When Bankrate (Nasdaq: RATE) got taken private two years ago, no one was more bummed than I. For months, I'd backed the stock as a great way to play consumers' desire for independent personal finance info, a trend that helped make Morningstar (Nasdaq: MORN) a star, gave rise to Jim Cramer and TheStreet.com (NYSE: TST), and even fueled The Motley Fool's fires.
As evidence of the company's popularity, in 2009, the year of its takeover, Bankrate generated $37 million worth of free cash flow from its business of distributing credit card offers, mortgage rates, and other financial data on its site. At the $571 million takeout price, the company's private equity buyers got themselves a sweetheart deal, paying just 15.4 times FCF to own one of the best pieces of real estate on the Web.
Friday, they sold it back to us, reIPO'ing Bankrate at $15 a share. I probably should be cheering at getting a second chance to own it -- but I'm not.
Why not? Because today's Bankrate is barely a shadow of its former self. Two years after private equity took Bankrate in-house to "improve" the business, Bankrate's now generating just $8 million in annual free cash flow. Its market cap, according to Capital IQ, looks bloated at $1.5 billion. Worst of all, this formerly cash-rich company returns to us laden with nearly $300 million in long-term debt, $117 million of which is to be retired with proceeds from the re-IPO. I fear that so much debt will hamstring Bankrate's ability to compete effectively against much better funded rivals such as News Corp. (NYSE: NWSA) and Google (Nasdaq: GOOG).
Granted, management promises to produce pretty dramatic improvements in free cash flow "on a go-forward basis." If this happens, such free cash can be used to pay down the debt. For the time being, however, I'm looking at a stock that costs three times what it cost just two years ago, yet generates less free cash flow. And no, I'm not impressed.
Editor's Note: A previous version of this article referenced $245 million in preferred equity, which is being converted to common stock in accordance with the IPO. The article has been updated to reflect IPO-related changes to the company’s debt condition and to offer management’s free cash flow outlook.
