Neil Vogel, CEO of Dotdash Meredith on how they became the largest publisher in the United States and why they can now compete with both Google/Facebook plus much more…

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The Interview Discusses: 

  • How Dotdash in a relatively short period of time became the largest publisher in the United States.
  • IAC’s recent acquisition of Meredith and why he believes they now have the scale to effectively compete against Facebook and Google
  • Lessons learned from working with media mogul Barry Diller.
  • The future of print magazines and why Dotdash is intentionally shrinking their subscriber base.
  • The tremendous licensing opportunities they intend to take advantage of.
  • A potential spinout of Dotdash from parent company IAC.

About Neil Vogel:

Neil Vogel is the CEO of Dotdash Meredith, the largest digital and print publisher in America. Prior to its acquisition of Meredith in December 2021, Mr. Vogel was the CEO of Dotdash, where he led the company’s transformation from a general information website (then About.com) to a vibrant collection of branded properties and one of the largest and fastest-growing online publishers.

Before joining Dotdash, Mr. Vogel was the Founder and CEO of Recognition Media, a creator and producer of award shows and media properties for digital, creative, and advertising communities including the Webby Awards and the Telly Awards. Prior to starting Recognition Media, Mr. Vogel was Chief Corporate Development Officer at Alloy Media + Marketing, a digital content and marketing services company focused on the teen and youth market.

Mr. Vogel is a member of the Board of Directors of the Philadelphia Inquirer, the largest newspaper in America operated as a public-benefit corporation and serves as a venture partner at FirstMark Capital. He received a BS in Finance from the Wharton School of Business at the University of Pennsylvania.

 

Click Here to Read the Interview Transcript

Transcript of the Interview With Neil Vogel:

[00:00:00] [music]

Jonathan Boyar: [00:00:00] Welcome to The World According to Boyar, where we bring top investors, best selling authors and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Neil Vogel, CEO of Dotdash Meredith, one of the largest publishers in the United States that own some of the most widely recognized brands, including People, Better Homes and Gardens, Travel + Leisure and [00:00:30] Investopedia. Dotdash recently acquired the publishing assets of Meredith, and the combined company reaches over 175 million consumers monthly, and over 95% of American women. Neil, welcome to the show.

Neil Vogel: Thanks for having me. I’d like to point out, I am not a bestselling author, and I am not one of the world’s great investors either, but thank you for having me. It’s fun to be here.

Boyar: You are a business leader.

Neil: Thank you. I’ll take that. I’ll take what I can get.

Boyar: I, of course, want to discuss the recent Meredith deal, and what it means for the company, [00:01:00] but I first want to talk about the turnaround you did at what is now called Dotdash. Dotdash used to be About.com, which your parent company, IAC, bought from The New York Times, full disclosure, Boyar Asset Management owned shares of IAC. For those of you old enough to remember it, About.com was a very popular site in the early days of the internet that you would go in order to find out about pretty much anything, and you were tasked with running it after the acquisition, and after about two years or so, even though it was still making a fair amount of money, [00:01:30] you concluded that you essentially had to break up the site in order to grow it.

What you did was you took the giant site, About.com, dismantled it, and turned it into a bunch of standalone websites that focused on narrow verticals like health or personal finance. To me, this seemed like a really difficult business decision. You had a business that was working okay, but yet you decided to make a really expensive bet to transform the site knowing full well that initially, you would lose lots of money. [00:02:00] What gave you the confidence to do this? Can you take us through the analysis and decision making behind it?

Neil: The short story and the long story are kind of the same story. The thing that gave us the confidence to do this was that, we were wrong for two years, and understanding and learning from being wrong and learning from trying things gave us the confidence to pivot the model. I’ll give you a little backstory here. I joined About.com not that long after IAC bought it, probably six or eight months. I knew Joey Levin, who’s now the CEO of IAC. [00:02:30] He brought me in to run About.com, and at the time, About.com was definitely challenged. Joey had spoken broadly about why they bought it and what they did with it, but we got there and we saw this publisher.

About.com name that everybody knew. We’re like, “Oh, this is going to be for fun. This is like this fallen giant of the history of the internet. We’re just going to clean it up, and it’s going to be great, and we’re going to be able to fix it.” That is exactly what did not happen. We got there, and I’d never really been a publisher before. I brought in a bunch of people that hadn’t been publishers before. [00:03:00] We tried a bunch of things. We tried to make the content better. We tried to make the sites faster. We tried to do all these things, but the fundamental problem that we learned that didn’t work anymore is that, About.com, if you remember, was very credible information on all kinds of topics, very, very broad.

The internet had changed. Where About.com had information on symptoms diabetes, and had a beer battered  fried chicken, people that have diabetes did not want their diabetes information from the fried chicken guys, and the fried chicken people didn’t want to be on the diabetes site. [00:03:30] We would lose, and we would lose visitors to in health, like WebMD and Healthline, and in food, to, you name it, like Bon Appétit and Food & Wine, and some of the brands, all rest be, some of the brands we own now. After two years of trying and flailing, our story became a very icy story.

We basically, I think we missed like eight of nine quarters when we first got there. This is all internal, obviously. It was us going back to Joey, and Barry Diller, and saying, “That didn’t work, but we’re going to try this, and that didn’t work, but we’re going to try this.” Eventually, [00:04:00] we went back and said, “Listen, everything we’ve done seems like we’ve failed, but we haven’t. Actually, each one of these is a data point, and we’ve assembled these data points, frankly, like what not to do.

In many ways, that’s more valuable than what to do. When you get something that’s what to do, you just keep doing it, when it’s what not to do, you have to think and you have to pivot.” What we realized was, there is no place for a general interest site on the internet anymore. Secondarily, we realized that even the publishers in these verticals were doing crappy things. There was too many ads, sites were [00:04:30] too slow and junky, people forgot they we were in the business of delivering content and aid to people. The content was getting crappy.

We’re like, okay, we went back and said, “Okay, here’s what we’re going to do. We’re going to take About.com. We have two million pieces of content, we’re going to through a million and a half of them in the trash,” which was obviously a big deal. “We’re going to take the remaining half million in health, and in finance, and in food, and in home, and in travel, we’re going to arrange them into verticals, and we’re going to launch new brands out of About.com, and when we’re done, there will be no more About.com. The reason why we think this is going to work [00:05:00] is because, all of our content is, we’re not news, we’re not sports.

It’s very intent-driven. We help people do something with their time. Cook something, make something, diagnose something. We can make fast sites that are really valuable and make brands that resonate, take them out. In all of our arrogance, we think we can actually compete with WebMD. We think we can actually compete with Bon Appétit. We can compete with all these guys.” Then we went back to IAC, and we went back to Joey and to Barry, and I’ll never forget this meeting.

We were like, “Listen, we’re still making money, but a lot less than we [00:05:30] used to.” We want to take this brand that we thought was all of the value of the company, we want to throw out the trash. We want to compete against the best players in publishing on the internet with this new model that we just came up with, and, oh by the way, you got to let us lose some money to do it.” The answer, which was a very IAC answer, and I know you’ve spoken with Joey before, and you know that it was, “What took you guys so long? It took you two years, you could have come with this a year ago.”

That was the exact spirit of answer that we were looking for. From that moment, [00:06:00] from that meeting, which was November or December of ’15, we started to execute our plan. From the first launch of Verywell, which was our health site. It was the first site we launched. We’d launch it. There was a dip for two or three months until people started to figure it out, and the algorithm started to figure it out, and then it just started to go. Then the minute that happened, we knew we had something, and it was just a race to launch The Spruce in home and food, and The Balance in personal finance, and TripSavvy in travel, and Lifewire in tech.

They just all started to work. We’re like five for [00:06:30] five. Then, in a very IAC move, and I’ll continue this story past the answer to the question, we went and said, “Look, we know what we’re doing here. We’ve got this pattern recognition. Let’s find some other things. We are doing this with brands we’ve made up, let’s buy some real brands.” We went out and we started to do some acquisitions. We bought Birdie, which is a very well known Indie fashion brand. We bought something called MyDomain in the home space. Then we bought Brides from Condé Nast, and then we bought Serious Eats and Simply Recipes and Treehugger.

All of a sudden, we’re like [00:07:00] 12 for 12. Like, every brand that we’ve launched or bought, we’ve grown. We’ve grown in revenue. We’ve grown in audience. We’ve really improved, and we’ve got this formula. It’s going. You can see in our financial results which are public how quickly we were growing. We did not look like a publisher. We looked a lot like an internet company, although we are a publisher, to be very clear.

Then, to finish the story with the acquisition you opened with, we got to the summer, and for those of you who followed Meredith in the past, Meredith was half TV stations and half publishing assets. They sold the TV [00:07:30] stations to another group called Gray Television, and the publishing assets were there. We had a very similar conversation with BD and Joey about Meredith that we had at the time we broke up About.com, which is, “Guys, let’s take a look at this thing. It’s obviously heavy in print, but if you look very closely, this is a digital business masquerading as a print business.”

We brought in some of the smartest consultants in print. We think we know what to do with that going forward to make it a really nice complimentary asset, but what we want is Better Homes and [00:08:00] Gardens and Food & Wine, and Travel + Leisure, and People, and if we can run our playbook on these brands that have been historically played second fiddle to print properties, and it’s a really weird thing to say in 2022 that that’s what happened, but that’s really what happened.

Like, let’s get in there and let us do it. More importantly, this whole idea of pattern recognition that we can go back to is, if you map every one of the brands we acquired from Meredith, you can draw a straight line to one of our brands, and what it looks like, and what we had to do. Although it looks like we took a very big bite, we bought something [00:08:30] much bigger than us, we broke it into its component pieces, and we know what to do with it, know how to digest it. Now, we’re three months in. I think today’s just about 90 days. We’re deep in the integration mode, but we’re really excited.

We’re the biggest publisher in the world. We’re these guys that were these non-publishing guys that were very much outsiders trying to figure out what to do with About.com, and now are the biggest publisher in the world. It’s been a crazy ride.

Boyar: No it has, and I applaud Joey and Barry Diller for [00:09:00] giving you the chance. I guess to take the devil’s advocate, success is the worst teacher. What are you doing to ensure that you are taking this situation individually? Obviously, you had a great playbook of what you do and how to improve properties, but this is a huge acquisition. Is there anything you’re doing differently?

Neil: Yes. The first thing is, we are totally paranoid as operators, and this playbook that we used to launch VeryWell four [00:09:30] years ago looks virtually nothing like we do today. What we do is we have some guiding principles that we know work, and what we know works specifically on the internet, but you can define this more broadly to other media assets is, best content for everything we do. Again, our content is called Evergreen Help People Content. Every single piece of content we make, we endeavor to make the very best thing on the internet for that. If you do that, that’s something people will like.

The second thing we want to do is, our sites will be the best performing [00:10:00] sites on the internet, and they are, in terms of speed, that really drives performance. Then the third thing is, the advertising and monetization we use will always be respectful. When we launched– It’s continuous today, it will be two-thirds the number of ads on a typical competitor, maybe less, because you don’t need more ads to make more money, that’s a false choice.

You just need better ads that you can charge more for, and better ways to monetize you can charge more for. If we focus in each of these brands with our number one job is making users [00:10:30] incredibly happy, and the money will follow, build audiences. Our audiences are generally down the funnel because, you’re trying to figure out what color to paint your kid’s bedroom, we know a lot about you. Your router is too slow, we know a lot about you, you’re trying to cook paya, we know a lot about you.

Once you’re down the funnel, we give people the very, very best experience, that’s how we build brand, that’s how we build loyalty, and it works. Now, the formula for People magazine looks very different than the formula for Better Homes and Gardens, and the formula for Health.com, but those three [00:11:00] principles are the overarching principles that underpin– Overarching and underpin. I might have mixed things up there. It’s a bad metaphor, but they’re the things that support everything we do.

Boyar: What’s really interesting, and you had mentioned print, and I used to go to any doctor’s office, et cetera, and you would see a Better Homes and Gardens or whatever, Meredith magazine, I’m assuming that’s no longer the case, but what you’re doing now is super interesting, is you’re making it more of a premium product, better paper, that sort of thing. Can you take us behind [00:11:30] that decision?

Neil: Yes, for sure. I think historically, we’ve pretty much telegraphed what we’re going to do, and we’ve pretty much stuck to that. Again, it’s the same thing if you look at what HAS and other people have done. Historically, magazines functioned a lot like the internet in how they made money. If you’re Better Homes and Gardens, you printed a lot of magazines, you had a very large subscriber base to try and sell ads against a very large subscriber base. I think what happened over time is the demand for advertising in print has gone down.

However, people who’s willing [00:12:00]  to subscribe to Better Homes and Gardens are still very robust, but there was a delta in the circulation between the people willing to pay and what they needed to serve advertisers. The trick is to unwind that delta. We don’t necessarily want to give deeply discounted magazines to people or places if there’s no ads to support them. We want the people who love these brands to pay for them. It turns out, the people who love these brands want a more premium product. In many cases, they’re even willing to pay more than they’ve [00:12:30] been paying.

Just like people like reading books in print, just like people love vinyl records, people love magazines, I have the media consumption habits of like a 17-year-old, which is probably in line with my chosen occupation, but we get magazines at home. Obviously, you’re not going to have Meredith magazines, but before that, we got Food & Wine, because we liked it. I’m a big sports fan, I watch a Sixers game and flip Food & Wine because I don’t want my phone around.

There is a real demand for this, and I think what [00:13:00] we’ve seen is that, magazine properties that have a premium element– Look, it’s not a mystery that people don’t want parenting advice from a magazine anymore. That’s hard but Food & Wine, Southern Living, People, the cadre that we kept and we’re actually investing in, they have real audiences that really love them, and it’s an experience. As long as you give them a great experience, it’s not going to be our biggest business at all.

It’s probably not even going to be a growing business, but it can be a very profitable, complementary [00:13:30] business. We’re in the brand business, if we’re building amazing brands, Southern Living‘s magazine is amazing, and it’s incredible for that brand, and people love it. Is its circulation going to double from here? Absolutely not, but can it be a really viable, profitable piece of the mix? 100%?

Boyar: One of the things that you’ve said before the acquisition of Meredith is, you didn’t have the scale to get a big chunk of advertising dollars. To me, it seems strange, you had almost 100 million visitors to your site. What can you do now that you couldn’t do before? [00:14:00] Now you have about 175, probably, it’s grown a little bit since you last gave that stat, but what can you do now that you couldn’t do before?

Neil: This is my favorite question. When we were Dotdash, not only did we say we didn’t have scale but, there was one thing we said we didn’t have, we didn’t have the brands, and we had great brands, we loved our brands, but our biggest brands were four and five years old. Like The Spruce is the single biggest home brand on the internet, it’s five years old. Everyone knows Better Homes and Gardens, no one knows The Spruce.

The Spruce is bigger than Better Homes and Gardens. So, we had a branding issue, and we had a scale issue [00:14:30] because, we do something unique that others can’t do, and we like our chances. One of the things that we do is, we don’t need cookies or personal identifiers to target because of the nature of our content. If you’re on our site because your router is too slow, we know exactly what kind of ads to serve you. We know exactly what kind of commerce opportunities to give you.

You need to either fix your router or get a new one, it’s very simple. Same thing with painting your kid’s bedroom example. If you’re trying to paint a bedroom for a newborn, we know that, obviously, you just had a kid, we know that you’re in the market for home improvement, we know that that very [00:15:00] highly [unintelligible 00:14:58] with a new car, a new house and a new credit card. We can target really, really well. What the Meredith scale allows us to do is for the first time, a premium publisher can target contextually as well if not better than someone can target audience, and you can’t outbuy us, because we have so much scale to do that.

The second thing was, it now gives us these incredible brands to talk to advertisers, like Better Homes and Gardens is 100 years old this summer, and People‘s 50 years old. These brands are [00:15:30] special and beloved as leaders to talk to advertisers with. This is what we like the most, so it’s like, “Okay, is your content safe and good?” “Yes,” the 175 million users you referenced, every single one of them experiences only content we’ve created, edited, completely ours.

There’s no feed. There’s no fake news. There’s no politics. There’s none of that stuff that you don’t want your ad next to. There’s no weird videos, like none of that, we control all that experience. [00:16:00] Check, that’s premium. Can we deliver scale to someone? Check. Can we deliver audience to someone? Check. Do we have some of the best brands in the world? Check. All of a sudden, we are a viable alternative, and again, this isn’t part of the model we need to succeed, but I think it’s going to happen. We’re a viable alternative to Facebook. We’re a viable alternative to some these other places that frankly, it’s an interesting position for us in that, we’re talking to all these big agencies and having lunch with the head of this agency and that agency, they’re all rooting for us. [00:16:30] Everybody wants this.

Everybody wants a premium publisher that has the internet bones that understands how to target, and in a world where there’s intent-based targeting is better than this like audience cookie-based targeting anyway. We tell everyone like, “Look, we’re better than Facebook because we’re trusted. We can compete with Google, and again, obviously not on total scale, and we can’t take all the money, but we think a little of it.” Then we go for the question, we’re the answer. We’re closer to the customer than Google is. We have a really interesting opportunity if we [00:17:00] get this right, and we put it all together correctly.

Boyar: Let me explore that. That’s really interesting, especially what you mentioned about Google and Facebook, large consumer product companies which are big advertisers of yours, spend tens, hundreds, and in some cases, billions of dollars a year on advertising in the case of like a Procter & Gamble or something. There are really few places outside of Google and Facebook where you can efficiently and effectively spend that money.

Neil: Well, there’s a new one now. [00:17:30]

Boyar: Yes, I’m saying, is Dotdash Meredith now a viable number three?

Neil: Listen, I hope so. That is our long-term goal. We would like to be in the same consideration set, and I think we can be with our performance, and our brands, and our scale, and our safety, and knowing that you’re going to be contextually around things that look and reflect favorably upon your brands. If we can do that, we got a puncher’s chance to [00:18:00] take a couple of nickels out of these guys, which I think that we can do. Now, the number one thing we have to do is– And to be clear, we’re not competing for the direct dollars. That’s not what we do, but all of the branded dollars that go to these places that are performance-based, they’re brand-driven-base, I think we got a puncher’s chance to fight for. We need a sit at the table, and I think we’re going to get at it.

Boyar: I think one of the things that maybe investors probably don’t get, and maybe you can explain, is like, what does a conversation look like when you’re going to a consumer product company and you’re saying, “I want you to advertise [00:18:30] on Dotdash Meredith. It’s not like a small business going on Google, whatever the Google services.

Neil: No, no, no, we’re generally talking to near agency heads and CMOs, and things like that.

Boyar: Yeas, so what are you offering them?

Neil: I’ll work backwards. One of the really interesting things about our business is, our ads and programs have historically performed incredibly well. Because we started from a place where we didn’t have brands, and all we had was scale and performance, we had to go into these [00:19:00] places and say, “Give us a chance, give us a shot. You’re going to learn our brands, but I promise you, our stuff’s going to perform better,” and because our sites are fast, and because we have fewer ads, they invariably performed better than other publishers.

That was really positive for us, and it’s manifested itself in a way where you’ll hear Joey on earnings call say things like, “Every quarter, 23 of the top 25, Dotdash advertisers will repeat.” That’s just not a thing that happens to publishers. Meredith, not even close to that. It’s because of how well [00:19:30] we perform. Now, it also depends on what the metric somebody wants is, is it an auto guy that wants test drives, or you’re selling charcoal that wants to sell charcoal around July 4th?

What we have historically been able to do is through contextual targeting and through scale, and through sites that are so performant and ads that are so well-placed, we’ve been able to show real ROI better than other advertisers, including platforms for the vast majority of the people who [00:20:00] advertise with us, whether it’s pharma clients, or finance clients, or food clients, and that initial performance got us in the door, got our brands more familiar.

Now that we’re adding these brands and these scales, what we’re going to do to Meredith is we’re taking all the Meredith brands, and we’re putting them on our ads back, like a technical term for making, putting them on our sites that are going to make them as fast and as perform as ours. All of a sudden, we have all this scale that’s going to be top of market or better than the market [00:20:30] performance, 175, 180 million people a month.

These brands, we can talk to virtually any CMO in their language, “What do you want? Do you want test drives? Do you want brand awareness? Do you want to sell more of your new soup? What is the KPI you are trying to hit? Tells us that KPI, we will make a program to hit it for you.” I think because we came from a point where we had to hustle for every client, and perform, and perform, and preform, when you add [00:21:00] that into what Meredith has with these incredible brands, and this incredible scale, if we can keep our hustle, and we can keep our brains, and we can keep our performance, we love the combination. Frankly, that’s what we’re hearing.

It’s early days, we’ve done a few deals with advertisers that are one plus one is more than two. Frankly, we’re hearing back from advertisers, the few that we’ve gone out with together, exactly what we’d hope in some flavor of this, like, “Wow, we’d love to give you more money, but we never could before because you couldn’t get more,” [00:21:30] or like, “Oh, this really performs, you’re top of plan. Here’s the mid-quarter re-up.” “Oh, we can now buy programmatically across this whole thing. This is great. I can find more of my audience here at a good price.” Again, we really like our chances that we can do this.

Boyar: One of the challenges Meredith, they have this quality content, and it’s obviously fantastic. These magazines wouldn’t have lasted a hundred years if they hadn’t, but a lot of them look like a PDF of the magazine, and what are you doing [00:22:00] to make that so they’re going to be a digital-first company?

Neil: This may be in more detail than you want, but it’s interesting to talk about. One of the things that we were very different from Meredith is how we run each of our brands. Each of our brands has its own general manager, which is basically a mini CEO, has dedicated technology, dedicated content, dedicated design, dedicated product, which is like how you build the website, like dedicated sales.

Meredith was very matrixed [00:22:30] where every one of our sites looks incredibly different. It’s built on the same platform, like the Lego base is the same, but they can use whatever Legos they want to build it. Meredith, which is a decision they made, every single website is exactly the same, and none of them had individual leadership, so health magazine, health.com looks exactly like people.com.

That’s not a thing in 2022. It’s not a thing one can do anymore. If you look at our sites, like if you look at Verywell and The Spruce, [00:23:00] you have no idea that they were part of the same company because it doesn’t matter, because the teams are free to do what is right for their brands, and then share knowledge across teams. We are bringing that across all of the Meredith brands. We’re three months in, and we already have every leader for every brand in place. What we’re doing is the first thing we’re doing is we’re taking all the old sites, moving them onto our ad stack and tech stack.

Then we are taking all the technology people and moving them into brands, and all the design people and all the products people, and all the leadership and saying, “Have at it, figure it out.” [00:23:30] Better Homes and Gardens should absolutely be the best home site on the internet. We’ve got all the tools. We’ve got all the resources. Now we have the structure, go do it. Think Better Homes and Gardens, for instance, The Spruce is probably depending on the day, 50% to a 100% bigger than Better Homes and Gardens in terms of audience.

However, if you look at Google searches, eight times more people search for the phrase, Better Homes and Gardens than search for The Spruce. That’s our opportunity. If we can do the right job with that Better Homes and Gardens [00:24:00] given its brand history, given the print magazine, given anything, we think it will achieve what you’re calling it’s rightful place in the universe in hopefully a relatively short period of time. The thing that got us most excited about Meredith was when we really dug in and we saw this, and we saw this structure, because this like the opportunity.

The industrial logic there was always like, “Well, we’re so big over here that like each of our things has to look the same.” If you take people out, we were bigger than Meredith at Dotdash. [00:24:30] You don’t have to do it that way. As a matter of fact, it’s much more engaging and inspiring for a team to be like, “All right, I am a health expert. I’m going to make the best health site on the internet. I am competing with Healthline and Everyday Health and WebMD, and we are going to beat them, and we’re going to build amazing things that are just for us. If you can do that, you can really succeed.

I think we’ve proven we can be successful, frankly, with some brands we’ve made up, and then, some brands we’ve acquired, but now if we can do it with the best brands in the world, [00:25:00] we’re a little bit like, “All right, lookout.” We say this all the time, “We are going to happen to things, we do not want things to happen to us, and the first thing we’re going to happen to is the priority, cadence, and structure at which we run websites, like they’re going in the front of the bus, and they weren’t necessarily there, and they are now.”

Boyar: One of the things that we’re really excited about that doesn’t necessarily get as much investor intention, it gets some, is Meredith was super strong in [00:25:30] licensing, really have done a great job, and Meredith is a company we’ve followed since the ’90s, and Meredith had this, and still does, this great partnership with Better Homes and Gardens, and Walmart since, I think, 1998 or so. It’s grown. How big of an opportunity is licensing in your opinion?

Neil: Very, and it’s something that we have spent a lot of time on since we got here. One day, this incredible relationship with Walmart has been an incredible partner at Better Homes and Gardens. At Dotdash, we always [00:26:00] looked at Meredith. When we made Dotdash originally, when we had to take apart About.com, we’d accomplish them at our office when we took Meredith and we dissected every single property, and every single thing that they were doing. It’s like this thing of folklore here and now because we actually do own Meredith now.

One of the things we looked at then was this licensing business, and we always said to ourselves like, “Licensing is the true testament if you have a brand that people care about,” and they have brands that people care about, and they have an incredible licensing business. I think it needs some sun, light and water, which we’re going to give [00:26:30] it. We’d at the beginnings have some really nice licensing around The Spruce, and around Verywell, and we had a seven-figure licensing business here before we did this, which is like a mini fraction of what they’re doing and what they can do.

One of the things we haven’t talked about is, we’re learning a ton from them, and one of them is like, how do you leverage brands in other ways? If we’re not going to be a print company, what are we doing? We have this Food & Wine, and Southern Living, and BHG, and the Spruce, and Verywell, and Investopedia. All of them [00:27:00] have a real chance to have other revenue streams that look a lot like licensing, right? I think we’re going to put our name on it, but we’re only going to deal with things that we really believe in. Like the Walmart collection’s incredible for Better Homes and Gardens.

Honestly, we got to get the Better Homes and Gardens, like we have to focus on that as much as possible, because it’s so on brand and it’s so good that that’s the blueprint for everything else we’re trying to do. It’s funny, most people don’t ask us about this. If we get it right, it’s going to be a nice part of the plan going forward.

Boyar: It’s just unbelievable high margin [00:27:30] revenue that you can get, and why not do it?

Neil: High margin revenue, and look, it’s funny like, high margin revenue doesn’t live on its own, doesn’t just fall out of the sky, you get high margin revenue because you’re doing amazing things, because you have a magazine that is the best shelter magazine in the world, and you have a website that is the best home and shelter website in the world. If we can get to there, things like licensing, if run appropriately, they’ll take care of themselves. Our number one objective is, get these [00:28:00] brands thriving again, get them absolutely thriving. If we can do that, things like this blueprint that we have for Walmart, Better Homes and Gardens, we’re going to be able to replicate in a lot of places.

Boyar: Just shifting gears a little bit. One of the things that you’ve historically been really strong on is performance marketing. That’s a big part of your business. A lot of people have no idea what that really is. Can you explain that?

Neil: Yes, performance marketing is, that’s the term we use in our financial reporting. It’s essentially [00:28:30] e-commerce. It’s essentially us helping customers connecting with goods and services. If you are on The Spruce and you need a new blender for your small kitchen, helping you find the best blender and buy it. If you just had kids and you want a new credit card to get you the best  we can help you find the best credit card. If you need an online therapist because of something going on in your life, we can help you pick the best online therapist.

If you need a new couch, if you need a refrigerator, if you need anything, you need to learn how to make smoky eyes for the date you’re going on tonight, like, we are [00:29:00] very, very deep in the, I call it the guides, ratings, reviews, commerce, business, where if you trust our brands, you’re a young woman on Birdie, and you love Birdie and you love Birdie’s content, and they all make fun of me for using this example all the time, so I’m going to use it again so they can listen and make fun of me.

People like the woman who wants to do smoky eyes for her big date or for her big night out, to the extent that we are the people that can tell her what products she needs to do that and tell her how to do that. That is totally in line with the mission of the brand, and it’s a great way for us [00:29:30] to monetize. Because our audience is so down the funnel when they come to us normally, like how to do smoky eyes, or, again, same example just like, “My router’s too slow, I don’t need a router.”

It presents a real opportunity to connect to people with services in mind, in mental health. We’ve been pretty good at that, but I think we were fairly early on that because I think we recognized the power of the intent-driven audience. During the pandemic, that business went absolutely bonkers. That is a very big part of our business going forward. I think [00:30:00] it’s more than a third of our revenue now, connecting people. For us, we love it, because it’s totally editorial independent, no one that ever writes anything or reviews anything for us has any idea of any economic arrangement we have or we send somebody, we don’t care.

We often recommend things that don’t pay us. It doesn’t matter. We’re not like other publishers. We don’t order things in the way people pay us, we order things in the way we recommend them. With this acquisition, I think we probably have 75,000 to 100,000 square feet now of dedicated product testing space where we have 40 test kitchens in [00:30:30] Birmingham, Alabama, and probably another 15 or 20 in Des Moines, Iowa, where we’re testing, not only all these products, but like, virtually, every recipe that goes on our websites, and all of this stuff, and like, we do the same thing for all the home sites, and all the tech sites.

We can really take this seriously. We even think we have a chance to be the very modern consumer reports. The business is very similar to what like Wirecutter does and The New York times. There’s a lot of competitors in this space yet, but like everything else we do, there’s like no shortcuts to winning in the [00:31:00] commerce business. You do the hard work. You do all the work, you write the most comprehensive reviews, and people will trust you.

One of the interesting things we learned from Meredith, there’s a type of commerce they’re excellent at that we never really participated in, which is more of the deals type commerce, which is on People magazine, “Buy this dress that Jennifer Anderson wore last night, or this reasonable facsimile at this other place.” They are very, very good and very, very seasoned at that type of commerce, which is our stuff [00:31:30] really aligns with the intent of our users.

What they’re really good at is manufacturing intent at places where maybe there isn’t shopping intent, but like, you love Jennifer Anderson, and she looked great, and I want to own that dress, and we sell them that dress. That’s a surprisingly big business for them, it’s something we’re going to roll out across our sites, and we’re learning a lot from them on this. Look, a big opportunity for our type of commerce is, they don’t really do it this way on most of their brands. Like, there’s not that much commerce at Food & Wine or at any of these other places.

[00:32:00] It’s a way we can monetize without ads, and it’s something that customers actually want from us. They want our recommendations, they want to know what our editor’s like. They want to know what colors we like the best, it’s really interesting.

Boyar: IAC, their famous board and their playbook has historically been to spin out businesses once they’re able to operate on their own, they’ve done it many, many times. Most recently, Vimeo, I realize is a board decision, I totally get it, but there are any like metric the companies have said or something to figure out like, [00:32:30] now would be a good time where it’s appropriate?

Neil: To be clear, it’s not up to me. I think they’ve said in the past, when you get so big, there’s a compelling other reason to send you out of the nest, you get sent out of the nest, but the reason you’d need to be public or independent is, do we need capital? I think we’ve clearly just proven that we don’t need capital to execute a model, right? $2.7 billion is a lot of money. If you need a way to compensate people, and we have equity and data, we can do that. IAC has really great programs that make it look really [00:33:00] compelling for people. Do we need like the leadership of a board or outsiders, and like, I get to hang out with Barry Diller and Joey whenever I want, or maybe not whenever I want, but whenever they’re not sick of hearing from me, and that’s really valuable.

The IAC culture, which we really try to embrace, it’s not for everybody. I love it, it’s a lot of debate, a lot of standing up for what you believe in, like in many cases, they just want to know that you know, and [00:33:30] a lot of planning, and a lot of time, like I think BD calls it in an article once as creative conflict. Like, that room is not the easiest room, but if you enjoy being in that room and you enjoy having ideas and defending them, and you don’t mind when people are taking shots at your ideas, it’s the best place to work. There’s no other place in the world that would’ve let us mess around for two years with something, do as poorly as we did in the beginning, and that was pretty poorly.

Then turn around and tell us like, “Come on, guys, do the next thing, and take not as much money as you want, but as much money as you reasonably need [00:34:00] to do this. Then, literally, three or four years later, give us almost $3 billion to take this incredible shot, like IAC is the best possible place to work if you are an entrepreneur or CEO.

Boyar: You had mentioned Joey and Barry, I recently interviewed Joey late last year, and I asked him about the things he learned from working with Barry Diller. What he said was, “Think bigger, why settle for a small idea or category? Why not go after a big one?” Which I thought was pretty insightful, [00:34:30] and that led him to take a stake in MGM that’s been extraordinarily successful. Any insights that you’ve learned from Barry Diller that you want to share?

Neil: I think it’s, what Joey said applies directly to this. Are we in this business? Are we good at it? Good at it enough that we’re like, I guess have the confidence that we’re good at it, but like the self-awareness to know we have a long way to go and get better, and if we are, what are we doing [00:35:00] if we’re not going to take a shot here, what are we doing if we’re not going to do this? It’s all of that.

The other thing, there’s some really specific things that I’ve learned here. There’s some really interesting things that I’ve learned about managing people and managing organizations from these guys, which is, a 100% of the time you are better off finding your next leader internally than eternally. Meaning, look around the room, if there’s a job you need done and there’s someone who is going to– You think can have a shot at that job, even if they’re going to be over their head, [00:35:30] even if they’re going to be in the deep water, chuck it in the pool.

It’s way better than hiring from the outside because that disempowers all those that work for you if you bring. People from the outside fail more than people from the inside anyway. The organ rejection, cultural rejection, so our entire leadership team here has been– It’s the same team that was here when we sucked. Most of the people running our businesses are people that we brought in doing something completely different than they’re doing now. Like Tori Braham, who runs our commerce business. Who’s an absolute star and [00:36:00] responsible for whatever, a third to 40% of our revenue, she started out running a home vertical at About.com.

It’s just so smart and so good, and we’ve done this so many times. That’s the one thing now, are we insular, is that weird because we don’t go outside? We only go outside when we have needs to go outside. The effect that has on an organization, when everyone sees those around them are the people that can really advance, and that your career is not capped, and you can do anything. [00:36:30] Going back to the conversation, everybody owns some equity, and it creates an environment that is conducive for success, and sets you up to do the thing.

We never planned to buy Meredith. Were we ready to buy Meredith? Probably not, but had we learned how to think about something like buying Meredith? 100%. Whatever we don’t learn, we can ask, or we can be told, and we can– The stories always tell great and very smooth in retrospect, but we’re convincing some of the [00:37:00] smartest people in the world of what we want to do, and they have their own opinions, and nobody has better pattern recognition than Barry Diller. He’s seen virtually everything in media, and it might not be the exact same thing, but he knows, nobody’s better at building brands.

I don’t know, he gets to this place where he assemble learnings and the things you do, and you put into practice, and the culture. Like the culture of this place, once you get it right, they’ll invest in you, and go do it. It’s exactly what Joey said. The Meredith exactly– I listened to the podcast with Joe’s it’s exactly what he said to you. “If you’re going to do it, think bigger, think bigger, bigger, bigger, bigger, like let’s go. “That’s why we’re here now. Hopefully, not to our detriment.

Boyar: No, I don’t think so. It’s a great answer. Neil, you’ve been really generous with your time today, and thanks for coming onto The World According to Boyar to discuss the evolution of Dotdash, which is absolutely fascinating, and your recent acquisition of Meredith. As an IAC shareholder, I look forward to following your progress. Thanks for being on the show.

Neil: Thanks. Look, if anybody wants to [00:38:00] talk to me for an hour, I’m happy to talk to them at any time. Thank you. It’s been really fun. I really appreciate you having me on.

Boyar: I hope you’ve enjoyed the show. To be sure you never miss another World According to Boyar episode, please follow us on Twitter @boyarvalue. Until next time.

 

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Jonathan Boyar was on CNBC discussing his thoughts on the stock market and some of his top stock picks.

Jonathan Boyar was on CNBC discussing his thoughts on the stock market and sharing some of his top picks including Madison Square Garden Sports, Madison Square Garden Entertainment, and Scotts Miracle-Gro. He also talks about why Boyar does not generally invest in energy companies, his thoughts on financial shares, and a technology name he finds to be attractive at current levels.

To read Boyar’s latest reports on UBER, MSGE and MSGS, please click here. 

 

 

 

 

 

 

 

This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by Boyar Asset Management (“Boyar”) or its affiliates. Past performance does not guarantee future results. This material is as of the date indicated, is not complete, and is subject to change without notice.  Additional information is available upon request.  No representation is made with respect to the accuracy, completeness or timeliness of information and Boyar assumes no obligation to update or revise such information. Nothing in this video should be construed as investment advice of any kind. Consult your financial adviser before making any investment decisions. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information, and Boyar Asset Management and its affiliates assumes no obligation to update or revise such information. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable.   Past performance does not guarantee future results. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified and Boyar Asset Management or any of its affiliates is not responsible for third-party errors.  This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research.  Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Boyar Asset Management, its employees or affiliates may own shares in any of the companies referenced in this email.

Any results mentioned, do not necessarily represent the results of any of the accounts managed by Boyar Asset Management Inc., and the results of Boyar Asset Management Inc. accounts could and do differ materially from any of the results presented. While the results presented show profits, there was the real possibility of a permanent loss of capital. This information is for illustration and discussion purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Boyar Asset Management Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Boyar Asset Management Inc. at (212) 995-8300 with any questions.  Clients of Boyar Asset Management own shares of Scotts Miracle-Gro, MSG Sports, MSG Entertainment, Uber, Bank of America, and Chubb.

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James Hagedorn, Scotts Miracle-Gro Chief Executive Officer and Chairman of the Board, on the tremendous opportunity in the cannabis space, potentially spinning off the fast-growing Hawthorne division and more…

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The Interview Discusses: 

  • How their cannabis division Hawthorne has grown over 100% over the past two years.
  • Why he decided to enter the cannabis business.
  • His thoughts on the current regulatory environment for cannabis and what he believes needs to change.
  • Where the biggest money will be made in a post cannabis “prohibition” world and where they are investing.
  • The logic of potentially spinning out the Hawthorne business.
  • The demographic shift that is greatly helping their traditional consumer business.
  • A meeting he had with Henry Kravis in ~2007 and what he did in response to that meeting.
  • Why Scotts has been a “pandemic beneficiary.”
  • His thoughts on inflation.
  • How they have changed their marketing to target millennials.
  • Their innovative weather partnership with IBM that could greatly enhance their marketing.
  • Why he believes private label is not a threat to his consumer business.
  • How they incentivized employees during the pandemic.

About James Hagedorn:

Jim became chief executive officer of Scotts Miracle-Gro in 2001 and was named chairman of the Board of Directors in 2003. Prior to this, Jim helped to orchestrate Miracle-Gro’s merger with The Scotts Company in 1995, creating the leading consumer lawn and garden business in the world. He held the role of president from May 2001 to December 2005 and from November 2006 to October 2008. Jim also served in the United States Air Force for seven years, where he was a captain and an accomplished F-16 fighter pilot.

Jim is a graduate of The Harvard Business School Advanced Management Program and holds a degree in aeronautical science from Embry Riddle Aeronautical University, where he is a member of the Board of Trustees.

Please click here to download the Scotts Miracle-Gro report.

Click Here to Read the Interview Transcript

Transcript of the Interview With James Hagedorn:

[00:00:00] [music]

Jonathan: Welcome to The World According to Boyar, where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Jim Hagedorn, chairman and CEO of the Scotts Miracle-Gro company. Jim became chief executive officer of Scotts in 2001 and was named chairman of the board of directors in 2003. Prior to this, Jim helped to orchestrate the Miracle-Gro’s merger with Scotts company in 1995, creating the leading consumer lawn and garden business in the world.

Jim also served in the United States Air Force for seven years where he was a captain and accomplished F16 fighter pilot. Jim, welcome to the show.

Jim: Hey, thanks for having me.

Jonathan: I’m super excited to have you on The World According to Boyar. Scotts is a company that Boyar research began following in 2011 when shares were trading around $50 per share. We’ve owned it in certain accounts for almost a decade and one of the characteristics we look for in companies are ones that have great consumer franchises and the Scotts Miracle-Gro with its Coca-Cola-like market share, certainly fits the bill. We also like investing in companies, operated by people with skin in the game, as they make decisions that are in the best interests of long-term shareholders and not simply to meet wall street short-term targets.

You and your family owned about 30% of the company and have in our opinion, done a great job for shareholders utilizing a mix of dividends, buybacks and special dividends. Most importantly, though, you’ve invested in the business. In less than a decade, you created a division called Hawthorne that today is the world’s largest vertically integrated hydroponics company serving primarily the cannabis industry and generates about a billion and a half dollars in sales in fiscal year 2021 and grew revenues almost by 40%.

I first would like to talk about Hawthorne and the traditional [00:02:00] business, but first, you were a fighter pilot until at least the pandemic hit you live primarily on Long Island and actually flew yourself to Ohio each day to go to work. What was that like? I imagine it gave you a lot of time to think.

Jim: I love being in a metal tube by myself. The answer is, if you want to think about stuff, I’m not sure the FAA would want to hear all this, but it’s a great place to read. Yes, prior to COVID, I traveled back and forth on a daily basis from Long Island, Farmingdale to Marysville, Ohio, which is a couple of miles from the office here. They were early days, be home in time for dinner. We had a tragedy, lost a 24-year-old daughter who was killed and our family became unstable enough that coming home at night was important to maintaining the survivor family. Once I did that for a year, I actually liked being able to come home at night. I fly a single engine citation jet single pilot is a really great place to reflect on the business and think and read.

I get to be able to read all the papers, send a lot of emails to my team on that hour and a half each direction, back and forth. Not really from a time-wise much different from commuting into Manhattan. I really liked it. Now since COVID, I get to take that commuting time, mostly spend it on a treadmill running. Lately, I’ve been coming out here once or twice a week, and we’ve been running the business via Google Meeting used to be a Hangout. It’s been a really interesting couple of years. By the way, in regard to Hawthorne, it’s up 100% in two years, not just 40%. It was 60% in 2020 and 40% last year.

Jonathan: The business is on fire. It’s a fantastic business, which I definitely want to talk about. I don’t know if it’s true. I read in my research, 1994, SC Johnson offered your family a [00:04:00] lot of money to buy the company. Instead, you decided to buy Scotts, which was six times the size of Miracle-Gro. It got about half the value, but you took it in equity and warrants. Obviously, things turned out more than fine. Looking back at it, was this a crazy decision?

Jim: I put myself in the slightly, from a personality point of view, unusual. This would’ve been 1994 I think it was. Sam Johnson wants to meet with my dad. I wasn’t invited. Miracle was making about 100 million. Sub S company, we didn’t pay federal tax. It was great because it was Reagan time, where it was 28% federal rate and they were on the pay $400 million for call it 100 million of pre-tax earnings. My father said, “It was great meeting you, we’re not for sale.” My father went on vacation to Europe and people brought me in Scotts the big dog in this space. We had spies, so we had a bunch of people who work for Miracle-Gro who are ex-Scotts people.

We always wanted to see the retail programs where if we could get intel on programs that Scotts was offering, it kind of gives us some insights on how they operate. This is back to early days. This is when CompuServe and AOL. I went on the AOL and checked Scotts stock price. Remember SEJ offered 400 million for Miracle-Gro. Scotts’ market cap at the time, $600 million of sales compared to our $100 million. We make $40 million just so be clear. Made $40 million, they offered us $400 million. Top Line was about $100 million. Scotts’ market cap was $265 million. My father was traveling, my father was the right-hand man with his dad in the Virgin Islands.

I said to myself, “We’re worth more than Scotts is?” We didn’t know anybody. We didn’t know any lawyers or anything in this kind of world. I called my father’s estate lawyer [00:06:00] at Skadden, a guy named Bob Vincent. He was the chairman or something at Barclays. I said, “Hey, Bob, if Miracle-Gro was worth more than Scotts, I wonder if we could just take over Scotts?” There was no real shareholder and that had been a LBO from Clayton Dubilier and when they went public on the Nasdaq, first Boston and Goldman took them back public again out of Clayton Dubilier, [00:06:25] it really had no shareholding.

There was like a bunch of inside ownership because of the LBO and Singapore, completely passive investor only 10%. That was it, there was no concentration of the shareholdings and the company had not performed. When the two or so years that they’ve been public since Clayton Dubilier took them public again, they never made the number, not once. You miss call 10 quarters in a row, people just get discouraged and say, “XXXX this,” and analysts stop covering the stock and that’s where Scotts was. He said, “I think maybe you could take them over.” He said, “What you need is an investment banker.” The guy running First Boston’s Investment Bank is a guy named Allen Wheat.

Bob introduced me to Allen Wheat and he says, “I think it’s definitely possible.” Remember they took Scotts public again out of Clayton Dubilier and he said, “The banker who did that work is a guy named Brian Finn. Now Brian Finn is on our board today. One of the really fabulous strategic bankers I think in the world ever is Brian Finn. We met with Brian and he and I came up with a script. Now, I met my father. He came back on the QE2 or whatever the hell it was back in the day. I picked them up in the hand and said, “Dude, if I told you we could take over Scotts but the currency would be Miracle-Gro.”

He just looked at me and said, “I am in.” That was it, “I’m In.” Our script was [00:08:00] pretty simple. This is to Scotts, “Miracle-Gro is not for sale, if it was for sale, you couldn’t afford it. Good news is we would be willing to merge the companies but it will have to be pooling as opposed to purchase accounting.” Now we didn’t end up doing that because my old man at the last minute, said he wanted to leave and that’s where he set up his charity. If you go back two years and go forward one year, Miracle-Gro people were there in about 42% of the combined equity and it’s pretty consistent over time.

We would make a suggestion, we pull, we get 42% of the equity and we don’t want any cash. We ended up with a little bit different deal because late in the transaction, my old man comes into my office and he says, “I’m out,” and this is how I think about age. My father was probably this most powerful like 75, which makes you wonder why people leave so early but seriously, I’m a student of my dad’s, I would say the most powerful intellectually as a business person at probably 75. At this point, he was probably 79 and he said, “I’m out,” and I said, “What do you mean?” My mother had died of cancer, he remarried this excellent woman who’s also gone now named Amy. He said, “Amy and I are starting a new business.”

Now, I’m thinking to myself, “What the XXXX does my old man know? Does he want to compete with me?” This is all going through my head in a second before he told me the answer. I said, “Oh, what do you mean?” and he said, “Amy and I are going to start a new business, we’re going to be co-CEO’s and it’s going to be giving away every single dollar I have, 100%, everything I’m going to give away. My father was not a usual charitable person. My father would love to give $20,000, $50,000, $100,000, be on the board, participate. It wasn’t a big giant check where he gives all his money away.

It’s lots of bets where [00:10:00] he participates, and Amy participated. At that point, he gave me a number and said, “This is what it’s going to cost.” Now probably I’ll argue with my own man. We didn’t actually pay for business we got. When my mother got cancer, my father wanted to step up the basis of Miracle-Gro so he gave 100% of it to my mother, with the idea you step up the basis to whatever the current value was, but she had to live a year for that to work. She didn’t. He basically renounced my mother’s estate, and it went to the kids. He maintained 20% of the business, 40% of the voting stock.

What you do when your old man says, “This is what it’s going to cost.” I called our lawyers at Skadden, really great guys and women. I told him. I said, first of all, he’s XXXX this whole deal up, we’re going to lose the pooling, and we’re going to go purchase accounting and they just said, “Dude, what are you going to do? It’s your own man, get a grip. He’s given it away.” I was like, “Fine.” We established a preferred equity to pay the dividend and that dividend was used to buy my father out. Prior to the deal, he gave his equity to the New York Community Trust, and then they had a capital stake that we closed out two or three years ago.

A couple of things. My wife during the whole thing, because the company is in Ohio, we live in New York. My wife’s like, “What the hell are you trying to build, Jim?” I said, “I want to create Procter & Gamble’s of Lawn & Garden. She said, “What the hell’s that mean?” I said, “Anything of value I want.” That effectively was the vision. My brother Peter, he was on board. This is my older brother, 12 years older than I am. He’s like, “What’s the plan here?” I said, “Peter, this is the truth. I’m not exaggerating. It’s not going to sound great, maybe to you,” but I said, “Peter, I can take Scotts,” and he said, “You sure it’s the right thing?”

I said, “No, but my urge to hunt here is so high that I feel like I have to take them [00:12:00] and I want to do this.” We made that presentation in Pittsburgh airport because my father was like, “No, we don’t want to do it in Columbus, we don’t want to do it in New York, we’ll go in between.” We agreed we’re going to meet a club in Pittsburgh. The first time we came here, I never been discussed before in Marysville. We drove in the parking lot and Tad Seitz, the chairman of the board is driving the car. My father is in the front seat. My father’s partner, John Kenlon, president of Miracle-Gro is in the backseat and me, the two of us in the back.

We’re driving the parking lot and this is like a 600-acre campus here, manufacturing R&D, office complex built when ITT was in conglomerate phase. I looked at John and said, “This is going to be ours?” The weird thing is, nobody ever said, “No.”

I had this view of noses in, fingers out. I think that’s a terrible idea. For one reason, I am the leader that the board could wake up and say, “Are you kidding me? What did he say and all this XXXX? What’s he up to?” Let’s just say you’re a merchant for Home Depot and you said, “I think you should make this product.” If I say yes, you know what? You’re going to carry the XXXX out of it because it’s your project.

If I let the board engage in management of the business, they’re much more comfortable with what I’m up to. I run the board way different than I used to. We meet more frequently now, six-plus times per year, we do all the nonsense, which is important and a lot of it the committee’s. We do that during the week, but before the board meeting by telephone, or video now. When we show up in person, we’re strictly talking about the business. Now the board, especially my chairman, I’m much more involved in business so there’s not this educational process that has to occur all the time and I have a board that is really functional.

The problem is I got pretty high tenure, Mike and I are getting pretty [00:14:00] old and so there’s change afoot, not because anybody’s threatening to leave or anything like that but both from the board, especially if we say this, another board going to have to happen for Apollo. I got a whole new leadership I got to groom, it’s taken up a lot of time. Our last board meeting– I’m not making this up. I’m usually pretty happy when my board speaks with this foul language as I do, but we had a subject item on this schedule at our meeting where it was like, “If you’re going to do all this XXXX, your five pillars, this was the subject, you would want XXXXing army.”

That’s taking up a lot of our time right now, especially complicated if you say maybe SMG today is two businesses with two boards, two management teams, and do you have the people to do this? We’re in a very expansion-centric mode right now too so it’s a really cool time.

Jonathan: Your traditional consumer business which produces fertilizer, grass seed, et cetera has unbelievable brand recognition, as I said earlier, Coca Cola-like market share, and anyone who gardens know your product. You were a huge pandemic beneficiary, and as your son, Chris, who also works in the business said on a conference call, we joked when all this started, not that it’s a joking matter, but you got to find levity where you can, that what were people going to do when quarantine hit the whole country is they’re going to go sit at home and smoke pot and garden.

I think in all seriousness, there’s a lot of truth in that statement. One of the reasons you were a pandemic beneficiary was millennials moving to the suburbs. How big of a deal has been the exodus from the city to the suburbs been for your business?

Jim: It’s been huge. We had these dark fears, the weirdness about the financial community, the investor community, particularly short-term investors, there was a lot of discussion about work, people are going to move inside the beltway, have condos, no lawns, and that’s what young people wanted. [00:16:00] We weirdly started to believe that, that maybe the growth is done in consumer lawn and garden. I had this conversation with Craig Menear, from Depot, who’s a good friend and a fabulous CEO. Craig said, “Do you think anybody knows homeowners better than we do, Jim? We spent a lot of money on research, and I think you’re completely wrong. If you look at the demographics, there’s a huge bubble of young people who are now having families.”

He said, Jim, “Our research shows that when they have kids, they want a home, a yard, a dog, or a pet. They want all the things that people traditionally wanted.” Even before COVID, we started to become very much believers that if you look at the huge number of our kids, this is my age kids. I’m 66. They’re all buying homes, and even before COVID, buying a home around here in central Ohio, you better do it quick because there’s going to be bidding wars on it, and there’s just a lack of supply here. Homes are just being built and sold. There’s a big article today in the Journal on homeownership and where it’s headed and what the numbers are looking like, but clearly benefited from low-interest rates.

I think generally, a lack of supply and a big group of people who want to be homeowners that are bigger even than people like us that are retiring and downsizing. Even before we were very positive that lawn and garden was a business particularly if we kept up, meaning, innovate market to people the way they want to be marketed to that we could grow that business, at least kind of a GDP. That was where we’re at. Unlike Peloton, who I think is struggling hard right now, that was a big issue for us coming out of COVID, what are people going to do? [00:18:00] We saw a double-digit increase in consumer sales last year, in ’21.

Our fiscal year ends at the end of September, on top of growth 23 or 24%, in ’20. A 33% increase in two years on a business that we viewed is pretty mature. It gets back to the demographics wanting to have a home, a yard, and garden. What happened during COVID was this issue, we didn’t know what was going to happen. This issue of essentiality– remember that whole argument, only essential businesses could be open, you only could go out to do something essential. People early on said gardening is essential, and not every state agreed. There were two states that didn’t. Michigan and Vermont, both said, “Really? Buying plants? That’s essential?”

Consumers argued the point, and both those states had to back up and say, “We agree, lawn and garden is essential.” For us, having a business– and the same was true with the cannabis business. People both from a medical point of view and most states recreationally, it was deemed to be an essential business. That, to me is some kind of confirmation that we’re not on the wrong track, that people say, “Your business is essential.” Last year was not– if you live in New York, it was not a fabulous weather year. Mother’s Day sucked, Father’s Day sucked, Memorial Day sucked, and Fourth of July sucked. Even with no brakes on this sort of Midwest, Northeast weather, we were still up 10%.

We didn’t lose anything coming out of that. I think it’s a real positive for the business. We also got an opportunity to do because when COVID hit, retailers didn’t want to advertise. I think everybody was pretty happy if their store was deemed to be essential. [00:20:00] They didn’t want to advertise and be criticized. You’re bringing people together and you’re going to get people sick. They didn’t promote at all. What happens then? First of all, retails went up by at least 10%. Meaning, everything that would have been promoted wasn’t, so the actual price that the consumers went up double digits and take away was up a quarter call it.

They weren’t afraid of a little bit higher prices, which I think is important right now, but also because they wouldn’t market because the retailers didn’t want to be criticized, we started taking over and doing a lot of work with this guy, Gary Vaynerchuk. I don’t know if you know Gary. Gary’s at VaynerMedia. We basically said, “Look, we’re on our own. We’re going to take the money that we would have given the retailers to market. We’re going to market ourselves.” That really gave us a lot of confidence that we could change how we market. Remember if you say, “To do this, we can’t be the old company we were, we’re going to have to innovate. We’re going to have to sell to that younger group that they do want a garden.”

That’s what the research tells us. They just don’t want to be a slave to it like their parents were. How many people actually watch TV commercials these days on commercial TV, unless it’s sports or news? I think not much. Therefore, we’ve got to figure out how to use social media and influencers. We’ve made a ton of progress on how do we communicate to younger people today. COVID, I think both on the Hawthorne side and then on the consumer side, in spite of the tragedy that I think it was for America, in the world, it was very gratifying to know that this is business that people actually, when this XXXX was happening people said, “I’m going to garden.”

Jonathan: You actually did something that was really interesting. You have something with the weather channel or Watson, you’re able to advertise more when the weather is predicted to be more favorable for gardening, is that something?

Jim: Yes, [00:22:00] this was a criticism. If you look at how marketing happen in lawn and garden pre-COVID, it was falling apart. I’m not sure the retailers agreed with me on this. I thought it was falling apart, that if you looked at, call it, the marketing hit rate, let’s just say you had three or four Black Friday events throughout the lawn and garden season. I’ll bet you, 70% of your marketing and promotional dollars get spent against that. They want to get out early. The retailers want to get out early to get the lawn and garden consumer in, because if they buy certain things on Black Friday events, they tend to buy a bigger basket of stuff. This may be a global environmental change that’s happening, which is we tend to have really good weather up through March.

Then it becomes unstable April, May and then summer hits and you have a decent normal season. We were seeing 80% miss rate on weather. If it’s cold and raining and you go into a Home Depot or Lowe’s when the weather sucks and it’s cold and wet, it’s like crickets in there. This is nobody there. We know the phasing of how people buy stuff. It tends to be because it’s a good promotional item, lawn fertilizer, and grass seed. Then you get into the bug season, pesticides and weed killers. We know the flow of it, but what’s the value of advertising when the weather sucks?

The business we’re in is a t-shirt business. If it’s not going to be t-shirts and people are in a down jacket, don’t expect them to be in a store. Can we pull the advertising either forward up to maybe two weeks or push it back based on weather forecasting? The weather channel data part of it is owned by IBM and it’s a big data deal. I don’t know that they can predict the weather a year in advance, but they can predict the weather two or three weeks in advance pretty well. If [00:24:00] you know you’re going into a weekend, just don’t advertise, push it off or pull it forward.

What we’re learning is if you promote into good weather where you have the promotions, the inventory, the weather, all in your favor, it’s just so much easier to have good business. Yes, we’re pretty careful on the data and learning how to be flexible to move promotions. Now, retailers, it’s harder because the retailers are doing Black Friday events a year out and getting the merchant teams to say, “But you got to be flexible just plus, or minus a week or two. If you’re flexible, then we’ll just promote in a good weather.” It turns out we think weekends are important and they are, but good weather, in season, even if the middle of the week is okay.

We’re trying to run our sales and our advertising, have the weather on our back, not blowing and freezing cold in our face.

Jonathan: One of things I think about in your consumer business– it’s obvious you have a fantastic product but I think about, let’s say the food industry as an example, were over let’s say, a past decade roughly, many of the supermarkets and other places where people purchased food, decided to compete against the established brands with decently high-quality private label brands and they took away market share. I know you do have some private label business, but what gives you the confidence that that’s not going to happen in lawn and garden?

Jim: Well, we start by saying experience. First of all, if you look at dollars spent and units sold, they’re different and you said 50% of the units and 68% of the dollars are the brands, but 50% of the units are private labels. Without private label, it’s going to be very challenging for retailers to make money in lawn and garden. Private label is key to it and we don’t resist that. We try to manage that alongside the retailers. I think that [00:26:00] makes it helpful. Chuck Berger, that was the CEO before me. He’d always tell me, “Don’t tell me what you think. Jim, tell me what you know.”

This is a little bit what I think, I think if you go to store managers and maybe you’ve done that, I know some of our analysts do. I think they’d say, Scotts and maybe Behr paint are the best vendors in the chain. They are some of the very few vendors that a store manager will give his personal cell phone number because they trust us. We’re all about helping them. I think that what you get with Scotts is not only access to very integrated private label programs. By the way, just so headline, we’re not losing share at private label and we haven’t over the last decade, but it’s a very integrated program where we’re delivering everything on the same trucks, which remember, a Depot doesn’t have a lot of bays.

A lot of times you’re just pulling stuff off in a parking lot. When you can reduce the number of trucks arriving by half by integrating private label with this national brand, that is a big benefit to them. We service the product, we counsel on the weekends. Meaning, we have thousands of people in these stores. We own the concrete. I think that the difference between food to some extent and lawn and garden is lawn and garden is a once or twice a season purchase. It’s not something you’re doing every day. Personally, I’m a brand freak. I don’t buy a lot of unbranded food.

I think we’re doing our job to innovate on the branded side especially, offer competitive programs on the private label side, but really try to reserve our big innovation for the branded product, at least initially. I think it’s working out pretty well. I’d start by saying, we are very much believers that a blended program of private label and national brand matters. To the extent we can and be competitive, we want to do both.

Jonathan: [00:28:00] The brand is clearly your biggest competitive advantage but you did spend a lot of money on your supply chain and you have one of the best ones out there. Clearly, for most businesses, they’re experiencing issues, but I can’t help, but wonder is it as bad of a problem as people say it is? Or is this an excuse for companies really just to kind of raise prices?

Jim: I’m going to talk to you the way I talk which is, it’s pretty up out there, seriously. Commodities, we don’t see much easing a little bit, I think right now. I think mostly in plastics and other things, it’s just a really tight supply and there’s no choice. Certain stuff we buy; bags and some containers. We’re a major customer, but they’ll say, “It’s a courtesy call, dude. This is what’s happening with pricing. If you don’t like it, I’m moving down the phone list and I’ll call the next person. Everything’s going to be sold. This is what’s happening with the price.” If you look at our Q3 call, our last third-quarter call, we ate XXXX on that call.

I think it was like for 500 basis points of margin decline in a quarter. I don’t think people were happy with my view on pricing. I think that everybody would’ve been happy if I’d taken 10 but I said 5. It was largely because I was believing this transitory nature of what the Fed was saying. I was hopeful. Now we told retailers, “If it ain’t transitory, we’re coming back,” but I don’t think the street heard that. I think they looked at margins. I think the view of the pot industry as being a little bit oversupplied at the moment and freaked out, but is it bad out there? Yes, I would say it’s pretty bad.

It was The Journal or The Times yesterday, the question is, is there easing happening right now? It’s this whole discussion of, you go from famine to feast. I don’t know if you saw that article yesterday. I think that’s probable, but if you look at right now, that was another thing. We’ve gone from half a billion of free cash flow to 165, I think, we ended last year at– [00:30:00] A couple of things. We had a great year in ’20, so we paid our incentive out at the beginning of ’21. That cost $100 million right there. Inventory is probably up $500 million. That’s us making sure we have the product.

Now, we thought we lost. I think the number we use publicly was $200 million, but I think reality is we think we lost in ’20, business we couldn’t fulfill, $300 million.

Jonathan: Just from not having enough supply?

Jim: Correct. Probably $100 million in Hawthorne, maybe $200 million in the consumer side. We didn’t want that to happen again because people accepted it because it was ’20 and everybody was screwed up then. Going forward, we can’t live like that. It’s not just that, we paid premium pay here during COVID and we didn’t get beaten into this.

We led with this. Meaning, from day one, we said people who have to work in hazardous areas, which we defined as infection rates of more than 45 per 100,000, we’re going to pay a 50% premium. What did we learn a year into it, was that people were tired.

They were working 12-hour shifts, because anybody gets sick, the whole shift goes bananas, and you end up where you have got three shifts, but you never could really feel three shifts. We’re working two shifts, 12 hours, and you do that for months and months, it doesn’t matter people getting paid a lot.

We just couldn’t operate basically on the margin like that. We’re going to burn out the people in our machinery and everything else. We had the investment inventory and then we had a $100 million in cost increases just based on cost of goods. You got $100 million there, $500 million, plus another– it’s about $700 million of investment, called $600 million if you pull out the incentive that was from ’20, that got paid in ’21.

[00:32:00] That’s the way of solving the issue right now is very much a dull instrument of a lot more bullXXXX so that you don’t run out of stock. It is not a super fine way of running a business, but it’s what we did. I think the answer is, I think it gets better over time. I think it starts with something as simple as the entire global supply chain shut down for a month at the beginning of COVID.

You lost 1/12 of the capacity of the world because everybody was shut down. Then when it came out of it, everybody had all this money and the government was stimulating and everybody wanted to buy XXXX. I fundamentally think that solves itself over time, but I am not a major fan of the policy of the United States at the moment, which is that I think stimulating the economy more with build back better, whatever the hell it’s called.

When people can’t get materials and labor right now, I don’t quite understand it other than politically, maybe it makes sense to Democrats. I think this probably continues for a year or two until it’s settles out.

Jonathan: I just want to shift gears just a bit to Hawthorne, which is your hydroponics business and it’s under the leadership, I believe, of your son, Chris. You built this into an almost $1.5 billion business in less than a decade. First, I just want to hear, how did you decided to get into this category in the first place and did he get a lot of pushback?

Jim: It’s a cool story, but the answer is, yes, on the pushback side. It started out where I was in a pizzeria  with two young women reporters for the Wall Street Journal. I think people can always trick me into saying stupid XXXX that gets me in trouble later. I didn’t have any babysitters with me. I got these two young women from the journal who were actually good reporters.

They said, “What do you think about marijuana?” I said, “What do you mean?” They said, “Do you think it’s a business you guys should be in?” I said, “Do I think it’s part of lawn and garden? Yes, it’s growing plants [00:34:00] and we sell XXX to help people grow plants. Why wouldn’t it be included?”

That was probably like a decade ago at this point. I showed up at the next board meeting and my chairman of the audit committee and my lead independent director pulled me aside and said, “Hell, Jim, have we ever said no to you before?” Actually, I have a very supportive board. I love working with them.

I said, “I don’t think so.” They said, “This is the time. The answer is, no. You’re not doing pot.” That lasted for a couple of years until I was making West Coast trips. I’m talking California, Colorado, Washington State, all the West states that are big and marijuana today, but it was all essentially illegal back then.

You’d start to see lawn and garden apartments that were being taken over by these niche brands. You talk to people and they’d say, “Dude, it’s giant. These people are coming in once a month. They’re paying cash. They don’t negotiate. They buy huge quantities and it’s getting to the point or for some of the independence, it was as big as lawn and garden to them. I kept coming back to Ohio and saying, “Yo, this business is happening.”

The crazy thing today, is it still a Schedule I narcotic, which is insane how anyone can defend that. You’d ask people, “What are people growing with this XXXX?” They’d look it right in the eyes and say, “Tomatoes.” That was not that long ago but it was clear that tomato business was getting to be real and Chris said, “Come out of an advertising agency in New York after college.”

We set him up running basically an indoor urban gardening business that was selling stuff where people live in New York city and urban young people, how they garden and it got to the point where we said,” You know what? You should include this hydroponic.” [00:36:00] That’s what people called it, hydroponic but it’s really cannabis supply for cultivators.

Eventually, that business got shed a couple of years ago. The urban, indoor organic gardening business went back into consumer and Hawthorne just kept the cannabis supply business. It’s been tremendous fun and it’s a real vision. It’s a lot of what I wanted to do in consumer lawn and garden, which is consolidate and be the vendor that I told you about like Depot person would say,” No, Scotts is like the best vendor I have.”

I’ve heard this from a lot of people when they’re being edgy with me on the consumer side, it’s like, “Why would they let you get this big, Jim?” They let us get this big because we’ve got the big brands, we advertising bring consumers in this store, we service the product, we do it pretty flawlessly.

We’re kind of the perfect vendor. The question is on the hydroponics side, what businesses would you have to be in? How would you show yourself to be this great partner to marijuana cultivators, where they say, “No, I love doing this with these guys. They bring technical support. They have all the brands I need. They combine it all in one delivery. They give me good pricing,” and we’re probably 70%, 80% of the way where I’ve wanted to do it.

The gratifying part is a compliment to Chris and Mike Lukemire, as a compliment to both of them, I have said to myself over the years, “I’m a crazy XXXXer at work.” I’ve surrounded myself with good technical operators but it gets tiring where you’re the only source of strategy thought in the business because everybody else is very much a technical implementer.

Where Mike has gotten to and Chris is they’re really good strategic partners to me today. That not only makes me [00:38:00] happy as a father to Christopher but very comfortable with Mike Lukemire. Our biggest issue, honestly, is that we’re both in our 60s. We are doing so much cool stuff right now that I just wish I was 20 years younger.

I mean, seriously, it’s one of those things where I don’t have a plan to leave but I also don’t want to be assassinated in my bed by the next generation who wants to take over. It’s not that important to me but I think I’m adding value right now but it’s just– I got a really good team to lead right now.

They’re really up in their game to include strategic game work that they’re definitely on the right track. I’ve always wanted that to be where my leadership team would come to me with ideas that would take my stuff as the beginning and then say, “Yo, not only do we think that’s a cool idea, here’s how we’re thinking we’re going to implement it.”

You say, “Well, that’s even better.” I think we’re getting to that point. I think we’re really seeing it in Hawthorne and this other project we’re calling Apollo, which is a super interesting part. I’m hoping that the investment community tries to understand what we’re up to there.

My end-of-year call, which I think has been good for the equity. I’ve been trying to be much more strategic about trying to help people understand what it is we’re up to because a Q3 call only people want to talk about margin and what’s going on in Q1 in Hawthorne. Seriously, I don’t think it was any questions other than, “What’s going on with your margin rate? Why didn’t you take more pricing? What’s happening in Hawthorne in Q1?”

We never really had a chance to say, “You have any idea how much cool stuff we’re up to?” Apollo was a part of that.

Jonathan: The one, I guess, big headwind I see and it’s obviously outside of your control is the regulatory environment. How is that impacting the growth strategy at Hawthorne?

Jim: [00:40:00] I have a point of view, I’ll tell it to you, but the answer is, I don’t know. If you could deal with safe banking 280E, which is taxation, according to the IRS code, if you’re engaging in a federally illegal business, you cannot deduct your business expenses, which means your taxable income is your revenue and which makes your federal rate nearly 80%. Effectively, anybody who’s gone legal can’t make money.

This issue of what do we consider legalization or major progress, and we’ve defined it because a bunch of deals we’re doing some of which are known, and some of which aren’t, basically said restructuring these as effectively loans that upon certain things happening, convert to equity.

Our lawyers were happy with this. JP Morgan is happy with this. Wells, Deloitte is happy with this, that we’re not stepping on a third rail issue, which has been really important for us as we pioneer a business that, five years ago, people weren’t that cool with it.

Today, I think people are cool with it, but the banks are super sensitive I think both on reputational and compliance issues on pot. We’re saying the right to make these conversions occurs when two things happen. One, you can bank with national banks and I don’t think that’s going to take that long.

Two, is the major stock exchanges in the United States, NASDAQ, and Nyse, except they’ll list companies that are directly touching pot. When those two things occur, we have the right to convert. I’m not really talking about legalization right now.

I have to say, other than a very few states like Oklahoma, most times when politicians touch this, they screw it up for years. I’m not [00:42:00] sure I need the feds to do anything other than don’t enforce, which they’re not enforcing anyway. Then you have banking and taxation, and those would be big steps forward. I don’t know what my expectations are.

Jonathan: If tomorrow you wake up and the taxation and the banking issue were gone, besides switching debt to equity, how does a strategy of Hawthorne change?

Jim: I’ve said from Mike and me, how do we want the business to be managed? We’ve decided there’s these five pillars, but call them business lines, that we want to play in. They’re really all cousins and nephews have two lines. One, is consumer. One, is marijuana, but all plant-based called.

You got our existing consumer legacy franchise. You have live goods, which we think is really important. You have direct to consumer, which we think needs to be a standalone, free-standing business, selling directly to consumers. Within that, managing the retail direct to consumer to where, whether it’s Amazon or homedepot.com does that. That’s three.

Then Hawthorne on the pot side plus Apollo. It’s two businesses, but five different business lines that we want to play in. We think in the world of, if you believe that prohibition on marijuana ends, I think our view is that is nearly certain. Now, this was the conversation. Why is it senators can easily change this when both Republicans, Independents, and Democrats all support this?

How hard is that from a risk point of view as a politician? It shouldn’t be that challenging, but they make it challenging. I think that’s all the dysfunction that occurs in there. Our view is if prohibition ends, where’s the big money going to be earned? [00:44:00] Well, what we know in consumer, consumer brands. Ready to consume consumer brands.

If we knew alcohol prohibition was going to end, houses that own a bunch of distilled liquor brands or beer brands would be where we’d invest. That’s what we see on the consumer side is that if you put a pie chart as the money up there, that ultimately, consumer brands are we think where the biggest money is going to be in a post-prohibition world and that’s where we want to put money.

The part that’s confusing about that is today, these are mostly, particularly in the East Coast, state-by-state limited monopolies permit holders. If you own the permits, especially the early legacy permits in a state like New Jersey or New York, these early medical permits were completely vertical, cultivation all the way to retail. You could argue implicit within that is brands. We’re right now trying to build a portfolio of brands and licenses that allow us particularly east of the Mississippi. My view is, there’s an old-world, a new world of marijuana, the old world is called west of the Mississippi. The new world is east of Mississippi, create a map that we can exploit with brands, cultivation, retail.

I think we’re very far down the road I’m just trying to understand. Now, we’re trying to implement it. It’s not for the faint heart, I’ll tell you that.

Jonathan: To use an analogy, cannabis legalization is like the gold rush. You’re the pick and shovel guy with Hawthorne. The real money, the gold rush was made with the pick and shovels. Mining for the most part for gold really wasn’t that profitable except for some people. Is growing cannabis where you want to be?

Jim: No, I think that the answer is what Hawthorne offers us virtually every [00:46:00] cultivator in the United States is our customer. We know the really great growers out there. I would say, I don’t think it’s an exaggeration to say that’s probably 10% or less of the population of cultivators are highly skillful at what they do. They’re all expendable. They want to participate.

We’ve talked to a lot of these people who own these great businesses but remember, the way at least the United States is organized today, it’s state by state. People who are powerful from California, aren’t powerful from Colorado, but they’re all state by state. When we talk to them and say, “We want to create long-term and equity,” the best equity in history in the space.

If you look at the MSOs, to some extent or the competition here, I got to say, it’s not that they don’t get it, but I think brands, they feel are less important. If you look at the quality of their product, I think we would argue some of these highly specialized people that already buy our stuff that we go in their growth facilities. We know who they are and they want to play with us.

I think cultivation is not crazy important except to say, the quality of the product is pretty important. I think in today’s world, if you’re not cultivating it, it’s pretty hard to get to the quality you want by outsourcing the production. I’m not sure long-term that owning retail and cultivation is important.

I think in the short-term if you look at the map, that’s what I call it, you’re forced into saying, if you want to play in New York, you need a permit. You need a license. You want to play in Jersey, you need a license.

I’ll tell you one of the big losses in election day, Steve Sweeney. Steve Sweeney is the senate leader in Jersey, was probably the most advanced politician I’ve ever talked to about marijuana strategy on a go-forward basis and its importance to the state of New Jersey. [00:48:00] It’s pretty screwed up that he lost to a truck driver who only spent less than $20,000 on his campaign.

Jonathan: That was an insane story, that loss. Going in terms of the regulation, you are the biggest player out there. You’re a publicly-traded company. You have a big target on your back. Does Hawthorne in some ways have a competitive disadvantage because you’re now under a regulatory microscope?

Jim: No, I think it’s an advantage. I’m a big fan of the industry. I’m not sure what I expected 10 years ago. You’d meet people, you’d go to these shows like MJBizCon, and early days like eight years ago, and the people in the industry, they were young, mostly male, mostly white, and still that’s pretty much the case.

I would say they reminded me, I’d come back to Marysville and people say, “What was it like?” I’d say, “It’s like somewhere between a motorcycle gang, and elite special operations. That’s what it feels like.” The people who are really good at it, remember, they suffered through the industry when it was highly outlawed, and suffered from arrests and all kinds of XXXX and harassment.

I’ve told a lot of CEOs, “If you ever want to have faith in young people,” and this is not true of all cultivators, but a lot of these cultivators, they run really good businesses. They didn’t go to business school. They’re self-taught, they’re young, and you know what they do with their money? They buy home next to mom and dad. They invest in your communities.

All of a sudden you say this is a great entrepreneurial business, who the government has been such a pain in the ass. Remember, just think about that. You want to invest in a state like Florida and build-out? It’s going to be at least $50 million to build out your cultivation facility. You can’t borrow from a bank.

You’ve got to borrow from weirdos and listen, it’s a business model. [00:50:00] You can borrow money in New York and Los Angeles. You know what they’re paying? Over 20% per year, with a covenant package that’s really scary when you read it, “You pay, or I get your entire business.”

It’s a real challenge where you don’t have access to normal capital. Then your tax rate basically means you can’t make money. I think that the young people who are running this business in spite of everything being stacked against them are some very, very cool business people. It’s been a lot of fun to partner up with them.

Jonathan: One of the things you mentioned on the last earnings call, someone asked, “Do you ever separate Hawthorne from Scotts?” You said, “You can go on for an hour on why that would make sense.” That was, and I just love to hear why you think that makes sense.

Jim: I’ll give you the reasons why it doesn’t make sense. If you look at the balance, you’ll figure it out. Why it does make sense to be part of SMG is R&D, supply chain, IT, general management, access to capital, and it’s a legal business.

Unlike a lot of the difficult we talked about on the plant-touching side, Hawthorne is completely legal. The banks are comfortable with it. The government’s not trying to enforce against us. We have all the synergies of being involved with the core, where the core has all these things that they can use and Hawthorne gets access to that.

There was a lot of struggle early on where Hawthorne wanted to do everything themselves, but the more we said, “Guys, some of that stuff you’ll never be big enough to be better than Scotts. We can give you that stuff nearly for free,” that’s why it makes sense.

The synergies of being part of it, actually, I know the numbers, and they’re pretty significant. Separating the de-synergies of separating Hawthorne are our material. Lots of reasons to stay part of it. If you believe the bullXXXX I told you about Apollo, [00:52:00] which is where we think the majority of the money is going to be, which again, is consumer brands.

This is not inconsistent with where we are on the SMG side. There are some of these guys from the West Coast that if they sold their business today, they could sell it for $1 billion. We’ve put $150 million at the RIV, we’ve had $200 million. Plus, to say, we got $350 million to play with RIV.

If one of those people said, “We’ll join. We become the minority shareholder, serious minority shareholder,” some of these people are really good, but they’re not going to run a multi-billion dollar business. They don’t think they could. They want to be partners. They want to ride with it. All of a sudden, you say to yourself, “I need poker chips to throw in, or we end up a minority partner.” That’s where Hawthorne.

Hawthorne is the most valuable business in the pot industry in the world. If we aren’t willing to use Hawthorne as a currency, we’re going to be overwhelmed and not be able to maintain control of it. I do think that there probably are investors who say, “Why are you making it so hard for me?” I know that we’ve had interest in some of these sovereign funds from the Mid-East who have basically said, “I’m not investing in a pot business.” I love the Scotts business, but I’m not investing in the pot business.”

I think there’s arguably some, if you separate the business that makes it easier from an investor point of view to say, “I know what I’m buying here. I’m interested in the pot business, or I’m interested in the consumer branded business.” If you listen to our call, it’s not that I’m chasing growth right now, but there are a lot of opportunities that we have visibility to right now.

I wouldn’t be surprised in five years of business, it’s twice the size of this right now. Therefore, even if there are some of de-synergies, if strategically we need Hawthorne to be part of it so that we don’t lose control of it, that’s the argument that I would make.

Jonathan: I think doing something because Wall Street tells you to do something is generally a bad [00:54:00] idea, but why not spin out 20% of it get a value?

Jim: This is not because Wall Street says. This is I love the people we’re talking about partnering with on the Apollo side. Do I want those guys to be the foster and they’re telling us what to do? I just don’t think it would work. I think there’s a lot of disciplines you’d get within Scotts, access to capital markets, the discipline, accounting, all the things that just go with every day being here.

I would be afraid, honestly, if we said we’re going to take a bunch of young guys who are 35 years old, and they’re going to be the majority shareholders. I just think that that’s a business that I’m not sure I’d want to be a part of. This is not because the Street is telling me anything.

This is because I’m a much better manager, I think Chris, as well, where we understand our authority. I think we need authority in Apollo. I think the upside is big enough that I’m making the number up right now but if you said there are $50 million of de-synergies, actually, I don’t think it matters in the big scheme of things. If you could actually create what you’re talking about, which is the finest pot equity, remember, a lot of stuff has to happen so we’re map building right now. If you could do that, does $50 million of de-synergies really matter? I don’t think so.

Jonathan: Not at all. As I said, doing things because Wall Street says to do so is generally a bad idea, but one of the things that they really have a tough time is SMGs top to value for a couple of reasons. One, it’s a two-quarter business, and then you have the weather issue. Is this a business that really needs to be public at this point? Why deal with annoying Wall Street analysts?

Jim: Henry Kravis came to visit with me. This is ’07, I think it was and the stock was probably less than $50 at the time. We can [00:56:00] privatize the business. You’ll make so much goddamn money. I think Doug Braunstein was the CFO over JP Morgan and a great banker.

I said, “You’re going to go borrow a bunch of money from Doug for free because interest rates are jack XXXX and we’ll buy the company. Now, I’m going to have a shareholder with a large appetite for making money, and I’m going to have to report to you guys. Then I’m going to have to go public again to get rid of you.”

Why can’t I just go and do a big dividend to our shareholders and I’ll borrow the money from Doug for nothing and distribute it to shareholders? Which we did and in today’s market, I’m not completely satisfied, but I think at this price, I don’t think the family would want the risk.

I think you’d say to yourself, “Do I like that world where I would have to have financial partners help me out, I think? Do I want to let them in?” I don’t know. If it was your family, would you do it?

Jonathan: I think you got a great business and I’m confident in the long-term aspect of Hawthorne.

Jim: In regard to challenging it and having a calendar that’s subject to not only weather but is effectively a six-month business, I think we’re a pretty consistent earner. I think we have a much more consistent business than it sounds. I think difference between good weather and bad weather is probably a percent or two.

That’s not that huge. I don’t think it’s that hard to value. I think if you look at our debt, we tend to issue debt at investment grade cost when we’re a non-investment grade issuer. What do I think? I think we get a lot of credit for being pretty reasonably run company with pretty consistent earnings.

I would add, we tell the Street what we’re going to do, and we do it, which I view as usually a good thing for the investment community is I think if we tell the Street clearly what we’re up to and we do it, even if the results involve degradation of some of the quality of business metrics in the short-term, [00:58:00] I think the Street buys into that chip and says, “I think this team can solve that problem.”

Hawthorne is a little bit different because the problem with Apollo right now is with 280E called an 80% tax rate on the federal side and then throw state taxes and local taxes and all the burdens that go along with that, you effectively can’t make money legally in the pot industry at the moment. It’s the weirdest thing.

Who makes the most money in pot right now? The federal government. That’s XXXX up. The problem is there’s not visibility to financial returns on that money in the short-term. You have to do it based on what you think the value of the franchises and I think the Street can handle that. I think my family can handle that, but time will tell on that one.

I think that’s a more challenging valuation metric is to say, “Well, wait a minute, how much money are you bringing in? What’s the cash flow?” That’s a harder one because then you got to talk to Chuck Schumer and say, “Solve this problem dude. America is in favor. 75% of America lives in states where this XXXX’s legal. The feds need to get on top of this.”

Jonathan: Jim, I want to thank you for being on The World According to Boyar. I really enjoy learning more about your fascinating story. How the pandemic has provided a significant tailwind for the consumer business and the tremendous opportunities at Hawthorne. I look forward as a shareholder to watching your progress. Thanks for coming on.

Jim: Thanks, guys.

Jonathan: I hope you enjoyed the show. To be sure you never miss another episode of The World According to Boyar, please follow us on Twitter at @BoyarValue. Also, if you would like to receive the Boyar Value group’s latest report on Scotts Miracle-Gro, please email info@boyarvaluegroup.com or click the link in the show notes. Until next time.

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IAC CEO Joey Levin on why his company took a 12% stake in MGM, which companies within IAC he is most excited about, lessons learned from working with Barry Diller, and how he approaches capital allocation.

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The Interview Discusses: 

  • Lessons learned from working with media mogul Barry Diller.
  • Why they decided to take a 12% stake in casino giant MGM.
  • Which businesses within the IAC portfolio he is most excited about.
  • How he approaches capital allocation at IAC.
  • Which stage he believes Angi is at in their fixed priced transformation.
  • Why he believes Angi’s “take rate” will increase with time.
  • IAC’s major competitive advantage.
  • Why he believes Care.com is a major opportunity for IAC.

About Joey Levin:

As CEO of IAC, Mr. Levin is responsible for the strategic leadership of IAC and its operating businesses and also serves on IAC’s Board of Directors. Prior to his appointment to CEO of IAC in 2015, Mr. Levin was CEO of IAC’s Search & Applications segment, where he oversaw strategy across IAC’s mobile and desktop software and media businesses. Prior to this, Mr. Levin served as Chief Executive Officer of Mindspark, an IAC subsidiary. Mr. Levin has also served as IAC’s Senior Vice President, M&A and Finance. Prior to IAC, Mr. Levin worked in the Technology M&A group for Credit Suisse First Boston (now Credit Suisse).

Mr. Levin is Chairman of the boards of Match Group, Inc. and Angi Inc. and also serves on the Board of Directors of Turo and MGM Resorts International. He graduated from the Jerome Fisher Program in Management & Technology from the University of Pennsylvania, with a BS in Economics from the Wharton School and a BAS in Engineering from the School of Engineering and Applied Sciences.

 

Click Here to Read the Interview Transcript

Transcript of the Interview With Joey Levin:

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Jonathan: Welcome to The World According to Boyar where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s special guest is Joey Levin. Since 2015 Joey has been CEO of IAC, which owns a collection of largely online businesses such as Angi, Vimeo, online publisher Dotdash, Care.com, as well as the host of other smaller, faster-growing businesses. Joey is also executive chairman of Match Group, which until recently was controlled by IAC, is on the board of casino giant, MGM, where in August of 2020, IAC opportunistically invested $1 billion to acquire a 12% stake in the company.

Over the past five years under Joey’s leadership, IAC shares, if you include spin-outs, have compounded at an annual rate of 60% versus 17% for the S&P 500. Full disclosure, clients of Boyar Asset Management, as well as myself, own shares in IAC, as well as IAC controlled Angi Homeservices. Joey, welcome to the show.

Joey: Thank you. Thanks for having me.

Jonathan: Really excited about the interview. I guess I’ll just delve right in. IAC has a market cap of a little over $20 billion, Match’s market cap is a little below 40 billion. You’re CEO of IAC and executive chair of Match. You’ve accomplished this, and you’re only in your early 40s. How do you achieve this level of success at a relatively young age?

Joey: One step at a time, [00:02:00] I guess. I’ve been very fortunate to be a part of IAC, which is a dynamic business with a dynamic chairman and a philosophy that generally– There’s a lot of components, but probably one of the most central elements is to do things differently, try and create new ground or try and go against whatever is the status quo. Things like specific experience or age are less relevant at IAC than they might be at another place. The thing that matters at IAC is people being passionate about something that they’re working on, working really hard on it, and wanting to get a chance to succeed at it, which is something that we give people.

Jonathan: You mentioned an executive chairman. That’s obviously Barry Diller. What are some of the important things that he’s taught you along the way?

Joey: Always think bigger is probably a big one. You think you’re thinking big at something. You say, “Look at this little business that’s doing a few million dollars of revenue. We can imagine one day if we work a lot of things out, we could do a $100 million in revenue.” Most people would say, “Wow. Well, that would be quite an accomplishment for a little business.” We could say that to Barry, and he’d say, “Well, why bother then? Because there’s a much bigger opportunity. If you’re not going for a bigger opportunity than that, then why bother?” That boundaryless thinking has been really important to creating value at IAC and really important to consistently setting the bar and the ambitions higher.

If you start with small ambitions, [00:04:00] the best you do is achieve those. We’re trying to look bigger, go after bigger markets, bigger opportunities with bigger wins that could work out for IAC. That’s been a pretty important one. Also, the willingness to allow yourself to be challenged, to challenge others, and to be comfortable in that state of constantly challenging and being challenged. I don’t ever have any problem disagreeing with our chairman on anything we want to disagree on, nor certainly does he with me. That gets us along with all of our colleagues.

That I think gets us to better answers because if you just start with one and everyone agrees or doesn’t challenge it, then you don’t explore the nooks and crannies of it in a way that allow you to prepare better for the future or better for thinking about what could go wrong or things like that. That challenging culture is really at the essence of getting to better answers I think. Those are some of the important ones, but there’s a lot.

Jonathan: Speaking of thinking big, in August of 2020, you announced a billion-dollar stake in MGM. It’s now May 2021 and that investment, using share prices, increased by about 128%. You get shown deals every day and you obviously pass on most. I’d love to hear how you sourced the idea and what gave you the confidence to give it the green light.

Joey: MGM in particular was a period where we were hair on fire looking at opportunities [00:06:00] knowing that we had a very short fuse because this was March and April of 2020, no one knew what the future looked like, everyone was scared and our businesses were in fine shape. Some businesses declined meaningfully for a short period, but we knew we had a very strong balance sheet. We knew we had the ability to get to the other sideway. As we do always believe that, ultimately, things come back to normal relative to challenging situations.

We said, “We have a very short window to deploy capital here. Let’s make sure we don’t miss this window.” We were looking at ideas round the clock in that period to try and figure out where to go. One thing we realized early was that buying an entire company in that window was probably impossible. Boards of directors weren’t meeting in that window to say, “How do we sell the company?” The only ones that were, were ones who were truly out of money, truly bankrupt, or at a significant risk of near-term bankruptcy. We looked at some of those but didn’t see ones that fit.

We realized that if we were going to put a lot of capital to work in that window, it would have to be likely through public companies and minority investment public companies. In that context, we looked at ones that didn’t have a control shareholder where we could be a meaningful shareholder and where we thought we could add value in the company. Also, ones that were clear leaders in their category with very clear asset value and enough capital to get to the other side, whether their own capital or capital we could contribute. That actually narrowed the field pretty quickly.

Among those, MGM was an idea that I think originated with somebody from our board, Alex von Fürstenberg, who had been talking to somebody else [00:08:00] about the idea. I think we had talked about it a few times in passing, but that one was something that we started to get excited about. I think he was, if not the catalyst, certainly a meaningful catalyst in it. We were looking at that in the context of all the other things we were looking at and as we do with every idea, we went through this process I was referring, which is taking apart the idea and figuring out all the reasons why it wouldn’t work.

Could they run out of money? Would the world change in some meaningful irreversible way? All these things you go through and then get what they were doing strategically. At each step, we didn’t find a blocker. In fact, we found more exciting opportunities, which was the sum of the parts thing, which was something that we’re familiar with. They had, basically still do, three different public companies under the same umbrella. They also had this really interesting theme that’s been relevant for us, which is an offline to online migration through a joint venture they have called Bet MGM, where they are one of the top three players in the US for digital gaming which is a business that’s a multi-billion dollar market today probably be 10x bigger 5 years from now, somewhere in that neighborhood.

You’ve got a market, you’ve got a leader in a very established category with great cash flow, which is I think some downside protection, then you’ve got a digital upside opportunity which is just a huge growing category with tailwind and a leadership or a potential leadership position there. The combination of those two things, which was the cash flow and downside protection plus the upside optionality, was really all we needed to proceed. You add to that a seasoned, solid, strong management team, they just had a new CEO, but a [00:10:00] person who had been in the business for an eternity and who knew it backwards, forwards, upside down, and sideways.

That was a winning formula for us. That has, so far, worked out very well, very quickly. Probably we’ve joked internally, I’ve joked a little bit dangerously, which is generally to create a billion and a half dollars of value, we’ve had to work for years and years, decades, making mistakes harrowing moments, all the things that you do to get there, which are very rare. This one happened in a few months. We didn’t have to do much work at all. The management team on their own did all of that. We were just, sitting back observing.

Jonathan: How did you come up with $1 billion? I think you had about $4 billion of cash on the balance sheet around that time, roughly. Did it just sound like a nice round number or was there just a capital allocation decision there?

Joey: It was two factors. One, it was a little bit of nice round number of us saying, this is about in the neighborhood of what we’re comfortable with, but the other big factor was we were buying in the public markets. We could buy up to 4.9% quietly and then our goal after that was to buy as much as we possibly could before we had to disclose. I think it ended up being a little bit more than a billion, but a billion and change we put in and that got us to 12%. I think they had 10 days to buy– I can’t remember how it works. You have 5 or 10 days to buy, and we bought as much as we possibly could in that time, which got us to the 12%, which ended up being somewhere in the neighborhood of a billion.

Jonathan: You think MGM is more of an attractive opportunity, even though the valuation has gone up now that you have certainty over COVID vaccines or as much certainty as you can, as it was when you bought it, obviously at a much lower price, [00:12:00] but you had that visibility that the world’s not going to end?

Joey: Yes, absolutely. MGM, I think they said last quarter, they had bought back some of their own stock. That’s, I think, a testament to the answer to your question. Yes is the answer. Two things have worked out probably better than we thought. Number one, the pace of the recovery. We always believed it would recover and we always believed they have enough capital to do that, but the pace of the recovery has been faster. Two, the pace of acceleration at BetMGM in capturing share. Now, there’s still a lot of unknown at BetMGM.

Most significantly, all the businesses in this category are losing an enormous amount of money and continuing to lose an enormous amount of money because it’s very competitive, it’s hard to acquire customers, it’s expensive to acquire customers. I think MGM has some unique advantages that they’ve been successfully leaning into. Nonetheless, it’s expensive. There’s still a lot of unknown as it relates to what happens when all of this spending shakes out or settles down. For now, taking real share in what is a huge and growing category.

Our thesis was that the offline and the online work together, that they both enhance each other. In some categories, online destroys offline. In this category, I think online enhances offline. One of the best examples of that was the state of Michigan, it’s the state where MGM has the best property in the state in Detroit. The MGM was at the beginning, other [00:14:00] states we’ve been late joining, this one was at the beginning. The combination of being there from the get-go with a physical property, and the success that we’ve seen there demonstrated how this whole ecosystem can work together in MGM’s favor.

I think that was really, really compelling. That a little bit validated the thesis, probably more than a little bit validated the thesis and that’s been a positive too. When we look at it overall, I think we feel stronger now than we did going in.

Jonathan: In your letter, right after the stake was announced discussing the deal, you left it pretty open-ended on how you would assist MGM. What have you been doing to help? I know obviously, you’re on the board as well — You obviously have great expertise on internet-related businesses. Are you actively engaging with them?

Joey: Very much. I had a call with them last night. Wherever they need us is the answers to specific examples, we’ve trying to help with talent. We’ve helped with sourcing or recruiting some folks. With some of the technology questions that MGM needs to answer for itself and also through the joint venture where and I see employee has joined the board of the BetMGM joint venture. With ideas and direction and helping with the storytelling, all that we’re trying to be helpful with, but we’re not doing anything really ourselves.

We’re passengers here with a team that’s very capable and doing well, doing it all on their own. It’s just us, we’re here to help when they need us and whenever they call, which they do sometimes, we [00:16:00] chip in.

Jonathan: You’re about to spin off Vimeo I think this week or so. Right now the most valuable piece of IAC after the spin-out will be your stake in Angi, your cash, Dotdash and obviously your MGM stake as well. You have a lot of lesser-known companies under the umbrella. Which are the ones that you’re most excited about that investors really should be paying more attention to?

Joey: I really am excited about all of them. If I want to pick out some that you haven’t mentioned that are fun right now, you take one called Turo. Turo we’re the largest minority shareholder, but own a meaningful stake in the business. I’m on the board along with my colleague Mark Stein. The businesses in a fantastic macro situation right now, which is, they’re in the business of peer-to-peer car sharing. If you think about Airbnb as it relates to hotels or vacation homes. Turo does similar for cars.

As a owner of a car, you can generate income from your car and as somebody who needs a car, you can get the most unique set of car inventory anywhere from Turo, generally at a pretty attractive price too relative to the rest of the market. What’s happening macro is two things that are really helping the business, besides the general situation which is Turo’s a much more engaging experience, much better experience. Once you use Turo instead of a traditional rental car, you really don’t ever want to go back to a traditional rental car. [00:18:00] What’s leading to a lot of discovery right now is, number one, there’s a lot of more, it’s called local mobility.

People are less getting on planes. Airplanes are starting to recover, but still even domestic travel on airplanes is still down, so people are taking cars, they’re taking cars for trips and sometimes they use fun cars for trips. That’s really helping Turo. By the way, even in that context, the rental car companies are based in airports. When there’s less people in airports, we don’t need the airports to operate our cars, they are spread out all over the place. The airports also all want to take a tax on the consumer to use cars in airports. We, fortunately, avoid some of that infrastructure by being a different kind of company.

Long-winded, the two macro things that are happening, one is the local mobility, the second one is that because during this crisis, a lot of the car companies sold off their fleets, and now with the chip shortages, the OEMs can’t make new cars, they can’t replace those fleets. You see these stories about the rental car companies charging insane prices for access to cars because the supply and demand aren’t lining up. We have supply and we can grow our supply. We don’t need to go to the OEMs and buy 1,000 of the same car at a time. We’re finding this all the time. Somebody whose operation is working picks up a second car.

Sometimes they buy a second car, sometimes they get a second car from their sibling or their brother-in-law, or father-in-law, or somebody who’s not using a car or who only use the car part-time. They realize that this is a yielding asset and that all these things are unused and they can do it. The business is seeing fantastic growth right now, which is a lot of fun. I think the way it’s transforming [00:20:00] the categories, something that’s going to be very– It is already and will continue to be something that is very beneficial for consumers. That’s a fun one, but we’re, again, minorities there.

We’re also in this category that I think is fascinating, which is matching temp labor with employers. This category lately has gotten a lot of tangential noise because of what’s happening with stimulus and what’s happening with unemployment benefits, and whether people are going to work or not in these light industrial jobs. What this platform does is it matches workers with employers. That traditionally happened, really still today, almost entirely offline. There were resumes, there were interviews, there were phone calls, there were literally physically going to pick workers up at a certain location and move them to another location.

Now in a small way, because it is still very small, but I think if you fast-forward a few years, then we’ll all be down with software, it’s just a better way of doing it. Knowing whether somebody is available to work, knowing whether somebody is proximate to a work location, knowing whether somebody is commute could be half-hour shorter, knowing whether their commute could be a few dollars cheaper. All these data points, knowing their propensity to show up on time, their ability to operate a certain kind of machine. Most of those things are actually relatively binary.

There’s not a huge amount that’s accomplished in an interview in jobs like that. You’re qualified for the work, you’ve done the work and you’ve either demonstrated or not an ability to show up and show up on time for that work. Software is going to be better at judging that than people are at judging that. That’s the idea with this platform is to match the workers with the work and really help the workers [00:22:00] in that context get better jobs, better-paying jobs that are closer to their home, that are more convenient for whatever they need to accomplish and getting rid of a lot of the hassle that really adds no value in that ecosystem.

We’ve got one business doing that in the light industrial space and we’ve got another business doing components of that, not in the same way, in the healthcare space. I think that it’s a pretty interesting category for us. That’s a fun one.

Jonathan: IAC is known for taking businesses, as you mentioned just now, that are primarily currently conducting most of their business offline and transitioning them to online. You’re doing with those businesses that you just referenced. You did it with Ticketmaster, Expedia, Match Group, Angi. Are there really any major categories left for IAC to enter that haven’t meaningfully transitioned from offline to online?

Joey: I thought for sure we’d be out of gas on this strategy by now or five years ago and there’s still a lot more. There’s the one we were just talking about temp labor. It’s almost entirely offline right now. Even Angi is probably still 10%-ish online, definitely less than 20% online. Healthcare is another huge one. We’re basically nowhere in healthcare other than a bit through this employment business. Healthcare is still significantly offline. Food has only in the last few years moved online. The pandemic was a big catalyst for that, but food just probably over the last three years moved massively online. It was otherwise offline.

Offline to online is a little bit– We still talk about it and it’s still, I think, a great way to look at it, but it’s a little bit old news in the [00:24:00] sense of what does offline to online mean anymore? There are different evolutions of online. Another big theme for us has been in a few of our businesses that we’re in that we’ve considered entering is the first amazing moment in going online, you might remember, but most people probably don’t, is this thing of there’s a list of all the available information online. That was transformative when you could find all the information, whether that was in travel or whether that was in ticketing or whether that was just in search, with Google offering you 10 billion results on any query.

Now, what’s happening is, just having the information is not– that’s obviously table stakes. In fact, that can get annoying. What you really want is the curation. You really want to go down to one answer or a couple answers and that curation is a whole other evolution in these businesses where you see disruption from the person providing the lists or the entity providing the list, the entity providing the match and, ultimately, the entity providing the transaction. In all of our businesses, probably Angi most pronounced is, we’re trying to enable that transaction online. That’s another evolution.

Jonathan: As I mentioned earlier and as well-known, you’re about to spin off a Vimeo. You have about $3 billion in cash. Do you have a preference of how you’re going to use it? Do you anticipate any of your current businesses needing a lot of cash, or you think it’s going to be spent on acquisitions? How do you see your use of capital going forward?

Joey: It’s probably not likely a huge amount of capital in just P&L losses. I do think one thing we have been doing with Angi and probably will continue to do is reinvest profits in Angi, but probably not. [00:26:00] Not likely going below zero in those businesses to reinvest, at least not a significant amount of cash into those businesses. We’ll invest into businesses and reinvest P&L, but I wouldn’t say materially more that way. That really leaves acquisitions or new acquisitions, acquisitions in our existing categories, or acquisitions of our own business, which is another word for share repurchases.

We’ve gone through periods where there was after the 2008 spinoffs where we span off four businesses in that period. I think we bought back over a few years basically half our shares. That’s one option. Another option is getting into new businesses and buying more businesses. I think both are possibilities and both are something that we analyze pretty regularly and we’ll continue to analyze regularly.

Jonathan: I guess when Anjali, who is currently leading Vimeo, came to you when it was a much smaller company with a new vision for it, you ended up plowing a lot of money into growing it to where it is today. What gave you the confidence to aggressively invest in that business?

Joey: The big thing that Anjali did was, she convinced us that it was– she really made the case for it being a much larger market than we originally thought. With the tools business, the services business, software as a service business had been Vimeo’s business for a very long time. We thought it was a small cottage business and we needed a really a big ambitious business. That’s what led us into the entertainment business, building our own streaming service. We knew that it was a big market, there were some big players in that market, eventually [00:28:00] ended up being basically every player in that market, but there were some big opportunities there.

What Anjali showed was that, actually, the market for people that needed those services were not just the software as a service video software as a service, were not only the most highly talented filmmakers, which was the bulk of Vimeo’s paying user base at one point, it was really anyone who could use video in their business. When we realized that, it became worthy of significantly more investment and significantly more acceleration. That’s what led to certainly the next $300 million of capital going into that business under her leadership.

Jonathan: For every Vimeo grand slam success, I imagine there has to be a lot of failures. How do you know when it’s right to walk away from an investment? You walked away from the streaming part of it and with the benefit of hindsight that was a great move because you have some deep-pocketed players. How do you know when to walk away?

Joey: The streaming business never really made it out of the crib or the womb or something if we keep going with the analogy. That was relatively easy. We’re investing in things constantly. When you see some sign of traction, you keep going, and when you see no traction, you pull back. You have to think about it differently. The way we think about it is, it certainly ties to the scale of the business. We have a big business, take Ask.com for example. We bought Ask Jeeves at some point. We bought that business for a billion and nine and at that time it was doing about 75 million EBITDA. [00:30:00] There was no question that we lost the search battle.

We lost that probably not that far after we bought the business, we lost to Google. Google was certainly winning when we bought it. Google was probably winning to a greater degree than we even realized when we bought it. We lost that. Instead of pulling out of Ask because there’s not really an easy way for us to do that as the owner of the asset, there weren’t a lot of people interested in buying it at that point and there wasn’t really a viable path to selling it. For us, it was, “Well, we have to make this business work in a different way, so we have to reinvent.”

We don’t usually have the option. For example, as a passive investor, you could buy something under a thesis, the thesis doesn’t work out, you sell it the next day. That’s not available for us. We may buy something, own something, we were trying and it’s not working, well, then we try something else and then we try something else and then we try something else until we find something that works. We did that with About.com, we did that with Ask Jeeves, we did that with basically every single one of our businesses. We’ve disrupted ourselves and tried something new rather than pulling out completely.

We don’t usually have the option available to pull out completely. We can pull out of a strategy completely and we could do that frequently, and we can pull out of something small, but if it exists as a business and it had a reason to exist as a business, then we ought to be able to pivot it and change and adapt and explore new alternatives until we find the thing that’s working. That’s on us to do that. We don’t really give up or cut things loose in that context.

Jonathan: Just want to focus a little bit on Angi, where you own roughly 85% of the company, [00:32:00] You’re making a big bet on fixed price services. It’s really complicated trying to figure out how to charge for jobs, sight unseen across different markets. How close are you to getting this right in terms of execution? How much further do you need to go? It’s really hard.

Joey: It is really hard. I think we’re close in the sense that we’ve proven it in certain parts of the market and far in the sense that we haven’t proven it in other parts of the market yet. You always learn more things good and bad as you scale further. You have certain assumptions on your ability to automate things. Sometimes you find you can do more things that you didn’t realize you could automate, and sometimes you find you can do less things that you were counting on to automate. We’ll go through those realizations over time, but if you focus just on the homeowner and the homeowner experience.

We’ve determined with certainty that for the vast majority of homeowners, when they get the full experience, they’re going to be happier. Full experience means you go online, you find the service you want, you pay for the service you want, that service is completed, and you’re done. You skipped the step where you have to negotiate, you skipped the step where you have to evaluate different providers for the service, and you skipped the step where you have to chase the person down to show up or finish the job or all that stuff. That is really a magical experience.

When you know you can deliver a magical experience relative to the incumbent, then everything else from there is just engineering to optimize that magical experience. Once you’ve seen the magical experience and delivered the magical experience, then you know the direction you’re headed with very high confidence, and you know there’s [00:34:00] no turning back from that direction. All you have to do at that point, I say all you have to do like it’s easy, it’s very hard, but all you have to do at that point is optimize. That is the phase that we’re in right now.

We talked about this how we change frequency. If you’re coming in and doing a fixed price job, what we call now Angi Services, if your first experience is an Angi Services job that gets fulfilled, your frequency, with a couple of other things built into there, change your frequency by 4x. That is transformational. I allegorize that to a bunch of other experience that we’ve admired, like Amazon Prime. When I first signed up for Amazon Prime many years ago, I remember saying, “Well, we get a package every now and then, and we like Amazon. I feel like I know that it’s $10 to ship something, so if I ship a few things, maybe one thing a month, it’s going to work out that we’ll be close enough with this two-day shipping.”

What happened is, we went from that to, we have a package from Amazon at our house four times a week, probably at least. The transformation was that you could rely on it. Once you can rely on something, then your behavior changes meaningfully. I believe that that same opportunity is available within home services. Right now, the average person does six to eight jobs and we get a little under two of them. I think the right number of jobs could be a multiple of that. Our portion of those could be also a multiple of what it is right now00:35:48]. That’s the behavior that we’re looking for.

We’re starting to see some of the early signs of that. That leaves me pretty optimistic about it. That’s why we’re putting in the [00:36:00] level of capital that we’re putting. I think that the faster we go, the better. Meaning a lot of these gains, a lot of these marketplaces are about building up liquidity on both sides of the marketplace. You got to keep the service professionals engaged and happy, and you got to keep the homeowners engaged and happy. The best way to do that is to keep more volume moving through the system. That’s what we’re trying to do right now.

Jonathan: Right now for Angi, your take rate or the amount Angi receives from a job, I think it’s a little less than 10% for the fixed price services. If you look at a company like Uber, they get roughly 20% or so. Is achieving a higher take rate over time realistic?

Joey: I’m not sure you’re right on your estimated take rate on the fixed price services. It’s going to be higher than that. The answer on take rate overall is yes, I do think it goes up over time because I do think we add incremental value over time to the service professional. We can actually start to make their operation more efficient and save them real costs and share in the savings with the service profession. You may not need a receptionist or a calendar person to be making or booking the calls, or a salesperson to be going out and doing the sales.

You could be more efficient with just people doing the work, and by the way, people doing the work in a finite geographic space, which saves on travel time and things like that, optimizing the schedule, optimizing the payments, not having to do invoice and collections, and things like that. You take a lot of those nuisances out of the equation for the service professional, you can start to justify a higher take rate because everyone’s doing better. The loss there [00:38:00] is the inefficiency and the unpleasant part for both sides. That added happiness is generally going to be added opportunity to share in the economics.

Jonathan: IAC is famous for not holding things forever. You let them go and break free. I’ve always thought that a major home improvement company like Lowe’s, which you do have a partnership with Angi, should own part of. I think it makes sense for both sides. In your mind, does it make sense for Angi to be a standalone, or would it be better to partner with a larger organization, or you’re just trying to achieve what you’re trying to achieve?

Joey: I always default to we’re on our own. We’re always open to things. If somebody calls and says something that makes sense, we certainly listen, but our mentality always is and always has to be we’re on our own forever. You’re right that we’ve spun off a lot of businesses and plan to spin off a lot more businesses. Our philosophy, when we get into something is we own it forever. Spinning it off doesn’t mean we don’t own it anymore. It just means our shareholders own it directly. Same owners before the spin as the owners after the spin.

Now, in reality, of course, some people trade in and some people trade out, so it’s not going to be all the same owners. Our thought is, when we buy something, we buy something to own it forever, we buy something for our shareholders to be able to own it forever, and we do that really efficiently. That forever mindset has been a massive competitive advantage for us, in that, very few other people operate with that mentality. [00:40:00]

Jonathan: No, absolutely. Short-termism is rampant. I know we’re running out of time. I just wanted to touch briefly on Care.com. You bought it not too long ago. Before you bought it, the site had some major safety issues which was profiled in a Wall Street Journal story, which I guess gave you the opportunity to purchase the company. They had a lot of hard problems that they needed to address. What gave you the confidence that you could right that ship?

Joey: A similar situation, in that, we looked at the Care’s market position, which they were, I don’t know, 30x the next competitor on audience. They were the default brand in the category, based on the genericness of their name, but also the brand equity that they had built in that area. Is a very large category, which we felt and we’ve been at least right on this part is that the category has a natural tailwind to it, not just offline to online migration, but also more of society feeling a responsibility to help in care, childcare, and senior care.

We’re seeing this on the enterprise side with the growth in the enterprise business at care, and we’re seeing this in government in the discussion in some of the infrastructure bills that are coming out around care. We’re seeing the necessity of this in what’s happened to the workforce, the makeup of the workforce over the course of the pandemic, and particularly women in the workforce. Now, they’ve borne much more of the brunt of childcare than men in the workforce. People are realizing, enterprises are realizing, government’s realizing this is a problem that we have to solve.

We looked [00:42:00] at that combination of things and said, “This is a really attractive place to be.” Generally, our view is that mistakes are fixable, the company made some mistakes in the past, those could be fixed. I don’t think that they fundamentally undermined the principle of what could be accomplished in that category. I think they just made some mistakes and we had the ability to work on fixing some of those. I think we made progress on– It’s impossible to be perfect, but I think we’ve made progress on a lot of those. We’re seeing that come through in the numbers a bit.

Jonathan: Has the pandemic changed the company’s prospects in your opinion?

Joey: Yes, it has. In a business like Vimeo, that came through in real-time where growth rates tripled, or whatever, overnight. In care, it’s perhaps an even bigger impact, but slower because it awakened the world to our responsibilities in helping with care. Now people are seeing that that needs to now translate into the business and people engaging with the right product to solve these problems. The spotlight on carrying the responsibilities around care is there in a way that would not have otherwise come. That’s going to, I think, be really important to the growth of that business.

Jonathan: Joey, you’ve been more than generous with your time. I want to thank you for being on the show and telling us more about your fascinating career as well as your vision for IAC and Angi in the future. We look forward to watching IAC’s and Angi’s progress. Again, thanks for being on.

Joey: Well, it’s my pleasure. I’m looking forward to all that too. I hope to see you again.

 

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Since 1975 we have been producing independent research on intrinsically undervalued companies across the market capitalization spectrum and in a wide variety of industries using a business person’s approach to stock market investing. To find out how we can help you with your research needs please click here

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Jonathan Boyar Discusses Warren Buffet’s Annual Letter

Jonathan Boyar was interviewed on Yahoo Finance where he discusses Warren Buffet’s annual letter.

 

 

 

 

 

This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by Boyar Asset Management (“Boyar”) or its affiliates. Past performance does not guarantee future results. This material is as of the date indicated, is not complete, and is subject to change without notice.  Additional information is available upon request.  No representation is made with respect to the accuracy, completeness or timeliness of information and Boyar assumes no obligation to update or revise such information. Nothing in this video should be construed as investment advice of any kind. Consult your financial adviser before making any investment decisions. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information, and Boyar Asset Management and its affiliates assumes no obligation to update or revise such information. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable.   Past performance does not guarantee future results. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified and Boyar Asset Management or any of its affiliates is not responsible for third-party errors.  This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research.  Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Boyar Asset Management, its employees or affiliates may own shares in any of the companies referenced in this email.

Any results mentioned, do not necessarily represent the results of any of the accounts managed by Boyar Asset Management Inc., and the results of Boyar Asset Management Inc. accounts could and do differ materially from any of the results presented. While the results presented show profits, there was the real possibility of a permanent loss of capital. This information is for illustration and discussion purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Boyar Asset Management Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Boyar Asset Management Inc. at (212) 995-8300 with any questions.  Clients of Boyar Asset Management own shares of Berkshire Hathaway. 

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Jonathan Boyar on GuruFocus’s Value Investing Live

Jonathan Boyar gave a presentation for GuruFocus’s Value Investing Live series.

Jonathan discusses:

  1. The Boyar Value Group’s investment philosophy
  2. How we uncover intrinsically undervalued companies
  3. The investment case for Madison Square Garden Entertainment & Madison Square Garden Sports
  4. Two household names he believes are currently selling at attractive valuations

 

 

Transcript of the Presentation:

[00:00:40.080]

All right, welcome, everyone, to Value Investing Live today, I’m pleased to welcome our guests, Jonathan Boyar. Jonathan is president of Boyar’s Intrinsic Value Research, an independent research boutique established in 1975 that counts some of the world’s largest sovereign wealth funds, hedge funds, mutual funds and family offices as subscribers. He is also a principal of the investment manager, which has been managing money utilizing a value orientated strategy since 1983. Mark Boyar started publishing independent equity research on intrinsically undervalued companies in 1975, which led to the establishment of Boya Asset Management in 1983.

[00:01:21.480]

Defining intrinsic value as the amount paid to stockholders of a business is liquidated or sold. Boyar Asset Management remains true to Mark’s vision by specializing in equity securities of intrinsically undervalued companies. Their analysis of financial statements is driven by economic reality, and clients see profits as the markets reflect true value. As always, to all of our viewers out there, please feel free to post your questions and comments in the chat throughout the presentation. But keep in mind we will hold all of them until we hit the Q&A there at the end.

[00:01:53.940]

And without further ado, I’ll go ahead and hand things over to Jonathan so we can begin his presentation. Thank you, Graham. Much appreciated. And thank you to yourself and Charlie for inviting me. It’s always an honor. I know I spoke a few years ago at the Guru Focus conference and, you know, I was supposed to speak this year live, but obviously that got derailed due to the coronaviruses. But I truly hope to be there next year when things hopefully get back to some semblance of normalcy.

[00:02:29.130]

So I guess let’s start the title, my presentation, the Dolan Discount Opportunity or Value Trap? plus other opportunities. So I guess before starting this presentation can be downloaded by going to the website address on the bottom left hand of the screen. We’ll also be posting you always can follow us on Twitter @ Boyarvalue. So in today’s presentation, I’m really going to do three things one, give a brief background on the Boyar value group to discuss how we identify intrinsically undervalued companies.

[00:03:10.500]

And then talk about two Dolan controlled entities that, in our opinion, are selling at significant discounts to our estimate of intrinsic value, as well as to other companies that are household names that we currently find attractive. So here’s the for the lawyers, full disclosure of both myself. My clients own shares in all the companies I present today. I don’t think you would want it any other way. So who is the Boyar Value Group? This is a family run firm, it was founded by my father, Mark, in 1975.

[00:03:44.770]

To really be a research team looking at intrinsic companies through a different lens, what would a knowledgeable acquire pay for the business as opposed to what is a given company going to earn next quarter or next year?

[00:03:59.680]

And we’ve morphed into really two businesses. We have a research division where we sell our research on a subscription basis. We also have a money management division where we manage money for both individuals and institutions, large insurance companies, all sorts of different vehicles utilizing this really in-depth research. So we just kind of two sides of the house that are that are related. So first for your research, as Graham mentioned earlier, we have an institutional research service, we have some very interesting clients, I would say some of the world’s leading investors or clients of ours.

[00:04:43.770]

And it’s something we’re quite proud of. And we think, quite frankly, this gives us makes us better investors. And then we, as I said earlier, utilize these ideas for our Boyar Asset Management clients, include family offices, large institutions, and manage money through both pooled investment vehicles and separately managed accounts. So that’s a just a brief background on the organization, but what about the approach? How do we invest money and how are we different?

[00:05:18.270]

I think we’re quite unique. We consider ourselves businessmen trying to buy the proverbial dollar for 50 cents. We look at every company through the lens of an employer. A father is instilled in this into me since I was a little kid, that I’ve lived with this my whole life. If a company’s share price sells at a significant discount to what it’s worth over a reasonable period of time and I emphasize reasonable, the stock market will either reflect the true value of the company or an acquirer will.

[00:05:57.370]

So that’s why we look at everything through that lens, because we think it’s very, very helpful and it’s different than what traditional Wall Street does, where they just slap a multiple on a on a name. So we essentially take a private equity approach to public market investing. So people ask me, how do we come up with our stock ideas? We have a variety of ways that we uncover value which go over briefly in a moment. I’ll just go through each of these quickly.

[00:06:32.250]

The business value approach is one method. Wall Street has a way of making industries the flavor of the day, making stocks in that industry soar to ridiculously high heights and then go as high as they get. They get just as low. And that’s where we get involved. We Wall Street will sell indiscriminately. If a company is associated with a given industry, what we do is we look for industries that are out of favor that we think have long term potential to avoid value traps and look at the companies with the most competitive advantages, the best balance sheets and for valuation purposes.

[00:07:15.210]

What if similar companies been acquired for in the recent past? So that’s that’s one method. The hidden asset approach is probably my favorite method and one that we do utilize, and one of the reasons I like it so much is no computer screen in the world can replicate what we are doing. The only way to do this is just through rolling up your sleeves and doing your own due diligence.

[00:07:48.720]

So what is the hidden asset method? Accounting rules require the depreciation of certain assets that in fact often increase in value over time. So this leads to companies selling for significantly below them what they’re worth. And the best way to illustrate this is by an example. I’ve heard this story a thousand times by my father. This was the first stock or one of the first stocks we ever profiled in our research service, Tiffany and Company. So in 1975, when we started, you could have bought entire Tiffany franchise for twenty four million dollars.

[00:08:28.350]

The building it owned on 57th Street and Fifth Avenue, even during the depressed 1970s, was worth significantly more than twenty four million dollars. So you were essentially getting the business at less than zero cost, but the balance sheet couldn’t reflect this and the stock price languished. And we knew over time if we could stay the course, we would be fine. And you would realize and a few years later, Avon, which at the time was a highflyer, came in and paid a very handsome price for that for the company.

[00:09:06.930]

So that’s just a brief overview of the hidden asset method. The franchise approach is another area we love great consumer franchises, especially when they’re masked by corporate name. Believe it or not, this leads to valuation discrepancy because when you have a corporate name, people just put it kind of in the too art category or just ignore it. And the best example is one that we’ve recently or the last year or two profiled has done quite well for clients called Acushnet.

[00:09:43.540]

And probably half of you have no idea where Acushnet does, because it’s just so a corporate name, but they own Titlist golf balls and foot joint golf clubs. And you have to look at things through the lens of a portfolio manager and they see a Acushnet go across their stream screen and they.

[00:10:00.330]

Kind of might ignore it, but if the name of the company was title lists or whatever, the valuation discrepancy might type. So this seems very simplistic.

[00:10:12.630]

But believe it or not, it works. Fallen angels are another area that we like looking at, like looking at the once darlings of Wall Street that are now unwanted and unloved, just like in the business value method. Wall Street has a way of making stocks go to dizzying heights and then having them fall to levels that are just ridiculous. What we do is when that happens, we look at the business, we look, is this a sustainable business?

[00:10:44.910]

Is this a value trap? Is there something behind it? And if it is, it’s something that we might profile and eventually buy for clients. We also like looking at special situations, spin offs, or have been a fertile hunting ground for us. We like looking at companies post-bankruptcy as you can usually get things on the cheap that way, but not all spin offs are created equal. You have to be very, very careful and figure out why is a company spinning off a division?

[00:11:18.120]

We actually, a year or so ago did a comprehensive report discussing, you know, why spin offs over the last 10 years or so have significantly underperformed the market. But if you looked at certain factors, you could find success, potentially successful spin offs.

[00:11:39.620]

So our methodology, the business value method, fallen angels, special situations, that’s just the starting point. Equally important is a catalyst or a trigger. If a stock is simply just cheap, it can stay that way for a long time. That’s why you need a cabinet. You need to find the catalyst. Otherwise you’re going to fall to that value trap, which is what so many value. Investors make that mistake. So every time we come up with an idea, we have to come up with a story, a reason why is that stock going to go up over a reasonable period of time?

[00:12:19.220]

Barron’s once called my father Mark, the world’s most patient investor. I might not be as patient as him, but I’m pretty close and we’re willing to wait two, three, four years for our thesis to pan out, which I think gives us a competitive advantage. So what are our other competitive advantages? There’s a lot of money management firms out there. There’s a lot of research boutiques. What makes us different? I think the most important is our proprietary research publications, we sell for a lot of money to institutions, high net worth individuals, et cetera, comprehensive research reports, really, really deep dives that get sent to some in our, in my opinion, some of the world’s best investor.

[00:13:09.840]

And they’re not afraid to tell us when we’re wrong or to push back on our theories or our thesis, and that back and forth I think really helps us. Also, having to constantly come up with new ideas for our subscribers is really helpful. A lot of money managers run into the trap of just recycling their old ideas because we’re paid to come up with new ideas. We have to be fresh. We have to be on top of our game and constantly come up with these with these new with these new names.

[00:13:46.720]

Another competitive advantage for us is we invest in areas of the market that we’re under followed in industries that are out of favor, and we think these overall and micro-cap stocks and we have a separate microcap service called Boyar’s Microcap Focus, which has been extremely successful. We believe these overlooked areas of the market offer the greatest opportunities for outsized long-term returns. Things will be lumpy, of course, value investing certainly is currently out of favor, but we think over the long period of time this is a sound investment strategy.

[00:14:30.840]

We stood the test of time. My father started the business in the late 60s, started our firm in 1975, he still very much involved in the day to day operations of our business. And we’ve gone through terrible periods of time and persevered and survived. And company came out stronger on top. And we see no reason why this time will be different. And we’ve established a terrific team of seasoned analysts, investment professionals that have a diverse background, diverse skill sets, and I think one of the things that makes us different is we’re all generalists.

[00:15:12.310]

We’re all free to come up with ideas regardless of market cap, regardless of sector. And I think that gives us another competitive advantage, because sometimes there’s reasons to ignore, completely ignore a sector. And if you’re an energy analyst at a particular firm and there’s nothing to buy in energy, you’re just trying to justify your existence there. Our clients are our employees are our team members are free to come up with any idea, any market cap, any sector.

[00:15:46.990]

And we’ve done quite well by our research clients, which translates to our many of the ideas we publish, we buy for our money management clients, as you can see, I don’t want to toot our own horn, but we’ve done quite well both on the Boyar Microcap Focus and our traditional all cap product Asset Analysis Focus. Obviously, past performance is no guarantee of future results, as our lawyers make us say. But it’s you know, this is how we’ve done.

[00:16:21.130]

So now I’m just going to start talking about stock markets, as I mentioned, and we’re talking about the MSG complex and then talk about two other ideas that are more household names. Anyone who’s a Knick fan must think I’m crazy to want to invest in this company are controlled by the Dolan family. However, we have a very different view of the dolphins than most people, we’ve actually found them to be great people to invest alongside with. We’ve been following them a long time, as we wish we were shareholders in Cablevision.

[00:16:56.780]

And the Dolans tried to take the Cablevision private and admit to thousands, but the minority shareholders blocked them and thankfully they did. As since then, the Dolans unlocked a lot of value for shareholders. And one of the things that they did was spin out Madison Square Garden. And because of the valuation and the great assets that they owned, we decided to feature it in our February 2010 issue of our all cap research service. At the time of the spin off, MSG, had a lot of issues that were worrying investors and not too similar.

[00:17:37.070]

Today, the Knicks were terrible. Same as today. Then there was the possibility of an NBA strike and people were worried about heavy capital expenditures as they were upgrading the company’s flagship arena, Madison Square Garden. So there were lots of worries and it was greeted with skepticism. And that’s what gave us the opportunity as we saw fantastic assets. And as I mentioned before, you know, Wall Street doesn’t particularly like the Dolans, and they’ve been terrible if you’re a Knick or  Ranger fan, but as a shareholder, we’ve been quite happy with them.

[00:18:19.310]

When they when they controlled Cablevision, they had an industry leading dividend, paid a large special dividend, and they eventually ended up selling Cablevision to Altice at a price we never thought they would get. So that also demonstrates to us that they’re willing to part with assets and both. And we think one or both of Murphy and MSG’s could potentially be sold. The value of sports teams have exploded and you can see the value of the Knicks in 2009 compared to today, and the Rangers have gone up significantly over time.

[00:19:05.950]

And that’s for a variety of reasons, doing with the value of sports media rights and now sports gambling, which is a huge opportunity for them. So that’s part of the valuation. And I know it sounds strange to use the Forbes value, but that’s actually utilized quite heavily when during sports transactions. So here’s the current opportunity in April of this year, Madison Square Garden, which separated into two companies, Madison Square Garden Sports and MSG Entertainment, both of which, in our opinion, are trading significantly less than our assessment of their intrinsic value.

[00:19:52.470]

The Dolans control both entities through super voting shares, and while many people are hesitant to go into dual class shares, we think if you have the right partner, it’s something you can live with or we can live with. And oftentimes it gives you the opportunity to buy shares cheaply. So what is Madison Square Garden Entertainment? It owns the world’s most famous arena and other iconic venues. It has a really large cash position, valuable air development rights. That was an example of a hidden asset, as those are not properly reflected on the balance sheet and it’s also in the process of building the sphere.

[00:20:42.280]

So what is this Sphere? This is besides obviously covid, because this is an entertainment company, the sphere is what’s really weighing on shares of the company. The sphere is the venue of the future, which is going to be built in Las Vegas and most likely London. Building’s going to be about three hundred and sixty-six feet tall by five hundred and sixty feet wide, and we’ll have the world’s LCD screen, look it up on Google. Really cool.

[00:21:10.310]

The concepts. Terrific. I have no doubt that this will be a really cool arena if they’re able to execute. What gives us pause is the price tag at one point six dollars billion. That’s a very expensive proposition relative to the size of the company. In our opinion. They already have a great business. Why mess with a good thing? So despite the obvious near-term headwinds created by Corona, we’re quite bullish on live entertainment. This is an area that has grown nicely, and we think when the world gets back to normal, we think it’ll grow quite meaningfully.

[00:21:55.500]

There’s a lot of pent up demand. If you look at the company like Live Nation, you see that most of their tickets that they sold, pre pandemic, have not been refunded. People are just holding them for it for the future. I think once the world gets back to, you know, back to where it was, these venues will be eventually utilized quite nicely. And we believe there are multiple ways for shareholders to unlock value. MSG has a large cash balance.

[00:22:36.790]

It has a 350-million-dollar share repurchase program, remember, the entire enterprise value of the company is roughly half a billion dollars. They have valuable air rights that they could monetize. And we don’t think James Dolan likes being a public company, and we would not be surprised if he took the company private. It’s worth noting that Silver Lake, the private equity firm that is also in the live events space in a pretty big way, is an eight percent holder of the company.

[00:23:08.540]

Perhaps they partner on something in the future. Obviously, that’s speculation. But it wouldn’t surprise us. So here’s our valuation and how we got their current share price, I think is roughly sixty eight dollars and change. Discuss the risks which are coronavirus, but most importantly, the uncertainty over Las Vegas. And because of what’s going on in Las Vegas and the risks there, we took out about a 50 percent haircut to their cash balance over here.

[00:23:47.350]

I encourage you to go to this. You can just Google Jonathan Boyar, Forbes Dolan. It’s an open letter I wrote to James Dolan discussing why our firm thinks this fear is a bad idea. Maybe he  will listen to me. But probably not. The next company, Madison Square Garden Sports. Right now, you can buy the Knicks and the Rangers for essentially three point five dollars billion. You’re basically at these levels getting buying the Knicks and essentially getting the Rangers for free.

[00:24:25.200]

Plus, you have a decent cash board. They have E-Sports franchises and other investments. I think they’re going to be a big beneficiary on online gambling because of coronavirus. Everyone’s state budget is extremely stretched. And I think legalized sports gambling is just going to continue to flourish. And I think the NBA and MSG will all profit from this and as shareholders do it as well. It’s also interesting, and this is what we really look at and we try to get in the heads of the people doing these transactions that Madison Square Garden sports was structured as the parent.

[00:25:12.030]

This, from our understanding of the law, allows the company to be sold at pretty much any time without losing the tax-free nature of the spin offs. So right now you have two entities, Madison Square Garden Entertainment, Madison Square Garden Sports. And I think if the Knicks or Rangers or both ever were put on sale, there would be a line of billionaires around the block wanting to buy these things. And I think. It’s in our opinion, it’s kind of a question of time, whether it’s one year or two or three years, I don’t think James Dolan wants to own the Knicks and the Rangers.

[00:25:53.240]

Over the long run, sports franchises have gone up dramatically. He’s made a lot of money. He bought the Knicks for next to nothing. But he’s getting nothing but grief for owning these teams. And I think at some point he’s going to want to just end it. As I mentioned earlier, this sports rights have gone up in value really for two reasons. One, mobile gambling and two, live entertainment. Besides news, live sports is the only other place that people people watch live.

[00:26:31.980]

And the value of sports teams has continued to increase and there was a transaction just recently, look at Steve Cohen paid well over two billion dollars, in which two and a half billion dollars for the Mets, which is a mediocre team, and that’s baseball, when the team valuation for baseball are significantly less than that for basketball. And it just shows that when these trophy assets come up for sale, there will be buyers. And I see no reason why the same thing won’t happen for the Knicks and the Rangers.

[00:27:05.520]

And here’s how we got to our valuation for Madison Square Garden sports again at the end, it’ll have a link on where you can get you can get the presentation. So that’s the MSG  saga. Please feel free to email me with any questions later. And the next company is a name that everyone knows. It’s certainly a high-quality name that we think is very interesting. And Wall Street really hasn’t given it the credit it’s deserved. We came up with this idea in a recent issue of our research service and decided it was attractive enough to purchase for certain clients, as you know, Coke the largest non-alcoholic beverage company in the world.

[00:28:06.640]

Amazingly, their products represent two billion of the sixty one billion beverages served globally. And it switched its strategy in multiple ways over the past decade, it bought and then re franchise its bottlers and it took the company from asset heavy business to an asset like business. And this shift really helped with margins. But much of this improvement has been masked by the strong US dollar as most of their costs, their headquarters in Atlanta, our dollars, but there are a global company and their revenue is obviously many, many different currencies.

[00:28:45.350]

And as you are well aware, the world is shifting away from sugary drinks, so now they’re selling healthier beverages and for their unhealthy beverages, they’re kind of more packaging them as a treat and smaller packaging, which has helped increase margins substantially. And believe it or not, even with shrinking the packaging, they’ve been able to grow volumes every year by two point eight percent for the last 14 years, which is pretty amazing when you consider the headwinds facing that business in terms of sugary, the sugary snacks, etc.

[00:29:23.180]

. Coronaviruses obviously impacting sales for Coke, but we think Wall Street’s overreacting and much of his sales will come back and we think the operational improvements it a rerating of shares and believe they’re selling about forty nine dollars today. We think they’re worth probably sixty six dollars per share, which would be forty five percent upside when you include dividends. But even if the multiple stays the same, we still see 30 percent upside when you factor in dividends. While the stock certainly is cheaper, we think it offers a could get cheaper, we think at current levels and offers a very compelling risk for.

[00:30:10.830]

So the next company I’m going to discuss is another company you are all very familiar with Disney. My father always discussed how powerful the Disney brand was from an investment standpoint. But until I had children of my own and started to have to pay for all the Disney paraphernalia, trips, et cetera, I really had no idea what he was saying. Now I do. And Disney controls some of the world’s best properties, from Marvel to Star Wars to ESPN and of course, Mickey, Minnie and Goofy.

[00:30:48.720]

Disney has obviously been impacted due to the virus, but they have the balance sheet to withstand the shutdown of their business for a long time and we don’t think their overall long term business is going to change. You know, in prior covid, the box office performance was absolutely fantastic. They also bought Fox bring over them even more fantastic franchises like National Geographic, X-Men, Fantastic Four, Avatar, you name it, they brought it over. It was terrific.

[00:31:24.010]

But what we’re most excited about is Disney Plus, I have two young children. It’s the best six ninety-nine I spend. And this is in one way it has been it has actually helped them with this. They had thought that they were going to get 60 to 90 million subs for Disney plus by 2024. We’re obviously still in 2020 and they’ve already less than a year to pre after release, already have 60 million subscribers. This is much faster than Netflix.

[00:31:59.620]

Got to that number significantly. And we think this is a huge growth engine for the company. So using a sum of the parts valuation, we get to a one hundred and eighty three dollars per share, I think over time this could prove to be conservative, as I think that Disney streaming services is is quite powerful. And if you compare it to the value of Netflix, either Netflix is extremely overvalued or Disney is extremely undervalued or probably somewhere in between.

[00:32:35.960]

Well, I want to thank Charlie and the rest of Guru Focus for inviting me to participate. I hope to be able to join you soon in person and happy to answer any questions you might have. I’ll leave it open for questions. And just to let you know if you want a copy of this presentation, please go. Go here and we’ll have one sent to you. Feel free to follow us on Twitter. And one of the things I forgot to mention is I have a podcast that I’m very proud of called The World according to Boyar, and it’s something that you can listen to for free items.

[00:33:16.460]

Thank you. All right, well, thank you, Jonathan, for that amazing presentation. We’ll go ahead and jump in to some questions here. We do have a decent map built up over on you, YouTube, first and foremost. So, would you mind giving us an example of a recent special situation that you’ve been involved in after mentioning those in the presentation?

 

[00:33:38.990]

Yeah, I would be happy. Doing special situations are a really interesting and sometimes they can be quite frustrating, and you question yourself. But the one that comes to mind is that happened recently has to do with Qurate, which is a stock we’ve been following for quite some time. They own Home Shopping Network and QVC. It’s controlled by John Malone and John Malone, you know, good guy to invest alongside, but he does some kind of crazy thing, convoluted structures, et cetera.

[00:34:15.110]

And one of the things he did was recently he spun off too existing equity shareholders, a preferred yielding eight percent. The symbol, I think, is QRTEP. It’s eight percent through to 2031. But to give and it originally came out at one hundred and five dollars and quickly got down to the low, to the high 80s. And the reason for that and that that gives you over a nine percent yield when they’re comparable bonds were yielding seven, seven and a half percent.

[00:34:54.680]

And I think the reason for that is if you look at their shareholder base, their index funds or other companies that just couldn’t own the preferred, so they sold them indiscriminately. And that’s where active managers like myself can really take advantage of these situations. And that’s what we did. So it just to me just didn’t make sense. It quickly went from 88. I think now it’s back to 98. So you’re still below par. They can’t call it, I believe, for five years or so.

[00:35:30.660]

I think it’s an attractive security in this low rate world,

[00:47:55.110]

And we’ll keep things open here for a little bit longer while we do our closing. But any final thoughts, anything like that they’d like to put out there before we go ahead and close things out here?

No, I just want to thank you and Charlie for having me hereAnd if you have any questions, feel free to get in touch with me. I hope I answered your questions.

[00:48:27.780]

And, you know, thank you. Thank you again for having me. Definitely. And thank you for the great presentation and for taking the time to answer these questions. Our audience really does appreciate having guests on here that they can interact with and truly get involved.

They were great questions. I wish I could do it in person, hopefully next year. Absolutely. And for those out in the audience right now, a full recap video of this presentation, including the Q&A, will be available here shortly, both on our YouTube channel as well as on camera focused dotcom.

[00:49:01.290]

We hope everybody out there stays safe and stays healthy. And we look forward to seeing you next time with our next guests. So thank you again, Jonathan. And we are happy to have everybody here hanging out with us. Great. Thank you.

The statistical and other information contained in this presentation has been obtained from third-party sources we deem to be reliable, but we cannot guarantee its entire accuracy or completeness. If not noted, all sources of information originated/ contained within Boyar Research report.

The information presented is not intended to be an offer to sell or the solicitation of an offer to purchase any security or investment product. This presentation may not be published or re-distributed without the prior written consent of Boyar Asset Management Inc. Investors should bear in mind that past performance of any investments described herein are for illustrative purposes only and are not necessarily indicative of future results.

This presentation may contain, or may be deemed to contain, “forward-looking” statements, which are statements other than statements of historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. The future of investment results of the investments described herein may vary from the results expressed in, or implied by, any forward looking statements included in this presentation, possibly to a material degree. This material is for informational purposes only, as of the date indicated, is not complete, and is subject to change. Additional information is available upon request. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information and Boyar Asset Management assumes no obligation to update or revise such information. Boyar Asset Management is a SEC Registered Investment Advisor. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2 is available upon request or at  https://adviserinfo.sec.gov/

Boyar Asset Management, its employees and/or shareholders own shares in Coca Cola, Disney, Madison Square Garden Entertainment & Madison Square Garden Sports. The presentation represents the views of Boyar Asset Management as of September 30th 2020 and is subject to change at anytime without notice.

 

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The Boyar Value Group’s Case for Investing in Sports Teams

Jonathan Boyar was a guest on the Contrarian Investor podcast where he discussed the merits of investing in the public equity of certain professional sports teams.

Other topics included:

  • The Boyar Value Group’s investing style and examples of stocks we currently find attractive
  • Why the continued legalization of online sports gambling should make teams more valuable
  • Boyar’s view on portfolio construction
  • And much more…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by Boyar Asset Management (“Boyar”) or its affiliates. Past performance does not guarantee future results. This material is as of the date indicated, is not complete, and is subject to change.  Additional information is available upon request.  No representation is made with respect to the accuracy, completeness or timeliness of information and Boyar assumes no obligation to update or revise such information. Nothing in this interview should be construed as investment advice of any kind. Consult your financial adviser before making any investment decisions. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information, and Boyar Asset Management and its affiliates assumes no obligation to update or revise such information. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable.   Past performance does not guarantee future results. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified and Boyar Asset Management or any of its affiliates is not responsible for third-party errors.  This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research.  Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Boyar Asset Management, its employees or affiliates may own shares in any of the companies referenced in this email.

Any results mentioned, do not necessarily represent the results of any of the accounts managed by Boyar Asset Management Inc., and the results of Boyar Asset Management Inc. accounts could and do differ materially from any of the results presented. While the results presented show profits, there was the real possibility of a permanent loss of capital. This information is for illustration and discussion purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Boyar Asset Management Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Boyar Asset Management Inc. at (212) 995-8300 with any questions.

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Tobias Carlisle, Founder of The Acquirer’s Multiple, on how to incorporate deep value investment into your investment process.

The Interview discusses:

• What is The Acquirer’s Multiple® and why investors should pay attention to this metric

• What does deep value investing really mean and tips on incorporating it into your investment process.

• The importance of mean reversion

• Two deep value stocks he currently finds attractive. 

Bio

Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is the founder of Acquirers Funds, LLC.

He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.

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About The Boyar Family of Companies

Boyar Asset Management
We have been managing money since 1983 utilizing our proprietary in-house value oriented equity strategies. We manage money for high net worth individuals and institutions via separately managed accounts. To find out how we can help you with your money management needs please click here

Boyar Research
Since 1975 we have been producing independent research on intrinsically undervalued companies across the market capitalization spectrum and in a wide variety of industries using a business person’s approach to stock market investing. To find out how we can help you with your research needs please click here

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of October 3rd 2018 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.

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