June 29, 2021

Diving Into BuzzFeed’s SPAC Plans

In a major win for CEO Jonah Peretti, BuzzFeed announced last week that, 13 and a half years after launching, it would be going public via a SPAC. According to The Wall Street Journal:

As part of the transaction, the company also said it is acquiring Complex Networks, a digital publisher that specializes in streetwear, music and pop culture, for $300 million in cash and stock from Verizon Communications Inc. and Hearst Corp., which together bought Complex in 2016. BuzzFeed is vying for greater scale to better compete for online ad dollars with tech giants such as Alphabet Inc.’s Google, Amazon . com Inc. and Facebook Inc.

BuzzFeed said the combined company would be valued at some $1.5 billion, roughly the same level as in 2015, when Comcast Corp.’s NBCUniversal invested $200 million in the new-media startup. BuzzFeed also said Thursday that it is raising $150 million in convertible notes.

At a valuation of $1.5b, it’s basically flat from where it raised its Series F and Series G rounds (and that’s before we take into consideration the addition of Complex). Nevertheless, when the deal closes in Q4 2021, it’ll be the first of the digital upstarts to go public. 

I’ll come out right now and say that everything BuzzFeed is suggesting in its investor presentation is loftier than lofty. And I’ll dig into that a bit, but if you haven’t already seen it, take a look at the investor presentation here

At the core of it, this deal is the manifestation of Peretti’s belief that the only way to win in media is to reach a greater scale. It has been his argument for years now that the major platforms will continue to earn a disproportionate percentage of ad revenue unless media could get large enough to compete.

I’ll circle back on the scale for scale’s sake argument in a bit. What I want to discuss is this… Is this a good deal? Not really.

Because it’s a SPAC and, therefore, only needs to convince a single management team to take it public, the acquisition multiples and assumptions are pretty intense. The multiple is 13x 2022 estimated EBITDA, which is $117 million. This is up from an estimated $57m in adjusted EBITDA this year (not taking into consideration that actual EBITDA last year was $17m).

In other words, the company is expecting to grow EBITDA from $17m to $57m this year, which is more than triple. And then it expects to more than double EBITDA again next year. Maybe that’s possible. But I don’t buy it. Here’s why.

The EBITDA growth is dependent on two components. The first, which we’ll discuss, is improved margin. The second is aggressive growth on the revenue side. I just don’t see that happening.

In 2019, Peretti told CNN’s Brian Stelter that BuzzFeed had generated a little over $300m in revenue in 2018. In 2020, he told Digiday that the company generated $320 million in revenue in 2019. And then the investor presentation says that it generated $321 million in 2020. Over three years, its CAGR is effectively 2%.

But starting this year and going forward, it expects the combined company to grow its revenue 26% every single year. How? Additionally, it assumes more of that growth is going to happen at BuzzFeed. From 2020 to 2021, it expects revenue to grow 25% at BuzzFeed alone; it only assumes 19% growth for Complex.

I just don’t buy it. Over the past few years, BuzzFeed has not been able to grow revenue at that high of a rate. What’s changed? Why is a company that has stagnated for years going to suddenly hit very aggressive growth targets? How has the DNA of the business changed to support this growth?

Now we return to margin. At the same time as it is growing its revenue at a far faster rate than it has in years, BuzzFeed also intends on reducing its OpEx and COGS as a % of revenue, which will contribute to a strengthening margin. In 2020, the combined business had a 4% margin. I was surprised in a positive way when I read this. But by 2022 (which is what this investment multiple is based on), it expects to hit an 18% margin. By 2024, when revenue is supposedly going to hit over $1 billion, its margin will be 25%.

A business that has not demonstrated much ability to grow over the past few years is going to suddenly start growing rather quickly while simultaneously improving margin? How? There are two ways that come to mind here.

First, I believe the real growth opportunity is Complex, not BuzzFeed, though it won’t look like that to start. In many respects, Complex is going to slow things down for BuzzFeed as it gets integrated. If BuzzFeed weren’t acquiring Complex, it would’ve had a 10% margin in 2020 (Complex wasn’t profitable last year).

But looking at the breakdown of IP, Complex has some of the richest on the planet. As Covid begins to move behind us, I am very interested in seeing how it can revitalize its ComplexCon business and take all that IP live. This should contribute to some of the growth the company hopes to achieve, though I’m unsure how much.

And although this investor document makes Complex out to be a major drag (since it’s not profitable), the company has a history of being profitable. I don’t anticipate this being a long-term burden on the combined business.

The real way that BuzzFeed is going to hit these goals is simple… It will use those wonderful public shares that are trading at an insanely high valuation and buy the growth. According to Insider:

Peretti told Insider he’s eyeing live events and possibly assets in the dating sphere, which could complement BuzzFeed’s popular viral content.

“I think there’s a lot of exploration of off-the-wall ideas,” said Peretti. “There’s all these adjacent industries like gaming, education, e-commerce, events. People are going to work on these other types of ideas. We looked at MeetUp a year and a half to two years ago. I was interested in that because I saw the way content was driving people to do things. They sold to someone else.” 

And then, according to The Information:

Peretti plans to keep up the acquisitions with the vision of turning BuzzFeed into a holding company for media brands, each of them operating independently, say people familiar with the plan. Some digital media properties, such as Scary Mommy, a popular blog for parents, have already approached BuzzFeed about acquiring them, the people say (BuzzFeed passed; Scary Mommy didn’t respond to a request for comment).

This will have to be the plan for BuzzFeed. But it can’t just buy any company. It’s going to have to find smaller companies that are generating 20-30% margin and use its shares to buy them. Buying unprofitable growth opportunities will likely hurt the business rather than help it (costs will hamper margin).

It then will need to turn around and look at its own traffic as a top of the funnel to these smaller companies. If, for example, it moves into the dating sphere, how can it introduce the tens of millions of monthly users at BuzzFeed to that product? Will it do a better job growing a dating product than a pure-play opportunity? I’m not very bullish on this.

On the other hand, I do think a smart play would be acquiring event brands. It’s a natural extension for the portfolio of IP that the company will have when this deal is done. At some point, people want to connect with brands in a physical way—I don’t buy a 100% digital future—so events should contribute to some of this growth.

There are so many unknowns and so many lofty expectations with this SPAC. So, what do I think will happen?

In 2021, BuzzFeed will see revenue grow faster than it did in previous years. This is a great year in the ad market. Covid is ending, the world is reopening, and businesses are spending. On the other hand, with the world reopening, people are stepping away from their screens, so users will likely drop across the network to some extent. While I do expect growth for the business (finally), I would be surprised if it hit its goal of $521m in 2021. It is just asking too much for a business that has not figured out how to grow.

Running a business is hard. I know that. Peretti knows that. Everyone knows that. But we have to live in a world of reality, not fantasy. For years now, the argument has been “scale can win.” And for years, that has been categorically proven to be false. Even with all of these deals, BuzzFeed is still a fraction of the size of the platforms. But that supposes that getting bigger will suddenly make these entities more attractive to advertisers. It won’t.

The reason companies use Facebook and Google is not only because they have scale. It’s also because the ads just plain work. If they didn’t, the scale wouldn’t matter. There’s a reason we never hear about Facebook and Google ads being a race to the bottom. Costs are actually increasing and clients have not stopped advertising.

Discussing scale rather than quality is why these media companies struggle; getting larger won’t just flip a switch and make the ads more valuable. That’s the entire undertone of this document. If BuzzFeed can get bigger, it’ll get better ad rates, which will increase revenue and margin without increasing costs. That won’t work. It’s not enough to get bigger.

I’ll close with this… BuzzFeed has spent years in the middle of the media barbell. It has no defined niche. The company still talks about the size of its audience rather than the depth of its audience. That’s why I think the acquisition of Complex is the smartest part of this deal. Complex has a defined audience and it has done a good job of building IP targeting that audience.

Do I think this presentation is lofty and unrealistic? Yes. Do I expect it to hit any of its numbers? Probably not. Will the share price likely fall after it announces its first quarterly miss? You bet. Am I buying? Not at a $1.5b valuation.

But… For someone who has often wanted to see more public media companies, if, for no other reason than I could look at the financials, I am excited about this. And once we move from investor presentation to SEC-compliant reporting, we’ll start to get legitimately informed insights. That’ll be fun.