I'd meant to type up a long reply here, but didn't have the time. In short, I went through a lot of the Ebix travel websites, and looked at available pictures of their physical locations.
Per the Wayback Machine, the websites had barely been updated since their purchases. They still us the same version of various JavaScript libraries they did back when they were bought. The business storefronts are shall we say very unimpressive.
I think Raina's MO is buying companies, and not spending anything on upkeep. That generates strong cash flow, until it doesn't.
Doesn't seem like EbixCash had any value:
"With respect to EbixCash, Jefferies contacted over 70 parties with explicit interest in all or certain of the assets of EbixCash. 21 parties executed a non-disclosure agreement with the Debtors, and nine (9) parties interested in EbixCash executed a non-reliance letter with Deloitte for access of Deloitte’s draft vendor due diligence report.
Again, however, although the Debtors received interest in the EbixCash assets, the Debtors were not able to secure a transaction for these assets, including due to the EbixCash Liabilities, potential regulatory review and approvals for such a transaction, cash flow impacts from the sale of the North America assets, and significant working capital requirements for the EbxCash business."
Your educated guess puts share price to fall upwards of $6 and, in best case lucky scenario, to reach $19.
Given a consortium, supposedly blessed by Raina et al, l stepped forward to buy EBIX outright without assuming liabilities, what are your thoughts on possible endgame, shareholders getting their money, etc.
Thank you for this informative post—I think this is the most interesting (and contrarian!) investing Substack I've read.
My first question is, what do view as the most salient risks regarding value leakage in the bankruptcy process? Due to the structure of the debt being large secured; very small unsecured; then equity, it seems to me that the incentives between the secured creditors who control the process and the equity holders should be aligned. The secured creditors are incentivized to properly market EbixCash, because without it, they run the risk of not recovering the full amount.
Secondly, what due diligence have you done on their Indian business? How is it doing post-bankruptcy?
Thirdly, why are its peers trading at such high multiples? Have they been acquisitive in the past?
Finally, how long do you expect this opportunity to last? When will they emerge from bankruptcy?
Thanks again for a very informative and well-written article.
Thanks for your reply. There is unfortunately far from full incentive alignment between the creditors and the equity holders. The biggest misalignment is due to mismatched time horizons. The banks are going to get mostly paid back no matter what, their current priority is speed, whereas equity holders would be willing to wait a few more months to maximize value.
I've had a couple of expert calls (the transcripts are on Tegus if you have an account) with Indian ex-employees, competitors and someone from Western Union and talked to the IR of two of their competitors. It's business as usual for Ebix in India. They are still hiring and advertising and their brand has not suffered any harm. They are well-respected in India and one of the four biggest travel agencies there. Hard to say where they are at financially. The periodic report indicates that they are up slightly from a revenue perspective, and also that they have had business shift improvements (from prepaid cards which are low margin even on a net basis to travel, which is high margin). I feel confident that revenue has grown some, and that EBITDA has grown a little more, hard to be more precise than that.
The other three big travel agencies trade at higher multiples for a few reasons. Firstly, India is just very hot right now (https://www.economist.com/finance-and-economics/2024/05/02/hedge-funds-make-billions-as-indias-options-market-goes-ballistic). There is definitely a lot of money flowing in and meme-stockesque speculation. The difference is the form of speculation (index options) pushes the index up rather than individual stocks. An underreported story is India now accounts for 84% of options traded globally. Secondly, while Ebix has a very similar business to Thomas Cooke (trades at 17x) its primarily offline business is not as attractive as MMYT and EaseMyTrip's primarily online businesses.
There also is a story to be had about how the business has low capital intensity, and the emerging Indian middle class means the Indian travel sector has massive tailwinds going for it. The peers have been very acquisitive in the past (more inorganic than organic growth), and all have strong balance sheets right now. When asked about how MMYT wanted to spend its $600M of cash on its earnings call, M&A was the top objective. Assuming no synergies, buying EbixCash at 9x EBITDA would increase its EBITDA by 40%, despite $423M being less than 6% of its EV. The accretion math is even more striking for EaseMyTrip and Thomas Cook. Both of which are valued at more than $1B despite being similarly profitable to Ebix. As a sanity check $423M would value EbixCash at a lower revenue multiple than Yatra, which is a much more challenged business that is barely breaking even.
The short answer is June 27, there may be a stalking horse bid announced before that. The bid deadline is June 14, and the Sale hearing is June 27. Those are both big days. After the Sale hearing a POR will be voted on, and Ebix should emerge in August, maybe September.
I shorted EBIX last year, when Raina took at $1.8M bonus from his company in forbearance. I have not been following it closely since, having mostly held on to my remaining position for tax reasons.
Reading this article and taking a fresher look at it reminds me of all the reasons I've held as long as I have:
Big discrepancies between the EbixCash DRHP numbers and EBIX's SEC filings.
Claimed 59% operating margins for the NA L&A assets? ...really? In a company famed for accounting shenanigans with inter-company transfers? I guess it got bought at 57% margins? If that was a trick, it worked.
Why such a discrepancy between EBITDA and cash flow from ops - interest?
Why have they not been able to refinance, especially when everyone thought rate cuts were right around the corner? My guess is their banking partners didn't trust the numbers.
If EbixCash is so amazing, why can't it IPO? I guess that might be hard since the original (and even re-stated) filings over-stated their numbers as much as they did. How did you arrive at $47M in EBITDA for EbixCash?
In summary, Ebix clearly isn't a total fraud, but I think it's clear there are shenanigans going on. I agree accounting tricks using inter-company transfers should be zero-sum, but actual cash flows seem to underperform.
Of course this is a matter of probabilities, and a 50-60 cent share price provides a lot of asymmetry.
Thank you for your reply, and congrats on the short. Let me try and tackle your questions one at a time.
The 59% EBITDA margins for the NA L&A assets eyeballs as very high. However, over the last few years the expenses of that business were cut to the bone in order to divert resources to India. It was always I high margin business, but over the last few years Ebix cut all S&M and R&D in that business, which hurt its longterm competitive positioning but because it is a duopoly market with real customer stickiness. This turned a growing business into one with a stagnant revenue, but strong short term profitability.
There is not a huge discrepancy between EBITDA and cashflow from operations. I did not break out CFO, but if you look at the cumulative FCF from 2009 through Q3 2023 and add back Capex, Taxes, change in NWC, Interest and (subtract) SBC you get to EBITDA.
There are a few reasons why they had difficulty refinancing; firstly, I dont think they expected to need to. I think they expected that they would be able to IPO, and that if they couldn't IPO they would get more than $386M for the NA L&A assets (Zinnia got an incredible deal). I also think that they probably thought the banks would give them another extension. They were current on interest and were trying to take steps to monetize their business effectively, the banks just understandably got impatient after giving Ebix a lot of rope. I dont think the banks expected to see impairments from forcing Ebix into bankruptcy either. If Ebix thought it had liquidity issues it could (and should) have issued 10M shares a year ago at $20 a share. This would have solved its debt problems, but I think the view at the time was the stock price was too cheap at $20 a share (it was at $80 in 2018) and Raina didnt want to dilute himself. It is hard to find a lender that would be willing to lend to Ebix when half its EBITDA was international (US banks won't do it maybe an Oaktree or Apollo) especially when all Ebix really needed was a bridge loan.
EbixCash couldn't IPO because it was presenting itself as making $110M when it wasn't. Sorry in advance about to copy and paste my accounting assumptions that got me to $47M, which are long and confusing.
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Ebix’s most recent 10Q stated that the entire business was doing $130M in LTM EBITDA, $136M excluding legal and professional costs. EbixCash’s stated EBITDA of $110M does not make sense when paired with the NA L&A Exchange’s $55M of EBITDA provided in the Asset Purchase Agreement. This implied that the remaining Risk Compliance Solutions division lost a combined $35M, which is inconsistent with everything else I have learned about it.
The puzzle piece that connects everything together is within the EbixCash IPO addendum. It states that Dubai based Ebix Asia Pacific FZ-LLC is its largest customer, accounting for 26%, or ~$75M of revenue in the TTM to March 2023. Ebix Asia Pacific FZ-LLC first appeared in Amendment No. 4 of Ebix’s credit agreement, which was filed in reaction to Ebix transferring IP to Ebix Asia Pacific FZ without notifying the creditors. This constituted an event of default and a subsequent waiver . I initially thought Ebix Asia Pacific FZ was purely an IP holding company. Furthermore, Ebix Cash Limited, the subsidiary that “provides export services” to Ebix Asia Pacific only does so through units in special economic zones that are eligible for tax holidays and has historically had “negligible domestic operations” . However, the bankruptcy docket showed Ebix Asia Pacific FZ-LLC’s revenue and expenses. They matched up almost perfectly, and it listed $12.6M of G&A expenses and $54.1M of “services and other costs” in the twelve months leading up to September 2023. My guess is that the $12.6M is legitimate and the rest (or at least most of the rest) is not. Additionally, the bankruptcy docket showed that TTM revenue had fallen from $75M in March to $67M in September 2023. My guess is that in the TTM to March 2023 the actual (G&A) expenses were the same. This implies that there was about $62.4M ($75M-$12.6M) of fake profits coming from Ebix Asia Pacific FZ. This is sanity checked by the fact that EbixCash Limited employs 1,350 people, some software developers, and some call center employees. These employees likely provide support to Ebix US and ~$9,300 of expenses per employee ($12.6M / 1,350) seems reasonable.
The possibility of artificially funneling profits to India is supported by a table showing losses by geography in Ebix’s 2022 10k . The table pairs a $44M loss in the US with a $100M profit in India. This maneuver is not unique to 2022, the last time Ebix had pre-tax income in the US was 2015. After 2015, Ebix’s profits showed up in Dubai before moving from Dubai to India.
Adjusting for internal billing and a few other noncash items that obscure the normalized earnings potential of the business, my estimate is that EbixCash’s true EBITDA was $47M in the twelve months preceding 3/31/2023. This compares to $136M of TTM EBITDA for the overall business as of 9/31/2023. Taking out the $55M of EBITDA from the NA Life and Annuity Assets, $47M from EbixCash and ~$33M for the remainder of Ebix’s businesses.
Of the remaining $33M, I estimate a little less than half is from international exchanges and the balance is from the remaining US businesses, principally the certificate of insurance business.
These EBITDA estimates roughly match up with the EBITDA growth Ebix experienced between 2016 and 2018. EBITDA, which in 2016 did not include EbixCash, jumped from $110M to $165M in 2018 after all the investments that underpin EbixCash were made. Additionally, during this time, US revenues fell 7%, leading me to believe EbixCash’s creation came with at least $55M of EBITDA. Since then, the business’s aggregate EBITDA has decreased by ~$35M.
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Hopefully this was helpful, sorry for responding with a second article. You asked very good questions and none of them had yes or no answers.
The potential tax liability is from the gain on sale of the NA L&A assets. There are some US NOLs to mitigate that tax, but they also may be wiped out in a restructuring.
Well that didn't work. Good try though!
I'd meant to type up a long reply here, but didn't have the time. In short, I went through a lot of the Ebix travel websites, and looked at available pictures of their physical locations.
Per the Wayback Machine, the websites had barely been updated since their purchases. They still us the same version of various JavaScript libraries they did back when they were bought. The business storefronts are shall we say very unimpressive.
I think Raina's MO is buying companies, and not spending anything on upkeep. That generates strong cash flow, until it doesn't.
Doesn't seem like EbixCash had any value:
"With respect to EbixCash, Jefferies contacted over 70 parties with explicit interest in all or certain of the assets of EbixCash. 21 parties executed a non-disclosure agreement with the Debtors, and nine (9) parties interested in EbixCash executed a non-reliance letter with Deloitte for access of Deloitte’s draft vendor due diligence report.
Again, however, although the Debtors received interest in the EbixCash assets, the Debtors were not able to secure a transaction for these assets, including due to the EbixCash Liabilities, potential regulatory review and approvals for such a transaction, cash flow impacts from the sale of the North America assets, and significant working capital requirements for the EbxCash business."
Good try?
Good well researched Article!
Your educated guess puts share price to fall upwards of $6 and, in best case lucky scenario, to reach $19.
Given a consortium, supposedly blessed by Raina et al, l stepped forward to buy EBIX outright without assuming liabilities, what are your thoughts on possible endgame, shareholders getting their money, etc.
Thanks!
Wow this tanked 60% today... any idea why!!
Looks like the bids are too low and auction date is near. Prospects of getting anything higher is dim.
Not sure if loan refinancing is on the table. If that happens, it will gain quickly its lost ground to the levels of 10x+
Or if Ebixcash is sold at higher valuation then also above possibility of stock value will hold...
AUTHOR of this research article is not able to comment further.
Whys he not able to comment further
A post mortem would be interesting.
Thank you for this informative post—I think this is the most interesting (and contrarian!) investing Substack I've read.
My first question is, what do view as the most salient risks regarding value leakage in the bankruptcy process? Due to the structure of the debt being large secured; very small unsecured; then equity, it seems to me that the incentives between the secured creditors who control the process and the equity holders should be aligned. The secured creditors are incentivized to properly market EbixCash, because without it, they run the risk of not recovering the full amount.
Secondly, what due diligence have you done on their Indian business? How is it doing post-bankruptcy?
Thirdly, why are its peers trading at such high multiples? Have they been acquisitive in the past?
Finally, how long do you expect this opportunity to last? When will they emerge from bankruptcy?
Thanks again for a very informative and well-written article.
Thanks for your reply. There is unfortunately far from full incentive alignment between the creditors and the equity holders. The biggest misalignment is due to mismatched time horizons. The banks are going to get mostly paid back no matter what, their current priority is speed, whereas equity holders would be willing to wait a few more months to maximize value.
I've had a couple of expert calls (the transcripts are on Tegus if you have an account) with Indian ex-employees, competitors and someone from Western Union and talked to the IR of two of their competitors. It's business as usual for Ebix in India. They are still hiring and advertising and their brand has not suffered any harm. They are well-respected in India and one of the four biggest travel agencies there. Hard to say where they are at financially. The periodic report indicates that they are up slightly from a revenue perspective, and also that they have had business shift improvements (from prepaid cards which are low margin even on a net basis to travel, which is high margin). I feel confident that revenue has grown some, and that EBITDA has grown a little more, hard to be more precise than that.
The other three big travel agencies trade at higher multiples for a few reasons. Firstly, India is just very hot right now (https://www.economist.com/finance-and-economics/2024/05/02/hedge-funds-make-billions-as-indias-options-market-goes-ballistic). There is definitely a lot of money flowing in and meme-stockesque speculation. The difference is the form of speculation (index options) pushes the index up rather than individual stocks. An underreported story is India now accounts for 84% of options traded globally. Secondly, while Ebix has a very similar business to Thomas Cooke (trades at 17x) its primarily offline business is not as attractive as MMYT and EaseMyTrip's primarily online businesses.
There also is a story to be had about how the business has low capital intensity, and the emerging Indian middle class means the Indian travel sector has massive tailwinds going for it. The peers have been very acquisitive in the past (more inorganic than organic growth), and all have strong balance sheets right now. When asked about how MMYT wanted to spend its $600M of cash on its earnings call, M&A was the top objective. Assuming no synergies, buying EbixCash at 9x EBITDA would increase its EBITDA by 40%, despite $423M being less than 6% of its EV. The accretion math is even more striking for EaseMyTrip and Thomas Cook. Both of which are valued at more than $1B despite being similarly profitable to Ebix. As a sanity check $423M would value EbixCash at a lower revenue multiple than Yatra, which is a much more challenged business that is barely breaking even.
The short answer is June 27, there may be a stalking horse bid announced before that. The bid deadline is June 14, and the Sale hearing is June 27. Those are both big days. After the Sale hearing a POR will be voted on, and Ebix should emerge in August, maybe September.
I shorted EBIX last year, when Raina took at $1.8M bonus from his company in forbearance. I have not been following it closely since, having mostly held on to my remaining position for tax reasons.
Reading this article and taking a fresher look at it reminds me of all the reasons I've held as long as I have:
Big discrepancies between the EbixCash DRHP numbers and EBIX's SEC filings.
Claimed 59% operating margins for the NA L&A assets? ...really? In a company famed for accounting shenanigans with inter-company transfers? I guess it got bought at 57% margins? If that was a trick, it worked.
Why such a discrepancy between EBITDA and cash flow from ops - interest?
Why have they not been able to refinance, especially when everyone thought rate cuts were right around the corner? My guess is their banking partners didn't trust the numbers.
If EbixCash is so amazing, why can't it IPO? I guess that might be hard since the original (and even re-stated) filings over-stated their numbers as much as they did. How did you arrive at $47M in EBITDA for EbixCash?
In summary, Ebix clearly isn't a total fraud, but I think it's clear there are shenanigans going on. I agree accounting tricks using inter-company transfers should be zero-sum, but actual cash flows seem to underperform.
Of course this is a matter of probabilities, and a 50-60 cent share price provides a lot of asymmetry.
Thank you for your reply, and congrats on the short. Let me try and tackle your questions one at a time.
The 59% EBITDA margins for the NA L&A assets eyeballs as very high. However, over the last few years the expenses of that business were cut to the bone in order to divert resources to India. It was always I high margin business, but over the last few years Ebix cut all S&M and R&D in that business, which hurt its longterm competitive positioning but because it is a duopoly market with real customer stickiness. This turned a growing business into one with a stagnant revenue, but strong short term profitability.
There is not a huge discrepancy between EBITDA and cashflow from operations. I did not break out CFO, but if you look at the cumulative FCF from 2009 through Q3 2023 and add back Capex, Taxes, change in NWC, Interest and (subtract) SBC you get to EBITDA.
There are a few reasons why they had difficulty refinancing; firstly, I dont think they expected to need to. I think they expected that they would be able to IPO, and that if they couldn't IPO they would get more than $386M for the NA L&A assets (Zinnia got an incredible deal). I also think that they probably thought the banks would give them another extension. They were current on interest and were trying to take steps to monetize their business effectively, the banks just understandably got impatient after giving Ebix a lot of rope. I dont think the banks expected to see impairments from forcing Ebix into bankruptcy either. If Ebix thought it had liquidity issues it could (and should) have issued 10M shares a year ago at $20 a share. This would have solved its debt problems, but I think the view at the time was the stock price was too cheap at $20 a share (it was at $80 in 2018) and Raina didnt want to dilute himself. It is hard to find a lender that would be willing to lend to Ebix when half its EBITDA was international (US banks won't do it maybe an Oaktree or Apollo) especially when all Ebix really needed was a bridge loan.
EbixCash couldn't IPO because it was presenting itself as making $110M when it wasn't. Sorry in advance about to copy and paste my accounting assumptions that got me to $47M, which are long and confusing.
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Ebix’s most recent 10Q stated that the entire business was doing $130M in LTM EBITDA, $136M excluding legal and professional costs. EbixCash’s stated EBITDA of $110M does not make sense when paired with the NA L&A Exchange’s $55M of EBITDA provided in the Asset Purchase Agreement. This implied that the remaining Risk Compliance Solutions division lost a combined $35M, which is inconsistent with everything else I have learned about it.
The puzzle piece that connects everything together is within the EbixCash IPO addendum. It states that Dubai based Ebix Asia Pacific FZ-LLC is its largest customer, accounting for 26%, or ~$75M of revenue in the TTM to March 2023. Ebix Asia Pacific FZ-LLC first appeared in Amendment No. 4 of Ebix’s credit agreement, which was filed in reaction to Ebix transferring IP to Ebix Asia Pacific FZ without notifying the creditors. This constituted an event of default and a subsequent waiver . I initially thought Ebix Asia Pacific FZ was purely an IP holding company. Furthermore, Ebix Cash Limited, the subsidiary that “provides export services” to Ebix Asia Pacific only does so through units in special economic zones that are eligible for tax holidays and has historically had “negligible domestic operations” . However, the bankruptcy docket showed Ebix Asia Pacific FZ-LLC’s revenue and expenses. They matched up almost perfectly, and it listed $12.6M of G&A expenses and $54.1M of “services and other costs” in the twelve months leading up to September 2023. My guess is that the $12.6M is legitimate and the rest (or at least most of the rest) is not. Additionally, the bankruptcy docket showed that TTM revenue had fallen from $75M in March to $67M in September 2023. My guess is that in the TTM to March 2023 the actual (G&A) expenses were the same. This implies that there was about $62.4M ($75M-$12.6M) of fake profits coming from Ebix Asia Pacific FZ. This is sanity checked by the fact that EbixCash Limited employs 1,350 people, some software developers, and some call center employees. These employees likely provide support to Ebix US and ~$9,300 of expenses per employee ($12.6M / 1,350) seems reasonable.
The possibility of artificially funneling profits to India is supported by a table showing losses by geography in Ebix’s 2022 10k . The table pairs a $44M loss in the US with a $100M profit in India. This maneuver is not unique to 2022, the last time Ebix had pre-tax income in the US was 2015. After 2015, Ebix’s profits showed up in Dubai before moving from Dubai to India.
Adjusting for internal billing and a few other noncash items that obscure the normalized earnings potential of the business, my estimate is that EbixCash’s true EBITDA was $47M in the twelve months preceding 3/31/2023. This compares to $136M of TTM EBITDA for the overall business as of 9/31/2023. Taking out the $55M of EBITDA from the NA Life and Annuity Assets, $47M from EbixCash and ~$33M for the remainder of Ebix’s businesses.
Of the remaining $33M, I estimate a little less than half is from international exchanges and the balance is from the remaining US businesses, principally the certificate of insurance business.
These EBITDA estimates roughly match up with the EBITDA growth Ebix experienced between 2016 and 2018. EBITDA, which in 2016 did not include EbixCash, jumped from $110M to $165M in 2018 after all the investments that underpin EbixCash were made. Additionally, during this time, US revenues fell 7%, leading me to believe EbixCash’s creation came with at least $55M of EBITDA. Since then, the business’s aggregate EBITDA has decreased by ~$35M.
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Hopefully this was helpful, sorry for responding with a second article. You asked very good questions and none of them had yes or no answers.
If they've been officially showing losses in the U.S. then maybe that means no tax liabilities
The potential tax liability is from the gain on sale of the NA L&A assets. There are some US NOLs to mitigate that tax, but they also may be wiped out in a restructuring.