January 24, 2023

Lots of M&A Talk, But Will Anything Happen?

There has been a lot of coverage about possible media acquisitions over the past couple of weeks; however, whether anything closes remains to be seen.

According to CNBC, the price of Vice continues to get depressed.

The digital media company, which was valued at $5.7 billion in 2017, is now likely to fetch a price of below $1 billion, the people said. Initially, Vice was looking for a valuation between $1 billion and $1.5 billion, one of the people added. The people weren’t authorized to speak publicly on the matter.

The company had been nearing a deal with Greek broadcaster Antenna Group, but those talks stalled in recent weeks, the people said. Antenna is still likely to be an interested bidder in the renewed sale process, they added.

We know the problems with Vice, but CNBC touches on the big one: “Vice missed its revenue goal by more than $100 million in 2022.” It was supposed to hit over $700 million but ended the year at $600 million— relatively flat to 2021.

So, we’ve got a business that is not growing and is barely profitable—if at all. That’s a big issue for Vice because there has been a very sharp narrative shift to focusing on EBITDA almost exclusively.

According to one banker who contacted me, “lots of buyers pivoted away from using revenue multiples at all midway through 2022. The speed of the switch [to EBITDA] was pretty remarkable.”

Is $1b even an option for Vice if that’s the case? I’d wager no. To some extent, you have to use BuzzFeed as the barometer. It’s estimated that BuzzFeed will generate $430 million in 2022 revenue, and whether it’s profitable is questionable. As of Monday, it’s trading at a valuation of approximately $130 million. That’s a 0.3x revenue multiple. Absolutely brutal.

And so, using BuzzFeed’s revenue multiple, Vice might only be worth <$200 million. That’s shockingly low, but why would it be worth more in this economy? If you’re buying Vice, it’s because you want scale. Vice and BuzzFeed both provide scale. So, would you rather pay $1 billion for Vice’s $600 million in revenue or, theoretically, $500 million to take BuzzFeed and its $430 million private?

My point with all of this is that Vice just isn’t worth that much, with buyers less concerned about revenue growth and more focused on EBITDA. The company’s inability to get profitable remains a significant weight around its neck. Perhaps some enterprising acquirer thinks it can cut its way to profitability—and maybe it can. However, that buyer won’t pay a premium.

As that banker said, “the bid-ask spread is narrowing.” But when it comes to Vice, has it narrowed enough? When BuzzFeed is who you’re compared to, I don’t know if it has.

Then there’s CoinDesk, which I have written about extensively over the past few months. According to The Wall Street Journal, it has officially retained Lazard to help it explore a partial or full sale.

CoinDesk’s parent company, Digital Currency Group Inc., or DCG, has received multiple unsolicited offers north of $200 million in the past few months, according to people familiar with the matter. DCG acquired the media company in 2016 for $500,000, the people said. CoinDesk generated $50 million in revenue last year from online advertising as well as its index and events business, they said.

CoinDesk is an interesting situation. It is going to generate considerably less revenue in 2023 than it did in 2022. I’ve written about the crypto cycles here. It is also owned by DCG, which is going through some serious problems right now. And so, it’s not exactly in a position of strength.

On the other hand, it is the leader in crypto media. If you believe in that industry’s growth, acquiring the top publication might make a lot of sense.

Here’s the real problem: who are the buyers?

No media company will come along and buy it because the bid-ask spread will be far too wide. Even at $50 million in revenue, that’s a 4x multiple if the $200 million is an actual price—and the multiple is higher if we assume lower revenue this year. The urgency to do a deal doesn’t exist.

Then there are the strategic buyers. Coinbase, the only publicly traded crypto exchange, has the cash to do a deal—it had $5 billion in cash and cash equivalents at the end of Q3. But does it have the interest? From Q1-Q3, it spent $353 million in sales and marketing costs (including stock-based compensation). Let’s assume it finishes the year by spending another $76 million (the same as in Q3); that’d be $429 million in total cost. If $200 million is what CoinDesk sells for, would Coinbase want to pay nearly half its sales and marketing budget?

And that doesn’t take into consideration the culture shock that would come from Coinbase—a tech company—owning a journalism-heavy media company. The fact that CoinDesk survived at DCG has always blown my mind. So, I have a hard time seeing that happening.

My money has always been on either Justin Sun, the founder of Tron, or Changpeng Zhao (CZ), the founder of Binance. Both run sprawling crypto empires that would benefit from the large-scale audience that CoinDesk can bring. Plus, there’s the ego of it all. Could that be enough to convince them to buy?

The reality is that unless CoinDesk changes how it values itself, it’s unlikely to see a legitimate deal get done. Ultimately, DCG doesn’t want to sell CoinDesk; it just needs to raise money. And if CoinDesk can’t command a high multiple, maybe DCG looks elsewhere for said cash.

This brings me back to the question in the headline: will any deals happen?

At some point, there’s no doubt deals will start in earnest. Buyers exist. They’re just waiting for the right prices. There has been a bit of a rewiring that has had to take place about how media companies are valued. With the economy tight, revenue growth is less important than profit. And until sellers get calibrated to that, we’ll see little activity on the M&A front.

Is U.S. News & World Report’s Licensing Business at Risk?

Over the past six months, numerous stories have been reported on U.S. News & World and its best university lists. According to The New York Times:

Harvard Medical School will no longer submit data to U.S. News & World Report for the magazine’s annual “best medical schools” rankings, becoming the university’s second graduate school to boycott the list in recent months, the school’s dean said on Tuesday.

It was also unclear what effect Harvard’s decision would have on other medical schools’ participation. Last fall, many of the country’s top law schools announced that they would no longer participate in the rankings after the ones at Harvard and Yale said they were pulling out.

This is problematic for U.S. News & World Report because it depends on these lists for revenue. For the average reader, the online list is free. But when it comes to colleges and universities, U.S. News can make big money. Many universities license the “U.S. News Ranked” brand because parents/students have been trained to look for it. And so long as that trust exists, licensing will continue.

But as more universities begin pulling out, will that trust remain?

Harvard Medical School ranked #1 on the list in 2023. It won’t participate next year, so it can’t win. But it begs the question: can the list be complete without mentioning Harvard? If other top medical schools pull out, can the list be trusted? And if it can’t be trusted, will students and parents seek it out?

This starts slowly, but it begins to snowball. This is where brand matters a lot. You can license your brand all day if consumers trust it. But once that starts to go away, it becomes increasingly difficult to generate money from it.

It’s not life or death for U.S. News & World Report. It has other lists from which it can also generate revenue. But this is where cracks start to show.

On the other hand, this acts as a reminder that there is legitimate revenue in licensing your brand. If users trust you, there’s money there. Companies will pay if they believe it’ll help them generate more revenue. For decades, universities have paid for the right to slap that U.S. News logo on their marketing materials. Whether it comes crashing down remains to be seen.

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