October 6, 2020

Media SPACs Just Waiting to Spend Their Money

We are going to remember a lot of things about 2020. We may not want to, but a decade’s worth of calamity has been compressed into a single year, so we’re stuck with these memories.

What might be forgotten as time goes on is how rapidly finance has become interesting again to so many people. In particular, I’m talking about the advent of rolling funds and the sudden revival of the special-purpose acquisition company, or SPAC. While not a new idea, people are acting as if it’s the next big idea.

For my non-finance readers, let me try to explain what this is… Essentially, these are shell companies that have no commercial operations. Instead, they go public with the promise that they will then use that capital to acquire a company or multiple companies.

The benefit for the companies getting acquired is that they don’t need to go through any sort of IPO process, which is inherently very expensive and time consuming. Since a SPAC has no operation, the IPO is likely very simple. “Hey, we’re going to acquire companies in a certain sector and we want to raise $100 million. You in?” So easy.

SPACs are not all they’re cut out to be and many in finance think they’re pretty awful instruments for the average investor. Consider Josh Brown saying that “SPACs are still bulls***.” (Come on, Josh, we can spell out words). And it’s not as if the returns from SPACs are even that good. Michelle Celarier wrote in Institutional Investor:

Since 2015, the 89 SPACs that have completed mergers have an average loss of 18.8 percent (and a median loss of 36.1 percent), compared with the average aftermarket gain of 37.2 percent for other IPOs through July 24, according to Renaissance Capital, which tracks IPOs. Only 29 percent of the SPACs had positive returns.

Josh Brown breaks down why they likely don’t work. With an IPO, the roadshow is a grueling exercise where the company has to convince a ton of people to invest. With a SPAC, the company only has to convince one person: the manager of the SPAC.

Nevertheless, we’re seeing SPACs all over the place. On October 1st, the Financial Times (paywall) wrote about Playboy returning to the public markets through a SPAC:

The company, which earlier this year shut down the print magazine that was long the centrepiece of its business, said it would merge with a blank cheque company known as Mountain Crest Acquisition Corp in a deal that valued Playboy at $381m, including $142m of debt. 

Playboy will raise roughly $101.5m after fees through the deal, a boost to a balance sheet that counted just $22m of cash at the end of June, according to a presentation to investors. Its existing owners will continue to hold 66 per cent of the company after the deal with Mountain Crest is finalised.

And this won’t be the last media deal to happen. Eric Peckham has this spreadsheet looking at SPACs focused on media, entertainment and gaming companies. If you add it up, that’s nearly $3.7 billion in capital waiting to be deployed to acquire companies.

That’s a lot of money. But it does present an interesting idea that could be an opportunity for someone.

A while back, I was DMing with one of the readers of A Media Operator about B2B media and he said:

Access Intelligence does a huge trade show [in a specific sector we were discussing] and I could argue all of those trade show floors = a plenty deep ad market. Might need to fight the fight to convert the market but there’s still opportunity.

So much of b2b is fat and lazy… if you come in straight digital without legacy employees and assets, you can shake it up relatively quickly. The old/established don’t change quickly based on my experience

This is the same opinion that Sean Griffey at Industry Dive shared on the recent A Media Operator podcast. Effectively, if there’s a trade show with thousands of attendees and hundreds of exhibitors, those are your readers and advertisers.

That got me thinking… Is there an opportunity to acquire a network of tangentially related legacy B2B media companies and effectively force them to become digital? It’s hard to change when you’re used to doing things a certain way, but if an outsider comes in and forces that change, it could be possible.

Consider the structure I talked about over the summer when HousingWire expanded into a second vertical. Then consider the structure I talked about with Dotdash. In both cases, the companies have a unified back office and share technology stacks with their respective publications. This allows the company to scale non-linearly. Adding additional sites becomes much easier when those constants are accounted for.

Could an investor come along with a strong operating team, acquire a series of these businesses and then fix them?

I tend to believe yes, but it’s unlikely to be through a SPAC. The public markets tend to be very unforgiving to turn around stories. Transitioning a legacy media company into a digital-first company would carry additional cost, reducing any profitability these companies might already have been seeing.

The other problem is that this opportunity might not be large enough for a SPAC. I was reading this piece on TechCrunch and apparently “it’s typical for a SPAC to combine with a company that’s two to four times its IPO proceeds in order to reduce the dilutive impact of the founder shares and warrants.”

That said, the idea of rolling up a few media companies, unifying the underlying technology stack and streamlining the operations does sound interesting. Whether it’s done through a SPAC or a more traditional route, I can’t help but feel that it’s going to happen. And it would be nice to see more media companies publicly traded like they are in Europe.

Google’s latest PR stunt

Google has decided that it’s going to up its PR budget by $1 billion with payments to some publishers. According to the WSJ:

Alphabet Inc.’s Google said Thursday it would pay publishers more than $1 billion over the next three years to license news content for a new product called Google News Showcase.

The product will display story panels—teasers for articles in Google’s news section—complete with images and summaries selected by publishers. Users who click on the story panels will be taken directly to news organizations’ websites, where a story can be read in full.

The program is launching in Germany and Brazil. Google is in talks with publishers in other countries, including the U.S., according to people familiar with the matter. Google has already signed deals with nearly 200 publications, including Der Spiegel, Stern, Handelsblatt and Folha de S. Paulo.

Alphabet, the parent company of Google, is a trillion dollar company. $1 billion is 0.1% of that. But when you bring out Alphabet’s CEO Sundar Pichai to deliver the news, you know it’s to drum up some press.

Suffice it to say, any opportunity for publishers to get some money is something worth covering, irrespective of the motive.

The way this new product, Google News Showcase, is theoretically going to work is straight forward. In exchange for the money, Google wants its editorial partners to curate stories to be included in the experience rather than all content just naturally flowing.

Since part of the incentive is tied to the number of stories curated, I would guess that it would require some sort of unique content creation. Perhaps the summary has to be unique for Google News Showcase versus what might be sent through the traditional Google News feed.

The major thing to remember here is that this is a short-term infusion of cash that will likely benefit the largest media companies (aka the ones who need it least). More importantly, this money will not ever be paid out a second time.

I always return to what Jon Steinberg at Cheddar said:

Always take the check. But you are never getting another check, so you either take the check and staff it in a way that you can do it and shut it down without hurting your people, or you figure out a way to make it self-sustainable.

Time to figure out which it is…

Axios tackles local

There was a great story in The Wall Street Journal last week about Axios’ success and growth, even through the pandemic.

The company has avoided staff reductions and is on track to take in about $58 million in revenue in 2020, up more than 30% compared with the year before, and is on target with its prepandemic projections, largely because of the success of its sponsored-newsletter business, the people said. Some big newsletter sponsors have included Comcast Corp., Koch Industries and Wells Fargo & Co.

Newsletter sponsorships contribute more than 50% of the company’s total revenue, the people said, and now Axios is looking to expand. Early next year, the company said, it plans to establish two-person newsletter teams in several local markets, starting with Minneapolis; Denver; Tampa, Fla.; and Des Moines, Iowa.

First thing’s first… It’s great news that Axios is doing so well. The company is only a few years old and for it to be generating $58 million in revenue is really rather impressive.

But I want to focus my discussion on that last sentence in the blurb about local markets. Axios intends to launch in a variety of local markets with the goal of covering business, technology and education for those regions.

I want to break this down because it has the potential to be an incredibly lucrative opportunity, but it also has the potential to struggle.

Axios can keep its costs low while expanding into new regions specifically because it doesn’t need to staff a back office for every one of these publications (a theme apparently). Instead, it only needs to add writers for each newsletter, giving it the ability to rapidly expand across the country.

That makes this incredibly appealing and is being done by other companies, including 6am City and Whereby.us. It’s a smart strategy and, honestly, likely the only way to scale one of these local newsletter businesses.

While I wouldn’t call Minneapolis, Denver, Tampa and Des Moines top locations, Axios has enough data that it likely knows where its readers are. That gives it the ability to quickly launch into new regions with targeted email campaigns to promote them.

The problem is the advertising business… If Axios intends the advertising business to just be an extension of its main newsletters—and seeing as how Facebook is the launch sponsor of this, that might be the case—then it should be a pretty straight forward endeavor. A little underwhelming, perhaps, but still straight forward.

However, if the idea is for these local newsletters to actually become engrained in the community, that’s going to necessitate local sales efforts as well, which requires additional staff. Ideally, the type of advertiser here is a major company in that particular region rather than Facebook trying to show the world it supports local news.

We’re only starting to see companies realize there’s an opportunity in local when the cost structure doesn’t weigh you down. And it’s obvious for Axios to expand into these regions with lean teams. I am very intrigued to see how their ad strategy plays out.

If it’s just the same national brands looking to push PR messages that we see in many of Axios’ newsletter, that’s fine. But it’s not a model for the rest of those local news entrepreneurs looking to grow. That’s a more boots on the ground, engrained community effort and it takes time.