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Angie's List activist investor pushes HomeAdvisor merger

October 16, 2015

The New York-based activist investor that's been boosting its stake in Angie's List Inc. in recent months has gone public with its demands, blasting the company's chairman and urging a merger.

TCS Capital Management LLC, which has a 9.1 percent stake in the struggling Indianapolis-based consumer-reviews and marketplace company, said in a regulatory filing this week that it wants Angie's List to explore a merger with HomeAdvisor, a portfolio company of publicly traded Internet behemoth IAC.

The investment firm had expressed its suggestions privately in an Oct. 7 letter, but recently opted to take them public in part to "make our views as explicit as possible for the board."

"Over its long history working with consumers and service providers, Angie’s List has built a strong brand and a significant customer and revenue base," TCS managing partner Eric Semler said in the letter.

"However, with competition intensifying in the home services industry, it no longer makes sense for Angie’s List to remain a standalone company."

TCS also called out Angie's List board chairman John H. Chuang, noting that the company's shares have declined nearly 50 percent since he became chairman 18 months ago.

"While we have appreciated our dialogue with you, it has become clear to us that your interests are not aligned with the vast majority of the company’s unaffiliated shareholders," Semler said.

TCS began pressing Angie's List in July, when it increased its ownership stake from 1.8 percent to to 6.5 percent and said it wanted to have input in the strategic direction of the company, including a possible sale of the business. It then disclosed a 9 percent position on Aug. 24 and a 9.1 position on Oct. 13.

The hedge fund's move is not unlike those of various activists across the country in recent years, said Ken Skarbeck of local investment firm Aldebaran Capital LLC, but it remains to be seen if Angie's List will take heed.

"Perhaps [Angie's List] thinks that there's some value in exploring this," Skarbeck said. "On the other hand, maybe they're committed to operating their business the way they want to do it."

In a written statement, Angie's List officials said the company values shareholder views and has had an ongoing dialog with TCS.

"Members of the board and management, who in the aggregate own more than 20 percent of our outstanding shares, are committed to enhancing shareholder value," The company said. "We are keenly focused on value creation and realizing the company’s full potential."

Angie's List went public in late 2011 at around $16 a share, and its stock price peaked in July 2013 at about $28. But the firm's aggressive spending on expansion has resulted to 15 unprofitable quarters out of the past 19, and shares have shriveled to as low as $3.74 in recent months.

The stock closed Thursday at $6.05 a share, up 21 cents on the day.

HomeAdvisor merger?

TCS said it believes the greatest long-term shareholder value for Angie's List can be achieved through a strategic combination with another industry player, namely HomeAdvisor.

The marriage, it said, would give it the needed scale to compete in an increasingly competitive home-services environment. Amazon.com Inc. and Google Inc. have plunged into the estimated $300 billion-a-year industry this year, and Facebook Inc. is reportedly looking to jump in.

The merger could also yield significant cost savings and end a hostile marketing battle between the two rivals, TCS said. It could be done in a "tax-free manner and Angie's could remain public," the hedge fund said, "and shares could at least double or triple following" the merger.

"We recognize that there may be other potential strategic suitors for Angie’s List," TCS said, so it would support hiring an investment bank and establishing a committee "to initiate a strategic review of the company in this robust M&A market."

Blake Harper, an analyst with Topeka Capital Markets who covers Angie's List, said the proposal makes sense, but price might be an issue for an IAC acquisition. Even a $10-a-share price tag on Angie's List—or a $585.2 million valuation based on shares outstanding—is reasonable considering Angie's List annual revenue, Harper said, but "I don't know if [IAC] wants to pay that."

TCS didn't describe in its letter what kind of merger it recommends to keep Angie's List publicly traded. But Harper said the firm could be referring to a reverse merger, with IAC spinning off HomeAdvisor, followed by HomeAdvisor acquiring Angie’s List and keeping the Angie's List name and brand.

Harper said Angie's List, which only has about $69 million in cash, is not big enough to acquire HomeAdvisor, which he estimates is worth between $500 million and $750 million.

The other tie-up option could be a "merger of equals" in which each entity's shareholders would be granted new shares as 50-50 partners in the combined company. But since Angie's List is likely valued less than HomeAdvisor, it would have to issue shares or debt to compensate for the shortfall.

Any transaction would have to be worth the while of IAC shareholders, and, Harper said, "the main issue for any deal will be price."

An IAC spokeswoman said the company does not comment on rumors and speculation about transactions. TCS's Semler did not return calls seeking comment.

 Angie's List is scheduled to report third quarter earnings Oct. 21. 

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