Deltatre is set to acquire Massive Interactive in a cash transaction valued at USD $92 million.  The two parties signed a definitive agreement on November 8^th with closing expected later in November.

Deltatre provides a variety of professional services for multi-platform content delivery within the sports vertical.  Massive provides technology and services for personalizing the user experience of OTT service offering.

Massive’s press release states the purchase consideration combines an upfront cash amount of $76.6 million with a potential earnout of a maximum of $35 million.  In order for Massive shareholders to receive the full $35 million, the Massive business must meet certain financial targets in the three years following acquisition.  The statement of a $92 million purchase price informs the reasonable valuation of the earnout at $15.4 million.

Massive is the first acquisition by Deltatre since being acquired by US investment group Bruin Capital Sports in June 2016.  Deltatre had a strong 2017 financial year, highlighted by year-over-year growth of 6.4% (in Euro terms) in an odd year.  Growth in an odd year is atypical given the traditional even year cyclicality of the sports industry, the vertical where the vast majority of Deltatre’s revenue is generated.

Deltatre’s revenue tied to the even year sporting events, not repeated in 2017, make the point on cyclicality.  Revenues related to the UEFA championship and the Olympics were over €8.5 million in 2016 (and not repeated in 2017).  Deltatre’s 2017 revenue was instead driven by OTT project builds for the NFL (Game Pass), JLeague (Japan), and Fox (Soccer in North America).  Those three projects alone amount to more than €13 million in 2017.  The press release notes 2018 was a record year for Deltratre, suggesting the even year was kind to the business.  2018 should have at least benefited from activities around the World Cup and Asian Games.

The disclosures of purchase price in the press release of two private businesses is partly explained by a review of Massive’s corporate history – which will take a few paragraphs.

A Long, Wild Journey for Massive Interactive

Massive was founded in Sydney, Australia in 1996.  Seventeen years later, in the fall of 2013, Southport Lane, a New York private equity firm purchased a majority stake in Massive.  The mechanics of the transaction were complex.  The transaction involved Southport purchasing the equity of a public shell company Xtreme Oil & Gas and then having Xtreme purchase 100% of the stock of Massive Interactive.

For those interested, Xtreme was founded on October 3, 2006 with a stated mission to engage in the acquisition, operation, and development of oil and natural gas properties located in Texas and the southeast region of the United States. (You can’t make this stuff up).

This form of transaction is commonly referred to as a ‘reverse merger’ where the acquired entity becomes the operating business.  The net effect of the transactions was Massive emerging as a listed company on the OTC counter markets, trading under the symbol HUGE.  Below is the stock plot.

Source: Bloomberg.com

We’ve included the stock plot to illustrate how the trading volume in Massive was, and has been, negligible.  Post-transaction Southport owned approximately 90% of common stock of the business, and management had approximately 5%, leaving only a small float for the OTC market.

Southport’s acquisition of Massive on October 17, 2013 was for a price of $4.2 million.  The annualized performance of Massive through September of 2013 was $7.3 million.  While Massive was losing money at the time (operating income was negative 696,000 thru the first nine months), the Company’s growth was almost 70% year-over-year.  At its then stage of development, operational investment by Massive’s management team to generate 70% year-over-year growth is understandable – even attractive in terms of value creation.  The valuation of 0.6x annual revenue then doesn’t really reflect the business, but rather the circumstances of the transaction.  Capturing the public shell is itself a value to the management team, though it is not counted in the price.  At the same time, the valuation reflects some challenges in financing the business. This is illustrated in the use of proceeds from the transaction.  $866,000 of the acquisition proceeds were used to settle existing debts of Massive (one of the extinguished loans carried an annual rate of interest of 43%).  In its subsequent 10-K filing in early 2014, Massive (the Newco created from the acquisition) would actually book a bargain gain since the purchase amount was less than the fair value of the assets acquired.

Upon completion of the transaction in November 2013, Xtreme Oil & Gas renamed itself Massive.  In April of the following year, Massive acquired Wunderkind, a business owned by Massive’s management team.  Since you don’t see such transactions very often, here is the actual text from the filing,

On March 26, 2014, Massive Interactive, Inc. (the “Company”) entered into a binding letter of intent (the “Letter of Intent”) with its Chief Executive Officer, Ronald Downey, to acquire Wunderkind Group Pty Ltd. (“Wunderkind”).  Mr. Downey is the majority shareholder of Wunderkind.

There isn’t a great discussion of Wunderkind’s business in the filings, but based on the purchase price allocation its primary asset was developed software.  So it would then appear this was an acquisition of technology to add to the Massive technology offering.

Before reading the above as an inappropriate corporate activity, consider the important context of the circumstances.  For starters, Southport, the majority owner of Massive, was a signatory to the letter of intent, and Massive did receive a satisfactory fairness opinion on the price from HighBank Securities.  One could even view the reversing into the public shell as a series of transactions – these things are usually messy.

This gets even more complicated.

The compensation to Wunderkind’s shareholders (which again was in large part Massive’s management team) was a convertible note in the amount of $5.5 million at an annual interest rate of 0.5% and a term of one year.  The note was convertible into 45% of the shares of Massive (in May 2015).  Since the operational profile of Massive was not compatible with funding the $5.5 million principal (due in one year), this structure would suggest a future financing event was envisioned at the time of the acquisition.

An unrelated series of events, at about the same time, impacted the ability of Massive to receive any further financing from its majority owner Southport.  Those events cumulated with FBI and IRS agents raiding Southport’s offices in January 2016.  The transgression of Southport management are outlined in a March 2016 Wall Street Journal article “Young Financier’s Insurance Empire Collapse” and more recently by the SEC charging Southport’s founders with “defrauding the firm’s advisory clients and pocketing millions in fees.”

These developments made fundraising for Massive impractical.  The 2014 Annual filing for Massive notes, “We do not have the ability to obtain short term financing on commercially reasonable terms because two of our large stockholders have been judicially declared insolvent and our largest common stockholder, Southport Lane Equity II, LLC, is under common control with the insolvent entities.”

This trouble was now compounded by the public vehicle.  To speed up the story, Massive initiated a series of short-term financing funds, which involved participation from the management team.  Then ahead of the conversion of the note used in the Wunderkind transaction, Massive hired an investment bank and explored strategic alternatives.  The decision to explore strategic alternatives was announced in an April 30, 2015 press release.

Again, separate from the corporate machinations the business was performing well.  2014 revenue was $13.4 million, representing 72% growth, and operating income was positive.

Ultimately, the vesting of the convertible note and the short-term financing transactions appear (the filings stopped) to have returned the control back to the management.  The last SEC filing for Massive was then for the second quarter of 2015.

There is of course a happy ending to the saga with the recent announcement of a transaction with Deltatre.

Transaction Pricing

Massive’s UK regulatory filings tease us with the progress of the business from its 2015 SEC filings to the current deal.  Full year 2017 revenue was $23.1 million (USD), 41% year-over-year growth (in GBP terms).  The growth obscures an even greater evolution of the business.  The 2012 / 2013 financials read like a professional service business with heavy customer concentration (five customers were 60% of revenue) and the 2017 filings present like a more focused solution provider.  Gross margins (2017) were 65% and the business – despite growth investments – was generating free cash flow, though with a helpful assist from movements in foreign currency.

Using the $92 million figure above and the 2017 results, the implied revenue multiple for the Deltatre acquisition is approximately 4.0x 2017 sales, though this likely overstates the revenue multiple since Massive is a growth business, which we can reasonably expect to have grown in 2018.  The below table does the math on 2018 multiple based on a series of revenue growth assumptions for the year.

Strategic Rationale

Out of convenience, general industry discussions group distinct categories of technology suppliers supporting the operations of OTT services into an all-encompassing category of OTT solution provider.  There are clear distinctions between sub-categories, but they are exceptionally challenging to outline.  For instance, there were well over 100 exhibitors at the 2018 IBC Show citing the provision of OTT services.

Massive is a great example of the distinct sub-categories within a given OTT technology architecture.  The technology is primarily used in the Subscription Video on Demand (“SVOD”) use case and as the technology component used in the presentation layer of an OTT service to customize the user experience for an individual viewer.

We’ve excerpted below an image of Massive’s technology architecture (from its website).  The image informs both what Massive provides and what it does not provide. It is not an end-to-end solution (read as a compliment); it is a technology component (depending on your perspectives on user experience, an essential component).  For the purposes of this discussion, the below diagram illustrates (top right) that Massive partners with other suppliers to complete the full solution.

Source: Massive Interactive

Massive’s position in the OTT technology stack is also informed from public partnership announcements.  Ahead of the 2018 NAB Show, Massive announced a solution offering to enable MVPDs to offer a-la-carte content bundles to consumers.  Google Cloud provided the video processing, Evergent the user management functionality, and Massive the content personalization.  Interestingly, the service was described as a fully customizable OTT service in under 100 days (not quite turnkey).  Also announced ahead of the 2018 NAB Show was a partnership between Kaltura and Massive, bringing together Massive’s user experience technology with Kaltura’s platform offering.

A few excerpts from the Deltatre press release add emphasis to the product fit.  “Massive’s next-generation user interface and audience engagement technology add a valuable new dimension to Deltatre as end-user-experience (UX) has become a difference-making resource for digital media growth.”  The release continues with “It [Massive] is a valuable addition to ‘Amplify’, Deltatre’s sophisticated OTT platform and completes the most advanced end-to-end OTT product suite for all media.”

The other public statement worth some discussion is the Deltatre claim (in the press release) that the combined entity is “the largest independent OTT solution provider in the world.”  The resulting business is definitely global, having 18 offices and 1,000 staff.  Combined 2017 revenues are approximately USD $100 million, and again both businesses almost certainly grew in 2018.  The reference to ‘independent’ is likely a not-so-subtle reminder that Deltatre is not owned by a media company, as are competitive solution providers such as BAMTech (Disney), NeuLion (Endeavor), and iStreamPlanet (Turner), among others.

To end with a provocative question, if Deltatre is in fact the largest independent OTT solution provider in the world, then how big is the market for providing OTT solutions?

Related Content: 

Massive Press Release on Acquisition by Deltatre

Deltatre Press Release on Massive Acquisition

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