Company Overview
Angie’s List, Inc. (NASDAQ: ANGI) is a consumer review platform and marketplace (www.angieslist.com) for home services professionals. The company’s online tools allow members to research and purchase local services, as well as leave detailed feedback on the completed work. Angie’s has more than five million members nationwide and 55,000 affiliated service professionals. In addition, the company has amassed more than 10 million verified customer reviews. Angie’s is headquartered in Indianapolis, Indiana.
Products and Services
Angie’s generates revenue from both members and service providers, and offers a differentiated suite of products for each.
Members
Customers may choose between three membership tiers. Green members do not pay an annual membership fee and have access to all ratings and reviews. Silver and Gold members receive extra benefits such as customer support, quality guarantees, and complaint resolution. These memberships come with annual fees of $24.99 and $99.99, respectively,
Angie’s has more than 700 categories of home services, a representative sample of which is shown below:
Members can rate service providers on a letter-grade scale ranging from A to F. Criteria include overall experience, availability, price, quality, responsiveness, punctuality, professionalism, and other criteria depending on the service provided. Members are also encouraged to leave detailed feedback.
Angie’s deploys a variety of resources to maintain the integrity of its member reviews, including proprietary fraud detection technology and a team of quality control and certification personnel.
Service Providers
Angie’s offers service providers a large pool of members seeking reputable providers for home services. Service providers on the company’s platform with a Grade of B or higher are invited to complete the service provider certification process which includes a criminal background check, attesting to proper licensing, maintaining a company-verified profile page, and purchasing advertising from Angie’s. Certified service providers rotate among the first service providers listed in search results for a given category.
The company also has an e-commerce platform where service providers can market to members directly. These transactions are processed by Angie’s who receives a portion of the price paid as revenue.
HomeAdvisor Merger
Deal Terms
On May 1, 2017, the company announced that it had reached an agreement to merge with HomeAdvisor, a division of IAC/InterActiveCorp (NASDAQ: IAC). HomeAdvisor is the largest online marketplace for home services, and provides homeowners with tools and resources for home repair, maintenance, and improvement projects.
Angie’s and HomeAdvisor will form a new publicly traded company, ANGI Homeservices Inc. The combined business will maintain both the Angie’s List and HomeAdvisor brands. According to the terms of the transaction, shareholders of Angie’s may elect to receive either one share of ANGI Homeservices Class A common stock or $8.50 in cash. The cap on cash payments is $130 million and will be prorated based on ownership. Post-transaction, shareholders of Angie’s will own between 10 and 13 percent of the new company’s equity, depending on the number of cash elections.
For its contribution of HomeAdvisor, IAC will receive Class B common stock and will own between 87 and 90 percent of the combined company’s equity value, depending on the number of cash elections. Class A shares will possess one vote per share, while Class B shares will have 10. Accordingly, IAC will hold approximately 98 percent of the voting power.
Market Opportunity
IAC believes that the opportunity in the $400 billion U.S. home services market is significant. Below is the estimated market share for each company pre-transaction:
Source: Company Presentation
Evidence suggests that both homeowners and service providers are migrating to online platforms, and improvements in technology are improving the experience for both sides. The primary business case for the combination is to leverage Angie’s brand, traffic, and audience to accelerate the growth of the HomeAdvisor service platform. IAC believes that it could begin to monetize Angie’s traffic almost immediately by integrating new search functions to the existing site:
Source: Company Presentation
Finally, IAC believes that the combined scale of Angie’s and HomeAdvisor will improve liquidity on the platform (i.e. more users and ultimately more transactions), which will drive repeat business.
Pro Forma Financials
Potential synergies from the transaction range from $100 million to $250 million to be realized in the next 18 months. On a call discussing the transaction, IAC executives expected that many of these synergies would be realized within one year of the transaction closing, currently projected for October 2017.
The 2018 target adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the combined entity is $270 million, excluding one-time transaction costs (up to $100 million) and the write-off of deferred revenue. The combined entity will also target a five-year revenue compound annual growth rate between 20 and 25 percent and an adjusted EBTIDA margin of 35 percent.
First Quarter Earnings Review
Total revenue for the first quarter of 2017 declined 13 percent to $73.1 million, attributable to lower service provider and membership revenue. Angie’s indicated that these decreases were caused by certain technology issues which impacted service origination and renewals, and the creation of the free (Green) membership tier.
Operating expenses declined 21 percent from the same period a year ago to $69.6 million. The company saw declines across all categories with the exception of product and technology expenses. Angie’s reported quarterly net income of $2.0 million, as compared to a net loss of $4.7 million in the first quarter of 2016.
Cash provided by operations in the first quarter of 2017 was $4.2 million, as compared to $9.2 million in the same period one year earlier. At March 31, 2017, Cash and equivalents stood at $28.8 million, and the company’s net working capital deficit was $14.5 million.
Stock Influences
- Developments regarding the timeline of the proposed merger;
- Further disclosures regarding the projected performance of the combined entity; and
- Changes in the consideration paid to shareholders of Angie’s.
Risk Factors
- The proposed merger does not close as anticipated.
Stock Performance
As of May 5, 2017, shares of Angie’s closed at $10.71, up slightly more than one percent on the day, yielding a market capitalization of approximately $650 million. The past year for Angie’s stock has been uneven, ranging from a low of $5.50 in mid-March to a high of $10.97 this past week. After the merger was announced, the stock surged more than 60 percent. The May 5, 2017, closing price represents a 26 percent premium to IAC’s cash offer price of $8.50 per share.
Summary
The combination of Angie’s and HomeAdvisor seems like a natural way to grow both companies and capitalize on the massive market for U.S. home services. Management has created some lofty expectations, and it remains to be seen whether they can deliver the promised synergies and growth.
The cash offer from IAC represents a 44 percent premium to the May 1, 2017, closing price of $5.89. While this is well below Angie’s 2011 IPO price of $13, this is still a significant premium to the pre-transaction share price. Furthermore, the stock is now trading above the IAC bid price, and shareholders have the option to simply cash out prior to the completion of the deal.
The other option is to simply wait and receive shares of ANGI Homeservices. While shareholders of Angie’s will only own between 10 and 13 percent of the company, there is significant upside potential that could provide superior returns to either IAC’s cash bid or the current market price.
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