Ebaum Sells Out: Pockets $20 – $50 Million For 10 Million Visitors
Last Thursday, we saw another major deal in the internet video space when Eric Bauman agreed to sell Ebaum’s World for anywhere between $17.5 – $50 million, depending on performance considerations.
The site was purchased by a small company named Handheld Entertainment (ZVUE). Handheld is a microcap company that makes a low end mp3 player. Over the last 9 months, they’ve had a pretty rough run in the market. After announcing the acquisition of Dorks.com for $1.5 million last November, the company saw their share price spike to $7 per share before settling to a little under $2, prior to the Ebaum purchase.
During that time, the company also purchased Putfile for $7.1 million, FunMansion.com for $1.1 million and Yourdailymedia for $1.06 million. By themselves, these sites seem trivial, but collectively, the traffic does start to add up.
Before the Ebaum purchase, I had never heard of Handheld, but over the weekend, I dugg into their conference call announcing the buyout and found a lot of good video stats buried in the presentation.
-Ebaum’s traffic is incredibly sticky. They average close to 22 page views per visit. Of all the video sites, they are ranked #2 in the amount of time that their users spend on the site. #8 in terms of traffic. With Nielsen changing the way they measure traffic, this could add an edge in attracting advertisers.
-Ebaum averages about 3.2 million unique visitors per week. A lot of these visits come from organic traffic. They estimate that 65% of their visits are repeat visitors. To help put this number into perspective, on Local.com’s (LOCM) most recent conference call, they said that they were getting a measly 10% of their traffic from organic sources. This is an important number to keep an eye on because when you have to buy your clicks, it eats into profitability.
-The number of 18 – 35 year olds that visit the site each week, is the same number that tunes into CSI or Law and Order each week. I found this stat to be the most fascinating. As media continues to develop, these micro communities will play an increasingly important role in media. I don’t have any data to back it up, but I would bet that the 18 – 35 year olds, who are visiting Ebaum’s World, are the ones who are less likely to be watching Law & Order to begin with.
-Handheld paid 6 times EBITDA for the site. If the site quits making money, then Bauman’s piece would be capped at the $17.5 million. If it does earn money, then he can earn another $27.5 million from a 60/40 split of the earnings. As part of the deal, Bauman will end up owning 2.5 million shares of the company. These will vest over the next 3 years.
-Prior to announcing the deal, Handheld not only secured financing that shareholders are allowed to vote on, but actually priced the warrants at a premium (albeit modest) to the current share prices. I still don’t have a good handle on the full impact the warrants will have on the company’s capitalization, but I can’t remember the last time I saw a microcap company actually price a private placement deal above market, let alone secure financing that didn’t have complicated contingencies attached. This shouldn’t be all that unusual, but sadly it is.
-Ebaum’s World earned $5.2 million in revenue last year and $1.6 million in net income. Personally, the ads are a little too aggressive for me, but it apparently hasn’t stopped others from spending time there. While the ads can be spammy, they also appear to be quite profitable. $1.6 million isn’t a huge number, but it does prove that online video can make cash.
With any microcap stock, there is always a high degree of risk and over the last 9 months, Handheld investors have had to learn that lesson the hard way. While I do think that there are some legitimate questions about the company’s hardware business, after the haircut they’ve taken, it’s hard to argue that this isn’t priced in.
Between the Ebaum purchase and their past acquisitions, the company has developed an impressive portfolio of web communities. The challenge now, is to find cost synergies and better ways to monetize these impressions. Because of the uncertainties surrounding their business model and the complexities of their previous financing, it’s hard to know how to value this one early on, but it’s one that might be worth keeping an eye on, even if it’s just for the juicy online video statistics.
Posted on August 6th, 2007 by Davis
Filed under: Media, VOD, Web 2.0
Davis,
This is a well-reasoned counterpoint to my more skeptical evaluation of the deal. The key, of course, will be translating eyeballs to dollars. I have my doubts, but if they pull it off I will be the first to admit that I misjudged them. A slight clarification on the financing: you correctly note that it is exceedingly rare for a microcap company to price shares in a private placement above market prices. I can only think of two instances in the past two years — Crystallex (KRY) and Littlefield (LTFD.OB). But this was not an above-market placement — it was a convertible debenture, which frequently have conversion prices slightly to substantially above the prevailing market price. The warrants provide extra incentive, or return, for the buyers. The value of the warrants can be determined using standard black-scholes or binomial pricing models, and should be considered an extra “cost” of financing. Given the stock’s volatility and their the value of those warrants is probably over $1. With 5.7 million covering $24 million in financing, the cost of that incentive is substantial. At the same time, the interest rate is fair and the fixed-conversion price far more shareholder-friendly than a floorless convert. Overall, the financing is fairly good. Let’s see what the company can do with the deal.
Thanks for the encouragement and clarification on the financing. I agree that the cost of the financing will be significant, that is part of why it’s so hard for me to figure out what a company like this should really be worth. If I was thinking about putting my own money in (which I’m not) I think I’d probably wait for some of the Ebaum buzz to die and for the financing pieces to be a little more clear. Still I think we both agree that the financing looks a lot cleaner than what’s standard for the microcap industry. It doesn’t mean that the company will be successful, but it’s a positive sign, when proceeds from an underwriting actually go towards making the company stronger.
It’s also tough to figure out the true value, because when it comes to these web communities, they aren’t being valued at traditional metrics. That’s part of why I thought 6x EBITDA sounded like a decent deal for both parties. With so much misunderstanding on how web communities work, these are either going for nosebleed prices or are really cheap. I’m sure that Yahoo! was happy to pay $35 million when they bought Flickr, but not every site will be a homerun. Still, when I see CollegeHumor selling half of their company to IAC at a $40 million valuation with 6 million uniques, it makes me wonder what a company like ZVUE is worth, with about four times the total traffic and a very similar demographic. If they can figure out ways to better monetize the sites, than a valuation will be easier to pinpoint, but given their past history with the mp3 players, I can understand why someone would (in fact should) be skeptical of management’s ability to execute on this. Only time will tell what happens, but I see this one as being high risk, but at least some kind of a potential for high reward, if things come together right.
You have pinpointed the reason why I am not short ZVUE. While I think the weight of the evidence makes this a questionable bet as an operating company, a takeout — even at levels you and I might think unreasonably high — is a distinct possibility. Shorts underestimate how easy it would be for the stock to spike if the company issued a single press release announcing that it was discontinuing the money-losing hardware biz, focusing all efforts on the websites that investors care about, and hiring an advisor to explore strategic alternatives.