Arkhouse targets big shakeup at Barry Diller’s IAC

0:04 spk_0

Welcome to a new episode of the opening bid podcast. I’m Yahoo Finance executive editor, Brian Sai. Like I always say this, the podcast that will make you a smarter investor, period. And of course, opening bid sponsored by our friends at Vanguard.So, my friends that know me pretty well, they know that I, I love me some activist investing. I love activist investors that roll up their sleeves and get the job done. That’s why my sleeves are rolled up for this one. They’re crunching numbers and they’re challenging management teams and boards, and one of the activist firms that I’ve been following for for some time is the team over at Ark house. I originally came in touch with them.Uh, for their work on Macy’s, they tried to take this company private for almost $7 billion thought the company was undervalued, of course, Macy’s owns a lot of real estate.But that’s how I came across for the first time the Arkha story. Now they’re back here challenging another company you know very well that is IAC led by media mogul, billionaire, uh, that is Barry Diller. Let’s bring in the, the main, the main guy here, uh, Gabriel Kahana. Good to see you. Great to see you, Brian. I, from, from Macy’s to IAC, I mean from a real estate play you guys normally specialize in retail. Now you’re going into is old old media. Why, why is that?

1:16 spk_1

Yeah, well, um, we were incredibly distracted by the wild undervaluation of their assets, and that’s really what is interesting to us generally. Um, similarly, as in the case of Macy’s, we recognized just a huge missed pricing of assets that you really don’t need to be a media expert to get your head around.

1:38 spk_0

So how AI AIAC.Uh, created by Barry Diller, uh, big time media mogul owns what, over 40 brands. People is one of them, um, stakes and MGM, Turo, the, the rental car company. What do you see is undervalued in this business?

1:55 spk_1

Yeah, well, you know, I, I, I think we see it asOne of the most compelling risk adjusted opportunities in the public market today because of the undervaluation, and there are, I would say like sort of two ways to skin the cat. There are thousands of ways, but two really simple ways to come at this. You’re either buying Turro like you mentioned, Care.com, Meredith that owns, you know, like,

2:19 spk_0

like150 million viewers of visitors a month or some crazy number. Wild

2:23 spk_1

eyeballs, great brands for free.On the basis of MGM and cash. So in other words, IAC is, is trading today, its share price is trading at the value of its liquid assets alone. We’re talking about US denominated dollars on restricted cash and MGM. I also, as an aside, think MGM is tremendously undervalued, and we could talk about that a little bit, but just for its cash and stake at MGM 22.5% stake in MGM, youUh, you can go in and buy those assets at cost and get the rest of that stuff that we just discussed for free, and we think that represents a 50% or so discount to um to true value.And um and and to your, you know, just I wanna reframe, I hate to force you to roll your sleeves back down, but I want to reframe the way you characterized our engagement with them. We’re really not challenging Barry Diller. We are very much cooperating with the guy and I really thrilled that he’s been engaged so constructively and I would say somewhat surprised that it’s been such a cooperative and fruitful um engagement thus far.

3:33 spk_0

What’s the difference betweenThere are essentially two types of activist investing. I mean, to your point, you have one that are these boards and management teams want to work together and and deliver your ideas, and then other firms are so entrenched, and I guess and challenge you, like, how do you overcome those management teams?

3:50 spk_1

Yeah, yeah, um, well, we try not to, like I, I would say, you know, interestingly,I, we’ll own the, um, the name activists, the description activist, because like, OK, we, we do activism. We use activism, shake it up tactics we do for sure, um, but I would say like unlike other activists, we’re really not drawn to the fight. Like I, I’m a pacifist dude, like you, you can, yeah, I walked into the room, you can size me up like you, you know, like you could take me on, anyone could. Like I’m not really like, uh, you know, uh, feigning for the fight.Um, I find activists are often sort of like moth to a flame in that way. So when we see like an entrenched board or bad governance, those aren’t things that attract us. Like for other activists, it’s like fodder for the fight. I get to say that, you know, this CEO is terrible and he’s misusing corporate funds andYou know, this director is, um, you know, is, uh, is embezzling money or what we don’t like that. That’s a problem. We want to get into you may not be able to fix, yeah, exactly. That’s, that’s like really unattractive to us. And in this case, I think actually interestingly there, there is still, and this is something that we are excited to correct.Um, a perception, I think it’s been dislodged a little bit in um the company adding Torbram to their board, a director that we uh encourage them to interview and consider. Um, there is a misperception that this is inYou know, autocracy, where Barry Diller, you know, reigns supreme and no one else is listened to, no one else has a voice, shareholders are sitting in the backseat, and that’s really not the case, notwithstanding their dual cash class structure. How

5:29 spk_0

didyou, uh, before I get to my next question, I will walk through some of the evaluation, how you get arrive to your to your number.How do you wake up one day and say, I want to challenge a Barry Diller from the outside looking in, this is a media mogul, uh, worth a lot, by all indications in past interviews, pretty intimidating dude. Like how did you even come to say, going after I see here, we want to do something with this company. Well,

5:51 spk_1

again, it was really um sort of a bottoms up underwriting and analysis of this asset of the, you know, these assets andA concern was, well, we don’t really want to go up against Barry Diller, and then we realized we don’t really have to go up against Barry Diller. We don’t need um to fight an entrenched uh manager here because that’s not what we’re dealing with. So, um I would say it was not an active decision to fight him, it was uh an active decision to invest.Uh, alongside him and make money withhim.

6:22 spk_0

So you got the board member, check done. Now you see IAC’s assets could be worth upwards of $72 a share. Walk us through how you, how you get to that number, what has to happen to drive that type of value.

6:33 spk_1

Yeah, so they could be worth a whole heck of a lot more. Um, the $72 a share is really just takingThe value of cash, which is, uh, you know, any, uh, I’m, I’m not a, uh, evaluation expert, uh, well

6:46 spk_0

they

6:46 spk_1

have

6:46 spk_0

theyhave $1.2 billion of cash on the balance. They own 20% of MGM. The market caps what, $3.2 billion or so. Somewhere there’s a disconnect,but something’s wrong,

6:56 spk_1

yeah, yeah, yeah. 0, 100%. So MGM plus cash alone again, you get to the, you know, high 30s number and then Meredith, um, you know, we are holding at cost.And that is a story of significant improvement and really great asset value, and tremendous cash flow. I mean, there IBIDA there, you know, exceeds $300 million. Goldman Sachs recently put a, you know, uh $10 or so on forward IBITDA valuation, implying $3.9 billion that would give you an additional $30 or so a share. We are holding it closer to $20 again, like cost, um.Then you have Care.com, uh Turo, together another in excess of $10 a share, and you have Vivian, uh, valued by Toma Bravo for another, you know, $4 a share. You have their headquarters, which is a gorgeous building on, you know, by the way, you got real estates.Of course, yeah, we’re

7:53 spk_0

we’re at the play you’re after

7:54 spk_1

we’re

7:55 spk_0

after

7:55 spk_1

those $3 a share,

7:56 spk_0

just like that Macy’s Herald Square.

7:58 spk_1

Yeah, we can talk about that. Um, yeah, it is, uh, it is a nice shiny object, but it’s not really driving the, uh, sort of underlying this pricing here.

8:07 spk_0

So where, you know, now that you’ve had these conversations, you’ve got your board member, you’ve had conversations with, uh, Barry, I imagine. What is he inclined, you think to do next? Does he, does he want to break up this company further?

8:21 spk_1

He’s always wanted to break up his company, right? He describes it himself as the anti-conglomerate conglomerate. Um, and I think what he means by that, and I know what he means by that, is that he seeks to incubate and then spin once grown to maturity.Great companies and he’s done it. He has a really great track record at doing it. Angie, most recently, Expedia, but before that, Expedia, Vimeo, Ticketmaster, really great businesses, and by the way, during his tenure doing that for two decades, his shareholder returns exceeded those of Berkshire Hathaway’s, and yet here we are sitting today with him resuming the helm of this company.And they’re trading at 50% off. Vire Hathaway, not really trading at 5% off, you know, maybe the opposite, um, and that, that’s weird, right? That doesn’t make a lot of sense and uh.You know, we seek to make dollars where things don’t make sense. So he’s, he’s good, that is pretty good. I’m not, it would be terrible if I had thought of that like if I had said that previously that actually just kidding.

9:23 spk_0

So he’s, he’s 80. Barrydale is 83 years old, came back to lead the company earlier this year.What is it? When does he start executing on his, what looks to be his final act, not to get depressing, I’m not talking about it from that perspective. When did we see a a release from him? We’re spinning off Dam, we’re selling it to another media company. Like, when did those things start to happen, you

9:43 spk_1

think? Uh, I’m not as a general practitioner, so I’m not going to, uh, you know, actuary him, but, um.But I would say it is unsurprising to me that he is retaking the wheel right now. He started executing, you know, after our engagement, 4.5 million share, you know, of share buybacks, 4.5 million shares bought back, um.He has another 9 million or so uh authorized, so he’s actively going to do things, and he’s actively started doing things that we think are going to collapse the dislocation between intrinsic value and the current share price.

10:25 spk_0

What’sWhat in the range of things that could happen first, is it Meredith, given that’s the biggest, one of the biggest publications he has or or collection of media assets, is it monetizing the the stake in MGM or is it mon monetizing the stake and Toto, or is it all three, and it could happen this year,

10:43 spk_1

um.We’re of course, uh very deferential to management at the company to make great decisions on behalf of shareholders. All of those things are possible. I would say DDM is a very attractive asset to private equity. Um.Very cash flow generative, um.It’s a little more confusing to the public market, though, I think there are opportunities for them to go and make strategic add-on acquisitions to that business that could really help to unlock public markets value for that asset.Um,MGM similarly mispriced, um, and, uh.A reallyInteresting opportunity for uh future value on lock. Right now it’s kind of sitting in a neither here nor there position where they own, you know, less than a quarter of the company.And don’t consolidate the company’s P&L onto their own balance sheet, which means that it just flies under the Bloom Bloomberg radar, you know, it just all these passive investors, quants trading, you know, moving the market are not appreciating that you own 25% of a very IIA generative super high yielding growth company.

12:10 spk_0

Hang with us, uh, Gabriel, we’re gonna go off for a quick break. We’ll be right back on opening bid.Welcome back to Opening bids, of course, sponsored by our friends at Vanguard, having a fun chat here with Gabriel Kahana, uh, over at Ark House, a managing partner and, and co-founder, uh, really digging into his thesis on IAC why he’s working with, uh, billionaire business mogul Barry Diller, uh, not challenging him.Um, why is, why are active for now, for now, for now, I mean, but do you want to challenge him? No, no, Mr. Jill, do your

12:45 spk_1

thing. Oh yeah, absolutely, for now. I, I would say like, um, the way we think about it is, um, we are thrilled that this company has governance such that shareholders can take action if necessary, and to the extent necessary we will take additional action.

13:00 spk_0

Is the board an inhibitor to driving real change? And I ask that because he owns what, 43% of the voting power.Uh, his wife, partner, uh, Diane von Farstenberg’s on the board, his stepson Alex von Fostenberg’s on the board, he’s on the board, even Chelsea Clinton, longtime board member at IAC. Are theyIs this the right board to drive big change, I guess is what I’m getting at.

13:23 spk_1

So I think umItIt is the right board now that Torram has joined. I would note that with respect to um his 43% voting control, that only applies to um once 9 of the 12 now fewer um uh directors. So, um, a number of the directors, and this is like a kind of, I I don’t mean to nerd out on, on governance now, butUm, a number of the directors on the board are elected by the common holders, and the common holders alone, separate and apart from the Class A, and that’s where Barry gets his sort of super voting power from.

14:03 spk_0

And if you want to learn more on what Gabrielle’s talking about, just pull the 10k. Go to SEC.gov and read up this stuff. How do you think I find I learned this stuff? I’m a former analyst. I go to SEC.gov, type in IAC, and you can read about thisyourself

14:15 spk_1

or call Brian’s cell phone,

14:18 spk_0

you know, totally, but you know, I wanna get, um, you know, I’m getting into Macy’s, but before I do, how did you get into activist investing? Like why is this your jam, so to speak,

14:27 spk_1

um, so.Our investment team is predominantly made up of like private equity oriented investors, analysts, um, that really cut their teeth buying and selling mostly real estate but not exclusively assets in the private markets. And a couple years ago, my managing partner and I, John Blackwell, recognized just a really weird dislocation in value between the public and private markets, mostly for real estate. AndIn today’s environment of really unprecedented opacity, and this, I, I think really into the future, like, just an inability to see what is going to happen next, and the results behind that door could vary so wildly. I think that dynamic really started to unfold and was exacerbated in the beginnings of COVID, but it’s, but it’s continued and persisted.It is really not fun to be whipsawed around by macro events you have no control over, right? Like tariffs, right? That’s a hot topic today, um, geopolitical tensions, interest rates, where are they gonna go? What we love about our strategy is we’re invested in situations.Where the public markets are deeply discounting a collection of assets that private equity values much higher, and that disconnect persists whether the rates are at 2% or 4 or 10 or 20%. So we’re really just looking to ride that collapsing of dislocation.And catalyzing that collapse of dislocation between public value and private equity value, or what we would call intrinsic or true value, and I, you know, I don’t mean to cast aspersions on public market investors. Maybe they’re right, maybe private equity is wrong. Who knows? Either way, we want to collapse that, you know, we want to buy for 10 and sell to PE for 20, and that’s effectively the goal. And it started with real estate and then we realized this kind of persists more generally and again I don’t need to go down a rabbit hole. I’ll take, I’ll go wherever you want me to go, but like.Uh, the, the, the public markets shareholder dynamics, the demographics of investors making up.The decision making processes of the public market has really shifted over the last couple decades.

16:46 spk_0

I want to get into Macy’s a little bit. Um, Macy’s a company that I covered, I used to cover as an analyst, maybe 7 or 8 years. It’s a story we covered very closely here at Yahoo Finance when you wereTrying to buy the company with brigade. Shout out to our senior reporter Brooke Brooke De Palma after coverage uh of it really, um, fascinating stuff and yours. Thank you. I appreciate it. Thank you, thank you. Um, your final offer inUh, the summer of 2024, was almost $6.9 billion brigade.This company’s market cap is now 3.1 billion or somewhere around there. Are you happy then you can get this deal done? No.

17:23 spk_1

No, I’m frustrated as, uh, you know, as I think the rest of, or most shareholders are, obviously, uh.You know, what it should have could have uh mid-twenties, the stocks trading in the low teens once again.

17:37 spk_0

Are you still shareholder at Macy’s? No comment. OK, fair, fair enough. I get it. I get that, you know, we all, you know, we got legal stuff here. I mean, but.What, what has to happen to that company? I just look at the Herald Square location in New York City, and you know this, but there’s been some estimates that this loan, this alone is worth a billion dollars.There there’s clearly some type of major

18:00 spk_1

I thought you were gonna say 4 by the way, and I was gonna have to like talk you down off because I, I mean I’ve heard some pretty wild numbers

18:05 spk_0

that is but that would be wild.

18:07 spk_1

Yeah, 4 would be wild. a billion, I think it’s worth more than a billion, really, yeah,

18:10 spk_0

I mean, is there.Uh, I mean, Macy’s, the current team is sitting over. It could be worth more than the, but massive value destruction here you had, and just to be clear, they made the case you didn’t have financing. Did you have financing? You do very

18:23 spk_1

much had financing and, and they actually didn’t make the case that we didn’t have financing in the end. They just put out because that would have been just, you know, baldly untrue. What they did say was that our financing was atypical.And on that, they weren’t entirely wrong. We did present two financing structures, one of which was really real estate diligence dependent, and they said, hey, this is a normal way corporate transaction come with traditional corporate financing that doesn’t require that we give you access to our umTo our department stores to go and do environmental checks. And our response was, we appreciate that you think you’re selling just a retail business, but as buyer, we’re buying a retailer and 100 million square feet of its real estate, and therefore need real estate diligence in the normal course, and our only outs under the contract that we’re looking for are related to that very narrow, um, you know, specific carve out.

19:24 spk_0

Are they still worth $6.9 billion?

19:28 spk_1

No comment.

19:29 spk_0

Yeah, well, I mean, this is a company that has been, well I ask it another way, is this, if they don’t change something, I mean, they’ve really stayed true to their bold new forward plan or whatever the CEO is calling it, bold new chapter is Macy’s the next Sears.

19:46 spk_1

I, I, I don’t know, I, you know, I left my crystal ball at home, but I, I would say that um.There is a very umCorpse ridden path of retailers that didn’t take private equity bids uh when they could have and should have for the sake of uh their shareholders.

20:07 spk_0

You see that disaster over Kohl’s? Why don’t you see the disaster over Kohl’s?

20:11 spk_1

Which one? Kohls,

20:12 spk_0

I mean with the CEO getting ousted.

20:14 spk_1

Oh yeah,

20:14 spk_0

yeah, wacky behavior. Would you ever shake trees at that company? I’ve been covering Kohls is a disaster. Yeah, it’s a disaster.Like, is there anything attractive to you about aKohl’s? Yeah,

20:24 spk_1

I mean, many of these department stores have asset value. The question is like, what does it matter to the public market until someone realizes that asset value, right? Like Sears used as an example, like,That’s true of JC Penney too, like, they, they will nurse their asset value.To keep themselves alive. They will, they will, um, drain the asset value, I should say, to sustain the otherwise dying business. And that’s just a slow death spiral, and our view is like,To the extent these companies and and I I’m not, I’m not talking about any specifically in this case, but I do think it is true that they are facing unfair, and we could talk about why they’re unfair, headwinds from the likes of Amazon, um.But to the extent those headwinds persist, and I don’t see them abating anytime soon, these guys are dying a slow death. Well,

21:22 spk_0

there’s still two people that Ark house appointed to Macy’s board. They’re still on the board. They are. Are you done? Uh, are you done shaking trees at Macy’s?

21:30 spk_1

Again, no comment. OK. No, but come around a different way. I

21:33 spk_0

might, I might

21:33 spk_1

get,

21:33 spk_0

I mean, do you want it, I mean.Are you just done engaging with Macy’s?I mean, is

21:42 spk_1

answer differently? Yeah,

21:43 spk_0

well, how would you, how, how would you, how would you put it? How would you put the

21:46 spk_1

situation? none I

21:47 spk_0

have. OK, fair enough. I mean, but, but, but all right, we’ll leave it there. Let me, let me get your, uh, hot take. We always like I think

21:53 spk_1

I, what I would say is Macy’s is still publicly traded, still mispriced, and still in desperate need of someone coming in to save shareholders.

22:03 spk_0

Macy’s, give this guy a call. All right, we’ll leave, uh, let’s get the hot take from, uh, Gabriel here. We were talking about activist investing.Now I think maybe maybe you’re me and you around the same age. We grew up thinking actors investing are these corporate raiders, you know, they have these big ass personalities. They’re gonna come, they’re gonna take your home and then fire the board.

22:22 spk_1

But you don’t you told me I couldn’t smoke a cigar, yeah,

22:24 spk_0

yeah, but, but, but you don’t sound like that guy. I mean, of course, I imagine you’re a very competitive person, you wanna win, you wanna make lots of money, and all those things are OK, but it seems like you’re different than the generation that you and I grew up with watching an activist Westing. Is that just outdated and that model can’t work anymore?

22:41 spk_1

Um, I, I don’t know. I think there’s room for, you know, pugnacious, bombastic people to make money as there are, you know, people just looking for everyone to be happy, which, you know, I, I think I’ve fallen into the ladder camp a little bit more, but I, I, I, again, like I didn’t really.We didn’t say, hey, you know what would be cool if we went to start an activism fund. That was not the genesis of our house at all. In fact, um, we really kind of bumped into it or backed into it and like looked over our shoulder and realized, 00 shoot, we’re activists, um, didn’t realize that or didn’t intend for that outcome. Um, so in many ways, like I think that um the sort of, you know, persona that comes along with it is uh.Um, is not anathema but like somewhatalien,

23:27 spk_0

someone, someone’s got to pick up the mantle from Bill Ackman. I talked to him at Milken last week and he’s trying to be the next Warren Buffett, and that’s not an activist. I mean, somebody’s got to pick that, that torch. Maybe you’re that torch guy.

23:36 spk_1

Yeah, yeah, well, maybe the new version of Warren Buffett includes someone telling, uh, uh, telling CEOs of companies like, hey, you actually need to do this because I’m a shareholder, right? In other words, like Warren Buffett, I wouldn’t say like it’s not that he wasn’t an activist. Look at what he did with the Washington Post. He just said, hey.I, I want to own a lot of your company. I want to work with you. I do not want to unseat directors and, uh, what was it, the famous letter to Graham, he said, uh, you know, uh, it’s, it’s your company, it’s Graham controlled and Graham owned, and, um, that’s fine by me.But he did acknowledge that as a shareholder, he does wield that stick, and I, I, I don’t think it was, um, maybe it was never made explicit by him, but I don’t think it wasn’t on the table sitting there quietly implied.

24:23 spk_0

Uh, we’re gonna leave it there. Uh, fascinating conversation here. Uh, Gabriel Kahana, uh, Ark house managing partner and co-founder. Keep me, keep me, uh, keep me post on at Macy’s for sure. All right, of course, opening events sponsored by our friends at Vanguard. Continue to hit us with all those thumbs up at likes on all the podcast platforms and YouTube. Love all your comments. Love all your feedback. It makes me a better interviewer and makes me better doing what I do all the time, which is talk to interesting people like Gabriel. We’ll talk to you soon.