significant existing membership base. The hedge fund sees these buyers paying between 9.1x and 11.3x EBITDA, which is where public comparables trade.

 

Osmium further notes that the true value of Spark Networks is obscured by its Other Affinity segment and chronic mismanagement. The company’s iconic JDate segment has 92% contribution margins, while its Other Affinity division stands at just 33%. And while it generates 23% adjusted EBITDA margins, management could be doing a lot more to build value.

 

“All of the decline in total subscribers over the last three years can be attributed to a management ordered intentional run-off of the General Markets segment,” continued Mr. Lewis in his letter. “Other factors that have hurt the company’s ability to grow include a 14% price hike on JDate in April 2008, a 50% cut in JDate’s marketing budget, and a large investment in subscale brands with deteriorating economics.”

 

In the end, Osmium demanded that the board of directors reject the proposal and seek a more open and fair sale by hiring an investment bank to consider strategic offers. Whether or not this materializes remains to be seen, but shareholders are clearly expressing some bullishness, as shares are trading above the proposed buyout price of $3.10 per share.