Bargain Alert: The Cheapest Spinoff in the World

This company trades at 4x earnings with little debt, and is dominant across its categories

*Image generated using AI for illustrative purposes only

In Joel Greenblatt’s seminal 1999 investing book “You Can be a Stock Market Genius”, he lays out the case for paying attention to spinoffs, noting that they’re often mispriced due to forced selling and lack of attention, setting them up for significant outperformance over the broader market.

In the ensuing years after that book was released, “good” spinoffs became increasingly hard to find - likely the result of more eyes examining the space. In more recent years, they’ve essentially become an anomaly. With legions of analysts focused on the space and enormous amounts of capital sloshing around the globe, the quality of spinoffs have also dropped, as parent companies have been able to saddle their offspring with more debt than is typically prudent in a higher interest rate environment. And for those that do come to market with strong balance sheets, they usually do so at nosebleed valuations.

Today’s bargain alert is truly an anomaly, with all the hallmarks of a classic Greenblatt spinoff.

The company comes to market with roughly 1 turn of net debt (vs. 3-4 times average for the industry), generates tremendous (albeit shrinking) free cash flow, has leading positions (#1 or #2) in their categories, and an experienced management team with proven capital allocation abilities within the company.

Despite all this, the market has pummeled the stock since it’s spinoff, as institutions (who owned the parent’s stock mainly for its larger core business), were clearly uninterested in this “smaller” stub, and decided to head for the exits en masse.

This selling pressure has created a gift for those who are paying attention, and the company can today be bought for roughly 4x free cash flow.

That company is Versant Media Group (VSNT), a cable network with household brands like CNBC, USA Network, MS NOW, Golf Channel, among others. Many of their channels occupy #1 or #2 positions in their categories.

If your initial reaction is something like “yuck”, you’re not alone. It’s no secret that the cable bundle is unravelling, and linear subscribers have been cutting the cord in increasing numbers, in favor of streaming.

Since 2022, Versant’s revenue has dropped from roughly $7.8B to $6.6B today, which is about a -5% clip. At the same time, EBITDA has fallen from roughly $3.1B to $2.2B today, or a -10% clip. This decline can be attributed to Versant’s heavy 85% revenue exposure to linear distribution and advertising.

So it seems apparent that though this spinoff appears cheap today, might this be a proverbial “value trap”?

It’s my opinion that this is unlikely to prove a value trap, for two main reasons:

1. 62% of Versant’s content is live content (news, sports, events), which is the lynchpin of the entire cable bundle, and a vertical the major streamers do not and cannot compete in. Especially for news, relevant coverage requires a large on-the-ground footprint, which is opposed to the “labor-light” nature of how the streamers like to operate.

2. There are early signs from cable distributors that the cable bundle is re-bundling into a patchwork of different streamers (vs. channels in the past). Given the must-have nature of much of Versant’s content, they have a very good seat at the table for whatever the new bundle may ultimately look like.

If my assumptions are correct, Versant’s declines may have almost bottomed out. The company currently generates roughly $1.4B free cash flow, and has guided for about $1B - $1.2B post-spin for 2026. That’s about 4x to 4.5x 2026 free cash flow.

That’s before counting any potential share buyback (which would be extremely lucrative at these levels), and acquisitions.

On the acquisition front, management has communicated a strategy that makes perfect sense. They will focus on vertical acquisitions to diversify beyond pay TV by integrating companies that enhance content distribution and audience engagement. That’s versus horizontal acquisition strategy that would involve buying more similar linear networks.

With a strong balance sheet (~1 turn of debt) and significant free cash flow built upon a firm foundation, Versant’s management has an attractive opportunity to truly paint on a new canvas. Before the spinoff, virtually all of Versant’s cash flows were redirected to Comcast’s cable and parks business, which had durable double-digit return on invested capital. I expect Versant’s management team to maintain their strict hurdles as they find potential opportunities. And with the entire media space bombed out, there’s a good chance they’ll be able to execute on favorable terms.

At 4x FCF, we’re not paying much for top-tier legacy assets, and can ride along an experienced media management team as they work to transform and position Versant Media for the future.

What a steal.

(This idea was a sample for readers who are considering a subscription. If you want even more mouth-watering bargains like this, feel free to subscribe - it’s a bargain.)

(Disclosure: The author and funds under their management hold shares of Versant Media Group (VSNT). We may hold, buy, and sell any securities mentioned on this blog at any time. The information contained herein should not be construed as investment advice or a recommendation to purchase or sell any specific security.)