November 23, 2021

BuzzFeed Is Weeks Away From Being Public… Where Do We Stand?

In late 2020 and early 2021, SPACs were going to be the savior—nay, the bailout—for digital media. Finally, there was liquidity. But then nothing happened. It seems that we might finally get some action.

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Now let’s jump in…

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BuzzFeed had always been the farthest along, actually announcing that it had a partner SPAC as well as announcing that it was merging with Complex Networks. I wrote about that here. And now we are likely weeks away from seeing shares trade. According to The New York Times:

The publisher’s plan to merge with 890 5th Avenue Partners, a blank-check company, will be put to a shareholder vote on Dec. 2, according to a recent securities filing. If investors agree to the deal, BuzzFeed could start trading on the public markets as soon as Dec. 6.

The extra few days are needed because of a second merger. BuzzFeed, led by its founder and chief executive, Jonah Peretti, will acquire the sports and entertainment publisher Complex Networks as part of its agreement with 890 5th Avenue Partners.

It would be an absolute shock if shareholders did not vote on this deal, which means that BuzzFeed will have accomplished something that very few in digital media ever thought possible. Whether this is the first of many or a one-off remains to be seen, but the same excitement about SPACs a year ago seems to have died down a bit.

Nevertheless, here we are. How do things look?

BuzzFeed announced its Q3 earnings late last week and, candidly, the growth looks good. I’ll break it down for you below.

  • BuzzFeed Q3 revenue grew from $75.2m in 2020 to $90m in 2021
  • BuzzFeed Q3 adjusted EBITDA grew from $2.8m in 2020 to $6m in 2021
  • Complex revenue grew from $28.6m in 2020 to $31.1m in 2021
  • Complex Adjusted EBITDA decreased from $914,000 in 2020 to $333,000 in 2021

For the quarter, the combined entity would have generated $121 million with an adjusted EBITDA of about $6.3m. In Q3, it generated a combined adjusted EBITDA margin of 5.2%. I’ll be honest, I never expected BuzzFeed to reach any semblance of profitability. It would have been more profitable if it weren’t merging with Complex.

But how are things looking toward the company’s projected revenue and EBITDA for the full year? This becomes a bit of a mixed bag.

In the original SPAC presentation, BuzzFeed estimated that the company would have $521 million in revenue this year. In the first nine months, it has generated $336.1 million in revenue. Therefore, it has a delta of about $185 million. Is that doable? Let’s look at 2020 to help inform that decision.

According to the presentation, it generated $421 million in 2020. If we subtract the $285 million it generated in the first nine months of 2020, that means it brought in $135.9 million in Q4 of 2020. Revenue would have to grow by approximately 36% year over year to hit its target.

I think there are certainly some struggles that could affect the company in Q4. As we’ve talked about, supply chain issues could negatively impact the advertising market. Additionally, commerce may see pullbacks as well compared to last year. But will it be a material difference? It’s hard to say.

On the other hand, ComplexCon was earlier this month. In October, Digiday wrote:

Sales of tickets, which range from $80 to $500 apiece, are already up more than 10% from where they were in 2019. The company declined to say how many attended that year, but 60,000 were in attendance in 2018. And brand sponsorship revenue, the fashion and entertainment confab’s key revenue source, is on pace to hit an all-time high too, with sponsors still asking if there’s room to participate, Complex Networks chief revenue officer Edgar Hernandez said. In 2019, ComplexCon Chicago reportedly generated $40 million in revenue. 

Could ComplexCon be a $50-$60m event? If so, that would be a major revenue opportunity that the business didn’t have in 2020 and contribute heavily to Q4 revenue targets.

The real risk is BuzzFeed’s full-year adjusted EBITDA targets. According to the earnings report, in the first nine months of the year, the combined business generated an adjusted EBITDA of $2 million. The expected adjusted EBITDA for the full year is $57 million. That seems highly unlikely.

Let’s contextualize that… If it does generate the $185 million it’d need to actually hit its revenue target, that would mean to hit its EBITDA target, the margin for the quarter would have to be nearly 30%. Anything is possible, but considering the adjusted EBITDA margin in Q3 was 5.2%, I just don’t see it happening.

Nevertheless, as BuzzFeed prepares to merge with Complex and then go public, we have a profitable and growing business. For a business that many called a zombie, it has figured out how to get into a position where it has some control over its destiny. None of this is to say, of course, that it deserves the lofty valuation, but it’s a step in the right direction.

Whether 2021 is a fluke or if this is a new trend remains to be seen. This was one of the best years media has ever had from an advertising perspective. Will 2022 repeat? If not, will growth slow for BuzzFeed or has it solved its problems? It’ll be interesting to watch.

Will Lee Enterprises be next?

Alden Global has its eyes set on the next newspaper chain. According to The New York Times:

In a letter to Lee Enterprise’s board of directors, Alden proposed a cash purchase at $24 a share, about 30 percent more than the company’s closing share price on Nov. 19 of $18.49. The deal values the company at about $141 million.

A number of the papers in the Lee Enterprises stable were once the property of the billionaire Warren E. Buffett, who soured on the business in recent years and said that most newspapers were “toast.” Lee Enterprises managed the 31 daily newspapers and dozens of weeklies owned by Mr. Buffett for a time before he sold them to that company in 2020 for $140 million.

Valuing the business at $141 million is almost laughable and also shows how difficult it is right now for local newspapers.

According to Lee Enterprises’ third quarter Q3 2021 earnings release, the business was on pace to generate $90.8 million in adjusted EBITDA. Assume Lee generates an additional $26.7 million in adjusted EBITDA in Q4 (this is what it did in Q3), then it would finish the year at $117.5 million. That means a purchase at $141 million would value this at 1.2x adjusted EBITDA.

But it’s not so cut and dry. It currently has $485.2 million in debt sitting on its balance sheet at a 9% fixed rate. And so, while its adjusted EBITDA was $26.7 million in Q3, it only had excess cash flow of $1.1 million. The reality is, if we add in the assumed debt, it looks less insane.

Does any of this really matter? Will shareholders balk at the low adjusted EBITDA multiple? It’s honestly hard to say. The business is in a precarious position. On a pro forma basis, operating revenue is down 4.7% year to date compared to last year. Maybe Lee shareholders just want out.

My guess? The deal goes through. Based on how quiet Lee is being with it other than saying it is reviewing the offer, it doesn’t seem to think there’s much of a fight. Perhaps it pushes back somewhat on price, but my suspicion is that Lee will soon be part of Alden’s growing empire.

Thanks for reading today’s newsletter. If you have thoughts, let me know. I will not be sending a newsletter on Friday due to the holiday. I will be back next week. Thank you!

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