Cash flow makes Utah’s Ancestry.com attractive target

E-commerce » It’s outperforming Facebook, which might be among its suitors.

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A private-equity firm would still be the more likely suitor, said Brian Nelson, president of equity research at Valuentum Securities in Woodstock, Illinois.

"Cash generation is still king for private equity," Nelson said in a phone interview. A financial buyer could "throw a mountain of debt on the company. Because it generates a lot of recurring cash flow, they can use it to pay off the debt service costs."

Going private may also help Ancestry focus on expanding its business without scrutiny from public shareholders, especially as short sellers target the stock, Hodges’ Hays said.

About 15 percent of Ancestry’s 42.6 million outstanding shares were sold short as of June 5, more than the industry’s average short interest ratio of 8 percent, according to data compiled by New York-based research firm Data Explorers. In a short sale, traders sell borrowed stock on the assumption the price will drop, enabling them to profit by buying it back at a lower price.

One challenge will be agreeing on a takeover price because management may not be eager to sell at the shares’ current depressed valuation, Broadview’s Garcia said. A buyer would have to pay a premium of more than 82 percent just to match the stock’s all-time high of $45.70 in April 2011.

According to Garcia, $35 a share would be a fair price, while Valuentum’s Nelson said the stock is worth $47 a share based on his discounted cash flow analysis.

Ancestry "is significantly undervalued," Nelson said. "This is a move by management to sidestep the market’s perception of the firm and really go after the best way for shareholders to extract the most value. It makes a lot of sense that they hired a shop to market them around to potential suitors."

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