Online dating conglomerate Match Group (NASDAQ:MTCH) has seen its stock rise more than 100% since its December 2019 spinoff announcement from parent company IAC/InterActiveCorp (NASDAQ:IAC). But as a part of that transaction, IAC transferred $1.7 billion of exchangeable notes onto Match Group's already debt-ridden balance sheet. While the bulk of this debt isn't due for a while, investors should be asking whether or not Match Group will ultimately be able to pay it down.

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How did Match Group get here?

IAC is well known for incubating and spinning off businesses frequently. It has a history of acquiring smaller brands with a central theme, putting them under one umbrella, then releasing its ownership stake to the public. IAC spun off Expedia Travel Group (NASDAQ:EXPE) in a similar manner in 2005, but in Match Group's case, IAC transferred most of its outstanding debt to the newly independent company.

Prior to the separation, Match already had about $1.6 billion in long-term debt on its balance sheet. At the time, Match was generating about $620 million in free cash flow a year, resulting in a 2.6x debt-to-free cash flow ratio. However, as a result of the spinoff, Match Group now sits with more than double the long-term debt at about $3.5 billion -- or roughly 4.7 times its current annual free cash flow. Fortunately for investors, more than 70% of this debt isn't due until 2027 and beyond, giving Match Group more than enough time to accumulate cash and pay it down early.

However, about $1.7 billion of the outstanding debt comes in the form of exchangeable notes maturing in 2022, 2026, and 2030. Each of these loans is eligible to be converted into equity if Match Group's stock price exceeds the specified strike price on the given date -- which it currently does. In the event that the stock continues to stay at its current level or higher, investors should expect to see some share dilution over the coming years as lenders convert their outstanding loans to newly issued shares.

Can Match pay it down?

Despite in-person dating being entirely upended by the pandemic, Match Group just wrapped up a very successful fiscal year. As more and more users were forced to social distance, they took to the internet to scratch their dating itch. Driven by strength in its leading Tinder brand, Match Group grew revenue 16.5% to $2.4 billion and free cash flow 23% to $746 million in 2020.

Currently, Match Group boasts 31% free cash flow margins (free cash flow/revenue), but management expects this number to grow over time. In its latest conference call, CFO Gary Swidler reaffirmed Match Group's long-term target of 40% margins.

That goal seems quite attainable since Match Group has such a desirable cost structure. As a conglomerate, Match owns a portfolio of dozens of online-dating brands that all operate independently and require their own attention and costs. However, because Match Group as the parent company is well established, it's able to centralize most of the back-end logistical work into one place. Instead of each independent brand having its own accountants, legal team, human resources, marketing, etc., those functions all get offloaded to Match Group the parent company -- ultimately limiting any excess overhead costs.

In addition to a favorable cost structure, online dating as an industry has seen a meteoric rise over the last decade. In 2010, approximately 20% of relationships were started online, but by 2017 that number jumped to roughly 40% -- and that growth doesn't look like it's slowing down. Since the start of 2017, Match Group's average subscriber base has grown 92%, from 5.7 million to almost 11 million in 2020.

If the industry continues to grow, as it looks like it will, and Match Group continues to achieve greater than 30% free cash flow margins, I see no reason why Match Group should have any difficulty paying down its debt and returning cash to shareholders over the coming years.

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