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May 24, 2023

Breakingviews: Activist Yelp review is worth hearing out

by Breakingviews.

Yelp has garnered another bad review – though this one may have some golden advice. Half a decade after another rabble-rousing shareholder launched a campaign at the $2 billion local review website, activist TCS Capital now wants Yelp to find a buyer or merger partner. Top of the list is Barry Diller’s home-improvement shop Angi, itself a recent creation of consolidation. While potential cost savings amid a tough market argue for a combination, a proposed $70 a share deal price might be a stretch too far.

TCS President Eric Semler wrote a letter to Yelp Chair Diane Irvine on Tuesday chock-full of disappointment and concern. Yelp’s stock price is down more than 30% in five years and the company trades at nearly 6 times analysts’ predicted EBITDA for the next 12 months, according to Refinitiv. That is much worse than less-profitable Angi, which is valued at around 13 times EBITDA.

Nonetheless, Yelp has grown revenue, which it gets mainly from advertising, for six consecutive quarters. In the first three months of this year, revenue rose 13% to $312 million – a much higher growth rate than Alphabet’s Google and Meta Platforms achieved. The trouble is that Yelp is a pipsqueak compared to Facebook or Google, where many people also go to get digital local advice and reviews. That is true of the $1.6 billion Angi, controlled by Diller’s IAC, as well. Given the risks of being a small fish in a big pond, the best outcome might be to join up, cut costs in marketing and sales to juice profit, and try to make the best of it.

But TCS’s $70-a-share valuation aspiration for Yelp is absurdly high, at more than double the company’s undisturbed share price on Monday. Take Yelp’s anticipated operating profit of some $138 million in 2024, according to Refinitiv data, then add an estimated $200 million in potential cost savings gleaned from slicing 10% of Yelp and Angi’s selling, general and administrative costs of nearly $2 billion. Once taxed at a standard 21%, the implied return on invested capital of only 6% looks light.

The devil may be in the details though. TCS is familiar with Angi: Semler won a seat on the board in 2016 and pushed for a sale with IAC’s Home Advisor. He clearly knows the business, and a lower price could make a deal work. While Yelp boss Jeremy Stoppelman has dueled with activists before, he may well find it hard to duck this review.

Context News

Activist investor TCS Capital Management sent a letter to Yelp Chair Diane Irvine on May 23 demanding the company explore a sale or merger with rival Angi, among other potential buyers. Yelp is a review website founded in 2004. Angi connects home-service professionals with consumers and is controlled by Barry Diller’s IAC. TCS holds more than 4% of Yelp’s shares. Fund President Eric Semler wrote that Yelp is “shockingly undervalued” and could be sold for at least $70 per share, a 115% premium to Yelp’s undisturbed price on Monday. “Yelp maintains an active dialogue with our shareholders and values constructive feedback on our business and ways to create value,” a spokesperson said in a statement.



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