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Muddy Waters is Short Ströer (SAX:GR)

Ströer went public in 2010 as a Germany-based operator of billboards, with the founders Dirk Ströer and Udo Müller floating 47.8% of the company’s shares – they still hold about 42% of the shares today. The business was steadily growing, but perhaps a bit boring. The stock price languished. At the end of 2012, it was down 40% from its IPO, and trading at 7x EV / EBITDA. But something big changed in 2013. Ströer unveiled a “digital” strategy based on three pillars – acquiring a group of online businesses in Turkey and Poland, buying a couple of online ad exchanges, and buying a few online advertising businesses from Dirk Ströer and Udo Müller, who is still the CEO of Ströer. This all seemed to make sense – old world advertising meeting the new, Ströer striving to become number one in Germany in online and offline, a bold company that grasped what others weren’t yet seeing…

Most of the world seems to think Ströer’s move into online has been a smashing success. Revenues, EBITDA, and net income are all up substantially since the end of 2012 – and not coincidentally – so is the stock price. At around €54 per share, Ströer now trades at 19.77x EV / EBITDA.

Ströer has since acquired content companies, Deutsche Telekom’s online portal, an education software company, mobile advertising companies, a statistical analysis company, gaming companies, a company aiming to make the yellow pages obsolete, and a location-based advertising firm. Since 2012, Ströer has bought stakes in at least 29 companies, spending what we calculate is €142 million in cash, and increasing the share count by 32%. Ströer says its digital businesses grew organically by 34.3% in 2014, and 23.5% in 2015. Why should anybody be skeptical?

Well, it turns out that Ströer’s claimed digital organic growth rates are way off from what we can calculate. We see Digital organic growth rates of only 2.2% in 2014, and 2.5% (using adjustments we believe are more reflective of the business) to 16.4% (using the company’s methodology) in 2015. Maybe Ströer’s digital foray makes as much sense as wanting to be sucked into your computer in order to get physical media implants. The billboard business strikes us as a real estate business. It is our view that much of the business revolves around knowing commuting patterns and neighborhood demographics, dealing with planning departments, negotiating leases with property owners, schmoozing with government employees, managing construction, securing adequate insurance, detecting structural problems and managing maintenance, working with industrial printers, managing logistics, etc., etc. Billboards seem to us like a fairly old school, hard-nosed business.

Perhaps there’s a good reason why Ströer seems unique among OOH advertising companies in aggressively pursuing online business. Why is it that large U.S. OOH companies with relatively easy access to Silicon Valley seemingly haven’t caught onto Ströer’s opportunity set? Probably for the same reason Sergei Brin, Larry Page, Jerry Yang, and Mark Zuckerberg were not in commercial real estate before founding online marketing powerhouses – there seems to be little overlap.

When we scratch the surface at Ströer, we see a company that to us appears far less successful in online than the market seems to think. Moreover, we see a company whose insiders have spun a great story, but with seemingly little substance; and, while telling the story, have engaged in more highly questionable self-dealing than we’ve ever seen outside of a Chinese company. That’s why we’re short Ströer.

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