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 company has never been profitable and does not project to be for the “foreseeable future”—less than ideal with the market rotating away from high-risk, high-growth companies toward value equities. But it still makes sense for the company to press forward with the proposed stock offering. When executing a roll-up strategy, as TAG intends to do, the cost of capital and an ability to get deals done (think: exposure to a broader swath of investors) are critical. Uplisting will ensure the company has access to the funding it needs to grow.
JWS’ Take: While you may not be familiar with The Arena Group, you likely know the company by another name: theMaven. The group media network owns the financial news site TheStreet and the operating rights to Sports Illustrated (Authentic Brands Group is the owner of the famed sports brand). It currently trades over-the-counter under the symbol MVEN (~$158 million market cap). TAG will execute a reverse stock split (to get the share price up, 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—never mind digital pure play content companies—traded on U.S. exchanges. That is in large part because of the difficulties associated with building an audience cost-effectively. “The traditional monetization mechanisms for analog publishers were [also] compromised as content moved online,” Lake Street Capital Markets noted in a November research report.
But Maven was taking a different approach. Working to grow at a local level, it sought out writers capable of aggregating an audience and then unified them on a dedicated digital platform. In theory, the company would be able to draw eyeballs without having to rely heavily on paid search, which would enable it to keep costs down since the bulk of 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 Maven co-founder) and the decentralized journalism model was widely criticized by the media and blamed for Sports Illustrated’s fall from prominence in the late 2010s, Wall Street was intrigued by the approach. Mark Argento (co-founder, head of institutional equities and senior research analyst, Lake Street Capital Markets) explained with the existing digital publisher model failing, investors were looking for someone to come up with, or at least try to come up with, a better system.
But Heckman and several other C-level executives left Maven in Q3 of 2021, before the group could realize its vision (they have since launched a new venture called Roundtable). The company rebranded, calling itself The Arena Group, and altered its strategy, “refocus[ing] its efforts around branded content, including its Sports Illustrated brand, under the leadership of CEO Ross Levinsohn, who took the helm in August 2020,” Lake Street wrote.
Levinsohn declined to comment for our story. But the success the company has enjoyed re-introducing the SI brand to readers (since the public backlash in the late 2010s) seemingly played into the decision to double down on its premium labels and in-house production capabilities.
Lake Street, which has a buy rating and a $1.50 price target on Arena, believes refocusing on branded content was the right move—particularly within the existing media environment. “We see significant acquisition potential, similar to The SPUN deal, for tuck-in acquisitions in existing verticals and larger acquisitions to stand up new verticals or ‘Arenas,’” the November note read. Plugging established brands into the TAG platform should be “nicely accretive” and provide “decent incremental margins,” Argento noted.
Considering scale is needed for the traditional media model to work, and capital is required to make acquisitions and introduce new verticals, it makes sense TAG wants to uplist to a national exchange. Companies uplist to improve their access to public equity and expand their audience of potential investors. Very few institutional investors are able to buy bulletin board stocks.
M&A ambitions aside, moving to the NYSE should enable TAG to clean up its balance sheet. Much of the existing debt will convert out on the uplist.
While Arena’s move makes strategic sense, trying to roll up disparate, underperforming media assets remains a high-risk proposition. “The question is, can they drive monetization rates and scale these models? Can they get [the business] sustainably and materially to EBITDA positive?” Argento asked.
The uplisting can generally be viewed as a positive development for TAG and its shareholders. But it will come with increased analyst coverage and consequently, more scrutiny. That is not necessarily a good thing for a company that has never been profitable and lost just slightly less money in Q3 2021 than it did in Q3 2020 (widely considered the worst digital advertising market in history).
But TAG is better off trying to execute its strategy while on the NYSE than it would be trading OTC or as a privately held company. That is because if the company is successful, the cost of capital is going to come down, and it will make potential acquisitions more attractive.
Lake Street was not particularly concerned about TAG’s inability to meaningfully cut down on losses over the last year. “Operating expenses have been volatile given higher professional fees due to integrating the businesses and bringing the SEC filings and account up to speed. Moving forward, opex should be relatively fixed in nature, providing substantial operating margin leverage as the business scales,” the note said.
Market conditions are tough right now (see: red everywhere). So, TAG could end up holding off on the uplisting until conditions improve. But it’s reasonable to believe the company will ultimately get the $30 million raise done. The executive team has proven capable of raising money in the past (see: a $30 million raise in the fall of 2020), and it is no longer the only pure play content company on the market. What was not a public-company kind of vertical, all of a sudden, is (see: Buzzfeed). We’ll see if any end up as success stories.