April 5, 2022

Hypebeast Tries Its Hand at a SPAC

After the fumble that was BuzzFeed’s SPAC, many media companies that were otherwise excited about the prospects of going public via a SPAC put their plans on hold. Hypebeast, though, has decided to move full steam ahead.

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Now let’s jump in…

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In a press release, Hypebeast announced that it was merging with Iron Spark I Inc. to list on Nasdaq. According to the release:

– The merger with Iron Spark is expected to provide up to US$180 million in total gross proceeds and is expected to result in a pro forma equity valuation of US$534 million.

– Transaction implies a pro forma enterprise value of US$353 million, representing a 3.1x multiple based on FY2021E revenue of not less than US$112 million.

This is an interesting deal. Hypebeast is already public on the Hong Kong Stock Exchange, so to do this deal, it has to technically acquire Iron Spark rather than how most SPACs acquire the target company. But the result should be the same thing: Hypebeast will trade on Nasdaq.

Hypebeast is three businesses in one. The first and oldest is its media business, which launched in 2005. In 2012, it launched its e-commerce operation, HBX. And in 2016, it launched Hypemaker, its agency. The revenue by division breaks down as follows:

  • Media: 31%
  • E-commerce: 28%
  • Agency: 41%

Based on the numbers that Hypebeast shared, it is in a relatively strong position (if you can trust any details in a SPAC). Hypebeast estimated that it would generate at least $112 million in revenue by the end of its fiscal year (March 31, so we should be getting updated numbers soon). Based on its “historical interim financial results for the period ended September 30, 2021,” its expected EBITDA margins are 22%, which would suggest that the business should generate approximately $24.64 million in EBITDA this year.

If we look at these numbers alone, it’s apparent why Hypebeast is pushing forward with a SPAC while other media companies have stepped back. A 22% EBITDA margin on a relatively diversified business is a solid place for the business.

Hypebeast is looking at two growth levers. The first is an expansion of its e-commerce operation, HBX. In one slide of the presentation, it lays out its pitch.

According to Hypebeast, the average order value and the order conversion rate are actual numbers. It just needs to figure out how to drive more people to the e-commerce platform. Candidly, this is likely optimistic, but it does show the value of linear commerce. It has a captivated audience, and if it can intelligently expose its products to users, it can generate a strong return on those visitors.

The other way it hopes to grow is to expand into new verticals. If Hypebeast is for “men’s fashion and streetwear,” it wants to figure out how it can expand into areas like watches, cars, and golf.

Without actual full-year numbers, it’s hard to truly offer an opinion on whether this is a good deal. However, Hypebeast says the pro forma enterprise value of $353 million is a 3.1x multiple on estimated 2021 revenue. And if we assume EBITDA comes in at $24.64 million, that would suggest it is valued at a 14.3x multiple.

Let’s compare these numbers with what BuzzFeed advertised in its SPAC presentation. It suggested that it would generate $57m in EBITDA in 2021 and be valued at only 13x 2022 estimated EBITDA. BuzzFeed came in light with an adjusted EBITDA of $45.1 million versus the $57 million it estimated.

According to The Wall Street Journal:

Hypebeast differs from many companies going public via SPACs in that it is already profitable. For the six months ended in September, Hypebeast posted a net profit of roughly $8 million, according to a regulatory filing.

If it’s going to hit its $24.64 million in EBITDA, it will need to have had a strong Q3 and Q4. But we have seen many other retailers have a strong 2021, so I would assume that Hypebeast’s e-commerce business will also show stronger results. Nevertheless, we’ll need to wait and see the full-year numbers.

The question, though, is how many people will opt to redeem their shares for cash. In a nutshell, a SPAC works by investing in a blank check company and then waiting to see what it’s going to acquire. Then, if you don’t like the target, you can exchange your shares for the original IPO price of the SPAC.

This happened quite a bit with BuzzFeed. It had anticipated that it would generate $288 million from the SPAC, but so many investors grew scared that only 5.5% stuck around, or about $16 million.

Will Hypebeast see a similar result? It depends on if earnings come in as strong as it suggests and if there is no broader market turmoil. That said, the quote from WSJ is correct: Hypebeast is profitable, so that should alleviate investor concerns.

As with all these deals, it’s exciting to see more media companies going public. We’ll know more about Hypebeast as the Q3 deal closing approaches.

Publishers focus on correct priorities

The past year was full of promise that new technology would help revolutionize media businesses. However, according to research by Digiday, it seems most publishers are not paying much attention.

With some exceptions, publishers’ revenue priorities are nearly identical to the ones they set entering 2020. Direct-sold advertising, subscriptions and branded content were considered the largest areas of focus for the 139 publishing executives surveyed by Digiday in the first quarter of 2022 — as they were pre-pandemic in the fourth quarter of 2019.

Close to half of the 122 publishing execs surveyed in February think none of these emerging technologies will have a significant impact on their businesses over the next few years.

These are the correct interpretations. A year ago, I wrote that crypto (Web3) was a distraction to 99% of media. In the piece, I said:

For most media companies, this is a distraction. To say it more specifically, it is a waste of time and if you’re spending time on it, you’re neglecting things that will actually help your business. The same goes for creators by the way. The media company of tomorrow is better spent figuring out how to create great content and providing upside to the creators than figuring out how to create decentralized autonomous organizations that issue NFTs (big, fancy words). If we want to reward the product creators, let’s do so in a simple way.

Search interest for terms like Web3 and NFT have both dropped quite a bit over the past few months. Even Twitter has become more palatable since so much of the insanity has washed away. That’s not to say that the technology has no future, but as with all bubbles, the hype certainly didn’t match up with reality.

What should media focus on?

More of the same. Create amazing content. Build an audience with that. And then identify the best means of monetization. Ideally, you own that monetization through directly sold ads using your own 1st-party data and subscriptions.

There’s a balance between being early and late to the game with technology. I like to take a moderate approach. Don’t be so late that you’re talking about launching a mobile responsive site in 2022. But, also, don’t be so early that you drop hundreds of thousands of dollars on a metaverse experiment when that money could be better invested in building the core business.

The time may come when this technology matters. But for right now, it’s back to basics for media companies. That’s the correct approach.

AMO Podcast: Arsalan Arif from Endpoints News

The latest episode of the AMO podcast is out, sponsored by Omeda! In this week’s episode, I spoke with Arsalan Arif, co-founder, and publisher of Endpoints News. We talked about the unique subscription product (a flat fee for unlimited seats), how the company is thinking about events in 2022 with two different strategies, and where the business goes from here.

Be sure to give it a listen on your podcast player of choice:

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