Yelp: Distressed Listing Group Should Review Options Including Cash Sale

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In its heyday, Yelp caught the attention of American consumers with reviews of local businesses. The company’s slow growth and lackluster share price performance have now brought scathing criticism from an activist investor.

On Tuesday, TCS Capital Management asked Yelp to explore a sale or combine with Angi online service company. TCS, which owns a stake of more than 4 percent in Yelp, says it is “shockingly undervalued” and worth more than double its share price.

That seems exaggerated. Founded in 2004, Yelp popularized user-generated reviews. It quickly became the dominant platform for restaurant and business reviews. Rapid growth led to a splashy initial public offering in 2012. At its peak in 2014, the shares were trading at nearly $100. Even after Tuesday’s 8 percent price increase, these are changing hands at just $35.

Yelp has had trouble holding its own against rivals. Hungry diners can turn to Google, Open Table, Urbanspoon, and even Instagram to find restaurant recommendations. Meanwhile, small business valuations have become more fragmented and specialized. Angi, owner of Angie’s List, focuses on home improvement and local merchants.

Yelp generated $1.2 billion in revenue last year, thanks to gains in advertising sales. But its share of US digital ad spending stood at just 0.4 percent last year, up from 0.9 percent in 2017, according to research group Insider Intelligence.

The merger with Angi, proposed by TCS, should generate cost savings. But Angi loses money and trades with just 0.8 times revenue, compared to 1.8 times for Yelp. Given the difficult environment for digital ad sales, even with the economies, there is no guarantee that the business will be in a better position for growth.

Yelp has a strong balance sheet with no debt. It owns $414 million in cash and cash equivalents that may have attracted TCS.

So a better solution for Yelp than a combination with Angi would be a private equity buyout. A decent cash payout would generate positive reviews from minority investors.