On June 10 Emerald, the publicly traded company that runs trade shows including Surf Expo and Outdoor Retailer and owns Shop Eat Surf announced they were going to issue $400 million in convertible preferred stock.
Like every company in our industry, Emerald is impacted by the pandemic, and is seeing already existing trends in its trade show business accelerated. I discussed that in April in this article and won’t repeat everything here. I’m going to quote parts of the filing and press release describing the deal and comment on each quote.
Emerald “…plans to raise $400 million through the issuance of convertible participating preferred stock (the “Preferred Stock”) to affiliates of Onex Corporation (“Onex”), the Company’s controlling stockholder, and in a subsequent rights offering to the Company’s other holders of common stock as of the record date for the rights offering, which will be backstopped by Onex.”
Onex has $33 billion under management, so I guess they can come up with $400 million. Here’s the link to their web site if you’re curious about Onex.
At closing, Onex will acquire $263.5 million of the preferred stock. The other $136.5 million will be offered to the other shareholders but will be “backstopped” by Onex. That is, whatever part of the $136.5 million isn’t purchased by other shareholders, Onex will purchase. So, Emerald will get $400 million one way or the other. Once the deal is done. Onex’s ownership of Emerald’s common stock will “…be between 65.9% and 86.8% on an as converted basis depending on the extent to which other common stockholders participate in the Rights Offering.”
Emerald went public on June 13, 2018 when its stock closed at $20.87. It’s generally been in downtrend since then and closed on June 12, 2020 at $2.86. It will be interesting to see how much the other shareholders will be prepared to purchase.
“Each share of Preferred Stock will have an initial liquidation preference of $5.60, which liquidation preference is to accrete at a rate of 7.0% per annum, compounded quarterly, in-kind for the first 12 quarters following its issuance, and thereafter will be paid either in cash or in-kind at the Company’s option. Upon liquidation or dissolution of the Company, the holders of Preferred Stock are entitled to receive the greater of (a) the accreted liquidation preference, and (b) the amount the holders of Preferred Stock would have received if they had converted their Preferred Stock into common stock immediately prior to such liquidation or dissolution.”
Preferred stocks have the advantage of being senior to the common stock in the event the company is liquidated. Typically, they are also attractive because of the dividend they pay. That dividend has to be paid before any common shareholders can get a dividend. As you read above, there’s no cash dividend in this case for three years- you just get 7% more preferred shares. After that, Emerald can pay in cash if they want to, but they can also continue giving out more shares. The lack of a cash dividend is one reason I’m wondering how many other shareholders will participate.
The liquidation preference of $5.60 a share is what each preferred share would be valued at if the company were to be sold or liquidated. In this case, the shareholder has a choice and can alternatively get what would have been the value of the common stock they could have converted into.
“Shares of the Preferred Stock may be converted at the option of the holder thereof into a number of shares of common stock equal to the (a) amount of the accreted liquidation preference, divided by (b) the applicable conversion price. The initial conversion price of the Preferred Stock will be $3.52 per share…”
With a liquidation preference of $5.60 and the current stock price $2.86, there won’t be any conversion for a while.
There are also some conditions under which, after 6 years, Emerald can redeem all, “but not less than all,” of the preferred stock. But I’m guessing you’ve had enough of the intricacies of preferred stock issues.
What you should remember is that convertible preferred is safer for an investor than just putting the money in as common stock but offers them upside should the stock perform.
The investment is going to be used “…to repay outstanding debt under its credit facility and for general corporate purposes, including organic and acquisition growth initiatives. The investment also substantially buttresses Emerald’s existing liquidity position. As of June 9, 2020, the Company carried cash on its balance sheet of $68 million, borrowings under its revolving credit facility of $100 million, borrowings under its term loan of $529 million and had funded $24 million of its cancelled event liability which had stood at $72 million on March 31, 2020.”
When I read that, I focus on the part about improving Emerald’s liquidity position, something most companies are concerned with these days. I doubt this was an investment ONEX was anxious to make. The clause about organic and acquisition growth initiatives is intriguing. Maybe it’s just generic use of funds language. But if I take it at face value it implies that ONEX and Emerald believe, as they did when Emerald went public, that the company’s opportunity is still to consolidate a fragmented industry and that the role and popularity of B to B trade shows will be more or less intact.
Yet, if you look at the OR home page you see that the January and June 2021 shows are both going to be digital. A “booth” will cost brands either $2,500, $3.750, or $5,000 depending on the associated features.
What will be the net financial impact to OR? I guess expenses will be lower but there won’t be food or hotel income. Will OR be selling other online services or opportunities and what will be the impact?
Let’s forget the financial nuts and bolts. What trade show operators can’t do is try and duplicate an in person show with an online one. Because, well, being there and not being there are two different experiences. Yeah, I’d love to be more specific. We’re all being forced to accelerate our thinking and take risks maybe we would not normally take as we try and figure out how this will all work.
A digital show can’t be about seeing new product online. You can already do that and make an appointment with the brand to do it without paying for it. It can’t be about education- we can already do that online. We are doing that.
On OR’s web site you can still book a hotel room for the January 2021 show. Pretty sure it’s not a digital hotel room. My point is that things are moving faster than we can keep up with. The only way we’re going to understand the value, or lack of value, in digital trade shows will be to have a few.
A couple of weeks ago, I participated in an online investment conference I’ve attended in person in the past. It involved 30 or 40 presenters individually and in panels from around the world and some thousands of “attendees.” There were a few technical glitches, but it worked pretty well. True, I missed interacting with some of these absolutely brilliant people over a meal and a cocktail. On the other hand, I only paid $350 to “attend.” That’s kind of better than something like $4,000 once you add in hotel, travel, some food and miscellaneous expenses. And I can go and watch replays of the presentations, get the slides and download the transcripts.
It will be interesting to see if it goes back to an actual gathering next year (assuming we’re having those then). I suspect I’ll just buy the online pass.
Though I continue to believe in the value of face to face contact (I’m a boomer after all) I was watching the utility and cost/benefit of our B to B trade shows decline before the pandemic. Most of you would probably agree with that characterization. Onex either believes that the traditional B to B model will reassert itself after the pandemic recedes, that Emerald can transition to consumer-based shows, or that digital shows are a viable replacement for in person. Or, as I think likely, some combination of the three.