The Arena Group (TAG) recently disclosed in an SEC filing that it expects to raise $30 million through an uplisting IPO on the New York Stock Exchange. The digital media business has never been profitable and doesn’t expect it to be in the “foreseeable future” – less than ideal with a market moving away from risky, high-growth companies to value stocks. But it still makes sense for the company to go ahead with the proposed stock offering. When executing a roll-up strategy, as TAG intends to do, the cost of capital and the ability to get deals done (think: exposure to a wider range of investors) are critical. Uplisting ensures that the company has access to the financing it needs to grow.
JWS’ Take: While you may not be familiar with The Arena Group, you probably know the company by a different name: theMaven. The group media network owns the financial news site The street and the exploitation rights to Illustrated Sports (Authentic Brands Group owns the famous sports brand). It currently trades over-the-counter under the symbol MVEN (~$158 million market cap). TAG will perform a reverse stock split (to increase the share price, as required by the NYSE) and formally change its name to The Arena Group Holdings with the uplisting.
When Maven first went public a few years ago, there were few, if any, pure play content companies — let alone digital pure play content companies – traded on US exchanges. This is largely due to the difficulties involved in building an audience cost-effectively. “The traditional monetization mechanisms for analog publishers were: [also] compromised when content went online,” Lake Street Capital Markets noted in a November research report.
But Maven took a different approach. It tried to grow on a local level and sought out writers who could gather an audience and then united them on a dedicated digital platform. In theory, the company could attract the eyeballs without relying heavily on paid search, which could help keep costs down as most of the writers were independent contractors working on a rev-share basis (as opposed to employees). . In the interest of full disclosure, JohnWallStreet was an independent contractor for Sports Illustrated between late 2019 and early 2020.
While James Heckman (former CEO and co-founder of Maven) and the decentralized journalism model have been heavily criticized by the media and blamed for Illustrated SportsWhen Wall Street faded from prominence in late 2010, he was intrigued by the approach. Mark Argento (co-founder, head of institutional equities and senior research analyst, Lake Street Capital Markets) explained that the existing digital publishing model that investors were looking for someone to come up with, or at least try to come up with, was failing. better system.
But Heckman and several other C-level executives left Maven in the third quarter of 2021, before the group could realize its vision (they’ve since launched a new venture called Roundtable). The company changed its name, called itself The Arena Group, and changed its strategy, “refocus”[ing] its branded content efforts, including its Illustrated Sports brand, led by CEO Ross Levinsohn, who took over in August 2020,” wrote Lake Street.
Levinsohn declined to comment on our story. But the company’s success in reintroducing the SI brand to readers (since the public response in late 2010) apparently played a part in the decision to double its premium labels and in-house manufacturing capabilities.
Lake Street, which has a buy rating and a $1.50 price target for Arena, believes a refocus on branded content was the right move, especially within the existing media environment. “We see significant acquisition potential, similar to the SPUN deal, for hidden acquisitions in existing verticals and larger acquisitions to build new verticals or ‘Arenas’,” the November note read. Connecting established brands to the TAG platform should be “nice contributors” and deliver “decent incremental margins,” Argento noted.
Given that scale is needed to make the traditional media model work, and capital is needed to make acquisitions and introduce new vertical markets, it makes sense that TAG would want to upgrade to a national exchange. Uplist companies to improve their access to public shares and expand their audience of potential investors. Very few institutional investors are able to buy bulletin board stocks.
Aside from mergers and acquisitions ambitions, a move to the NYSE should allow TAG to clear its balance sheet. Much of the existing debt will be converted on the uplist.
While Arena’s move makes strategic sense, trying to roll up disparate, underperforming media assets remains a risky proposition. “The question is, can they drive monetization and scale these models? can they get it? [the business] sustainable and material to EBITDA positive?” asked Argento.
The uplisting can generally be seen as a positive development for TAG and its shareholders. But it will come with more analyst coverage and consequently more control. That’s not necessarily a good thing for a company that has never been profitable and lost just a little less money in Q3 2021 than it did in Q3 2020 (widely regarded as the worst digital advertising market in history).
But TAG is better off trying to execute its strategy while on the NYSE than trading OTC or as a private company. That’s because if the company is successful, the cost of capital will fall and potential acquisitions will become more attractive.
Lake Street was not particularly concerned about TAG’s inability to meaningfully reduce last year’s losses. “Operating expenses were volatile given the higher professional fees resulting from the integration of the companies and the acceleration of SEC filings and account. Going forward, opex should be relatively fixed in nature, with significant leverage for the operating margin as the business scales,” the note said.
Market conditions are currently tough (see: red everywhere). TAG could therefore postpone the uplisting until conditions improve. But it’s reasonable to assume that the company will eventually get the $30 million raise. The executive team has a proven track record of raising money (see: a $30 million raise in Fall 2020), and it’s no longer the only pure play content company on the market. What was not a vertical company suddenly (see: Buzzfeed). We’ll see if there’s a success story.
