Let's play Pick the Punch Line. United Online (Nasdaq: UNTD), best known for its discount Web access providers Juno and NetZero and the botched spinoff of its Classmates.com and loyalty shopping hub MyPoints, is buying floral delivery company FTD Group (NYSE: FTD).
Why is United Online buying FTD?
- Deal provides easy access to funeral wreaths for its dying dial-up business.
- Juno is pregnant, and baby announcement gift baskets don't come cheap.
- After watching Classmates get trumped by more successful social networking sites, United mistakenly thinks that FTD stands for Facebooked To Death.
- It called 1-800-Flowers (Nasdaq: FLWS) first, but got a busy signal.
- It saw the future, and the future is floriculture.
The real answer isn't as funny, but it does make sense. FTD, the service that connects online and phone floral arrangement orders with local florists, will help diversify United's portfolio. Because FTD is simply passing on orders and providing other services for independent floral shops, it's a steady, high-margin cash cow.
That is just what United needs as it grapples with its fading access business and the somber realization that Classmates missed the social networking boat. Classmates.com may have been early on the bandwagon of connecting people, but it squandered its lead by trying to become a premium service for college alums to rekindle old friendships instead of the more open-ended campus-friendly model that made Facebook -- and News Corp.'s (NYSE: NWS) MySpace -- Web 2.0 sensations.
The only real shining star in United's portfolio was MyPoints, posting operating profits even as Classmates racked up losses. It was little for United to stand on, especially because so much is riding on Classmates making up for lost time by opening up its network in hurry.
With FTD on board, Juno and NetZero will now account for less than 25% of the overall revenue mix. That's really what this deal is all about, as cable and telco giants like Comcast (Nasdaq: CMCSA) and AT&T (NYSE: T) have taken over the Web access market at the expense of the dial-up stars of the 1990s like United, AOL, and EarthLink (Nasdaq: ELNK). The FTD deal may not come cheap, valued at $800 million, but it will add to earnings by this time next year.
The terms are a bit unusual. You've seen cash deals, stock deals, and a combination of cash and stock. In this one, FTD shareholders will receive what was initially valued at $15.08 a share worth of United's stock, cash, and debt. Yes, debt. Of that $15.08, $3.31 will be the principal amount of 13% senior secured notes due in five years. United has the option of substituting the debt for slightly less in greenbacks before the deal closes. It's hard to know if that will happen, though United is slashing its once-lofty dividend in half to start preserving its cash.
The purchase is the right move, and there are some genuine synergies between FTD and United's online properties.
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