December 7, 2021

BuzzFeed Stumbles, But Doesn’t Fumble As It Goes Public

Day one of BuzzFeed being public is now complete. While I doubt this is what the executive team had in mind, one thing is true. It’s now public.

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Now let’s jump in…

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According to The Wall Street Journal, BuzzFeed’s merger with 890 5th Avenue Partners Inc. to go public stumbled pretty hard.

BuzzFeed Inc. will raise roughly $16 million from its public listing, after the blank-check company it is merging with suffered a wave of investor withdrawals, according to a securities filing and people familiar with the situation.

But what does this actually mean? In a nutshell, a SPAC is a blank check company. It raises money with the goal of taking a private company public through a merger. In the case of 890 5th Avenue Partners Inc., it raised $288 million earlier this year. It had no idea what company it would buy, but it knew it would buy one.

In June, it announced that it was merging with BuzzFeed. I wrote about that here. Fast forward to Thursday. There was a shareholder vote to confirm the acquisition with BuzzFeed. Here is where the mechanics of SPACs can get very interesting.

If, as a shareholder, you decide you don’t want the deal to go through, you can redeem your shares in the SPAC for cash. Essentially, you can give your share back to the SPAC and get $10 for it. Of the $288 million raised, only about $16 million actually stuck around. That’s about 5.5%.

This is most certainly not what shareholders had in mind. Rather than getting $288 million-plus an additional $150 million in a convertible note, it got $166 million total. That’s rough.

Why did this happen, though? There are likely a couple of reasons.

First, SPACs are not a new product type, but they became far more popular during the pandemic. And historically, SPACs have underperformed. Couple a rough market with a history of underperformance and there should be no shock to see an increase in redemptions. According to the FT:

The average redemption rate during the third quarter was 52 per cent, up from 10 per cent during the first three months of the year, according to Dealogic figures.

When there is uncertainty, investors might decide to run from more speculative investments. But I doubt many deals look quite like this.

Second, I think this is a judge on BuzzFeed. Investors redeem when they worry that the value of the company will be less than what they invested. It’s a “get out of jail free” card. Made a mistake investing in that company? You never have to sell for less than $10 per share so long as you redeem before the merger is complete.

If investors believed that BuzzFeed was going to be able to achieve what it had set out to achieve, they would have held. Sure, some might balk, but not 94.5%. But when push came to shove, investors were concerned about their initial investment losing value and they preferred to be in cash.

Another part of the deal is the convertible note, which could come back to bite BuzzFeed. According to the FT:

The company secured $150m through convertible bonds, instead of typical private investment in public equity (Pipe) financing, a move dubbed “the kiss of death” by Michael Ohlrogge, a corporate finance professor at NYU Law School.

“The ideal is you find Pipe investors at $10 each. If you can’t do that, you give them a discount. If you still can’t do that, you try to sell them convertible notes,” he said, adding that the up to 8.5 per cent interest BuzzFeed’s investors can earn shows that “it’s going to be even more a rocky deal than most Spacs”.

Now BuzzFeed has debt on the balance sheet. It’s not traditional debt, but it is dilutive in the event that investors convert to common shares. Does this give the company flexibility or limit what it can do?

But what comes next?

Honestly, I think getting past this is the best thing that can happen to BuzzFeed. Now they’re public. Early market reactions (the stock was down 11% in first-day trading) are pretty irrelevant. Now all they have to focus on is executing. Whether right or wrong, the team will be judged by the public markets.

For the rest of BuzzFeed’s competitors, the path to liquidity is less clear. With SPACs retreating as a possible option, where do Vox, Vice, BDG, etc. go with their aspirations? It’s unlikely any of them go through a traditional IPO process, but it’s also unlikely they’ll be able to get a SPAC across the finish line. But they’re equally too large for a traditional acquisition as well.

The next 6-12 months of BuzzFeed’s performance are important for these other media companies. If BuzzFeed is able to hit its goals and the stock starts to rise, then investors may become more interested in these other digital media players. If, however, BuzzFeed does ultimately fumble, an easy exit may not exist.

The Future turnaround story

One of the reasons I am so excited about BuzzFeed going public even if it’ll be rocky is because we don’t have many public media companies here in the United States. In the United Kingdom, though, there are quite a few.

Future is one of them that has gone through quite a transition over the past decade. PressGazette dug into the history of the company since the financial crisis. But for context, this intro really is intense:

Pre-tax profits at specialist publisher Future have once again ballooned, this time more than doubling to £107.8m in its full-year results for 2020/2021.

Only five years ago, though, the company was reporting losses of £30m.

The company went from losing £30m to earning £107.8 million. That is an unbelievable turnaround. How has it done it? PressGazette looked at every deal that was done since 2016 and found that Future had spent at least $1.3 billion over 19 deals.

What was it buying?

In 2019, it paid £53.8 million for SmartBrief, which partners with industry associations to power their newsletters. The association drives the audience and SmartBrief writes and sells advertising in the newsletters. I wrote about its acquisition of Dennis back in August.

In a nutshell, Future is the truest definition of a niche media operation. I would be shocked if any of its publications are massive scale plays. But, each one serves a specific audience. SmartBrief’s pubs serve specific B2B industries. Dennis has brands like IT Pro, Minecraft World, and Kiplinger. These are niche players for very specific audiences.

So, what comes next?

I would be shocked if Future slowed down. It has found a model that works for it. Acquire an asset, clean things up, and put a diversified monetization model against it. It’s not sexy, but it works. Five years ago, shares of Future could be picked up for £172. Today, each share trades at £3,296. What a turnaround.

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