FOOL PLATE SPECIAL: An Investment Opinion
About.com agrees to be acquired by niche magazine firm Primedia in a $690 million stock deal, which is intended to integrate the old media and new media worlds. For investors, though, the most interesting element of the buyout may be the light it sheds on the valuations of other beaten-down online content companies.
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It's not quite Merger Monday. But these days, anyone who steps up to the plate and buys something in the unpopular Internet space is bound to make headlines. This morning, the self-proclaimed "King of Offline Niche Content" Primedia Inc. (NYSE: PRM) found itself in the spotlight after agreeing to acquire online topic sites directory About.com (Nasdaq: BOUT). The stock deal is valued at $690 million, based on Friday's closing prices. In early trading this morning, About.com's shares gained somewhat while Primedia's stock suffered from a bout (there, that's the only dumb pun you get) of acquisition anxiety and slumped. "With this transaction, Primedia has been transformed. Niche is king," is how Primedia Chairman and CEO Tom Rogers described it in the press release announcing the deal. The transforming aspect of the deal is unquestionable accurate. Prior to today's news, Primedia's major claim to fame was its line-up of specialty magazines, which includes such titles as Seventeen, New York, Modern Bride, and American Baby. In effect, Primedia is trading away stock equal to more than a quarter of its current fully diluted sharecount to acquire About.com. That makes the deal a fairly big bet by Primedia on the future of the so-called "old" and "new" media worlds. Unsurprisingly, both company's believe the two areas are destined to integrate and form a single media universe that will keep expanding, which is exactly what About.com's Science Guide, Gayle Olsen, will tell you the real universe is doing. It's interesting to note that the number of shares being offered by Primedia is more or less equal to the company's outstanding float, considering that roughly three-quarters of Primedia is owned by Wall Street buyout firm Kohlberg Kravis Roberts & Co. That raises the issue of who is running the show here -- and for whom. KKR hired Rogers away from NBC last year and installed him as Primedia's CEO for the purpose of taking the slow-growing company into the world of new media opportunities. With today's deal, that's exactly what has happened. But even with the boost to the float, individual shareholders won't get much say in terms of which way the new company will be steered. That's something for existing About.com shareholders to keep in mind as they examine the details of today's deal. The cloudy implications for shareholders aside, the combination is beneficial to investors in at least one other respect. It's not everyday that a beat-up online content company gets bought out. (For the record, About.com was down 77% from its March high before today's news.) So, the price being forked over for About.com creates an opportunity to do some comparable valuation exercises, especially using the price-to-revenue yardstick that sell-side analysts were so insistent on using earlier this year to back up so many ill-fated "strong buy" recommendations for online content companies.
Drawing concrete conclusions from a comparative valuation exercise like this one is tricky, especially considering that the firms involved aren't exactly "comparable" to begin with and the price-to-revenue multiple is a shaky measure to boot. Still, investors should pay attention when buyouts happen, as they offer a window into how an outside buyer might price businesses in a related area. There's no guarantee a buyer will appear for every beaten-down Internet content company out there. But for investors holding on to shares in these companies, the About.com buyout offers a glimmer of hope about what kind of business value today's stock quotes might not be picking up. Price to Revenue Multiple
About.com 8.2
LookSmart 5.8
Ask Jeeves 4.1
CNET Networks 9.6
(Note: Expected full-year revenues
for fiscal 2000, based on current
revenue run-rates)
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