Tuesday, December 10, 2013

IACI, BCOR: IACI acquires VCLK's O&O; Zoosk IPO possibly in 2014

Some interesting news regarding IACI came out on Monday.  First, the Company is purchasing ValueClick's (VCLK) owned and operated (O&O) websites business for all cash.  Second, some think that Zoosk, an internet dating service and a competitor to IACI's many dating sites, will go public sometime in 2014.  We have made some adjustments to our valuation of IACI; however, given the limited upside potential we continue to view the stock as a 'neutral'.  

Acquisition of VCLK's O&O

VCLK's O&O segment and its significant dependence on Google (GOOG), along with VCLK's different long-term strategy, forced the Company to put the business up for sale on 11/5.  Given such GOOG-dependency, from which every player in this space suffers, we briefly discussed possible M&A in this space on 11/4.  In an 8-K filed on Monday, VCLK stated it will get paid approx. $80MM by IACI.  We think IACI is making the right and very necessary move.  In addition, this price appears to be only 2x - 3x VCLK's O&O FY '13 EBITDA, which makes it a pretty good deal.  We derived the EBITDA multiple range based on our own assumptions: 15% Y/Y top-line growth and a 22% EBITDA margin (below prior year due to changes in GOOG's pricing policy) for VCLK's O&O in FY '13.  These translate into $139.2MM and $30.6MM in O&O revenues and EBITDA, respectively.  The deal will close in Jan. '14.  

We think the newly acquired assets will generate around $35MM in EBITDA next year (2014).  Although it appears that IACI is purchasing those assets at a significant discount, we think VCLK management's short time frame in divesting that segment also played a big role.  However, such a discount could impact BCOR negatively.  We said it before: BCOR's stock price is trading higher than where we value it at, and it could be negatively impacting chances of BCOR receiving offers for its Infospace business segment (for both the partners and O&O assets). 

While this acquisition will not provide IACI with nearly enough leverage to make it a naysayer to the space's behemoth, GOOG, we think it will provide more flexibility, via more content, to try to minimize negative impact of GOOG's pricing policies.  The acquisition also provides more international presence for IACI.  For these reasons, we expect slight margin expansion in 2014.  At 7x EBITDA, those assets could be worth around $245MM, or $165MM net of cash paid.  This adds approx. $1.85/sh to our valuation of IACI, resulting in a $61.35/sh valuation; only a 6.5% upside from where IACI closed at on Monday.  Our previous valuation of IACI was $59.50/sh. 

Possible IPO for Zoosk in 2014

In other news, it appears that the private company, Zoosk, a dating site founded by two fellow Iranians, will try to go public in 2014.  Zoosk competes with IACI's Match business segment (which includes match.com, Meetic, OkCupid, and Tinder).  

Based on a few news releases, it appears that Zoosk's revenues were on a $120MM run-rate by the end of Q1 '13.  We did a couple of back-of-the-envelope valuations.  Assuming a 5-year CAGR of 15% in revenues and an optimistic 30% EBITDA margin, with between $4MM and $7MM in capex per year, our DCF model spits out a $540MM EV for Zoosk.  We note that we are playing the role of an investment banker, which means we are being uber-optimistic.  Depending on Zoosk's growth strategy, the Company could see lower margins and higher capex.  We also applied an EBITDA multiple of 8 to our 2015 $48MM EBITDA guesstimate.  We note this is slightly higher than the 7.5 we give to IACI, as Zoosk will still be in more of a growth stage, but in a very competitive and non-dynamic space, in our opinion.  With that EBITDA multiple, we get a $384MM EV for Zoosk.  Given the lack of financial information, we could have just thrown darts to come up with our revenue and EBITDA estimates.  But we think we have made some logical assumptions (although the assumption that Zoosk is CF positive can be questioned), given the limited information.  So we estimate Zoosk to be valued between $384MM and $540MM, or 2.4x - 3.4x 2015 revenues.  Spark Networks (LOV) is trading at an EV/sales multiple of 1.4.

How may this potential IPO impact IACI?  As we mentioned on 11/4, one of IACI's hottest assets appears to be the online dating service, Tinder.  We think if the Zoosk IPO is successful next year, Tinder or other components of IACI's Match business (such as OkCupid), could follow.  

In the meantime, we continue to believe that the upside for the IACI stock is limited.  We value it at $61.35/sh.  Lastly, we believe BCOR is trading above fair value, which we believe is $25.30/sh.  Again, the surge in the stock has likely turned away some interested buyers.  In our opinion, a potential buyer would pay a maximum of 6x Infospace 2014 EBITDA, or $520MM.

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