December 14, 2021

Vox and Group Nine Merger Is a Smart Deal For All Involved

First scooped by The Wall Street Journal and then confirmed by the companies, Vox and Group Nine are merging. According to the Journal:

The companies are discussing an all-stock transaction that would give Vox Media 75% ownership of the combined company, with the remaining 25% going to Group Nine Media, the people said. Vox Media Chief Executive Jim Bankoff would helm the company, the people said.

The combined company is expected to generate more than $700 million in revenue in 2022 and more than $100 million in profit, according to people familiar with the matter. On a pro forma basis, the combined company grew revenue by about 30% this year compared with last year, the people said.

Major media consolidation has been discussed for years now, but the big players—BuzzFeed, Vice, Group Nine, BDG, and Vox—all saw themselves as the consolidators rather than the consolidated. Alex Sherman at CNBC cut right to the issue in a recent piece when he wrote, “industry consolidation has been blocked by two factors: Agreement on value and founder ego.”

It seems that the ego has left the room in this deal, which is good because this is a smart deal for both parties for a variety of reasons.

In the immediate sense, this provides a pretty hefty scale to the combined business. In 2022, it expects to generate over $700 million in revenue. That makes it bigger than BuzzFeed was at its SPAC. While we don’t know what their definition of “profit” is, generating $100 million on $700 million would give them a 14% margin.

The deal makes a lot of sense from a scale perspective. Many in media talk about the barbell where you’re either niche on one side or a generalist with scale on the other. For many of these digital media companies, they were stuck in the middle. By merging, both companies now have far more heft than they would otherwise.

There are two areas that I am particularly interested in watching over the next couple of years.

First, Vox Media rolled out its 1st-party data product Forte in late 2019. By combining with Group Nine, the entity will have a lot more data to work with. This is going to be a critical part of scaling their advertising business, especially as 3rd-party cookies continue to lose their relevance.

Second, I think their partnership with Kara Swisher and Scott Galloway could be a template for an interesting business. Neither of them are full-time employees at Vox, but instead, create a twice-weekly podcast called Pivot. However, this IP is something that can be monetized in more ways than one. You can get hints of it in the announcement piece Vox published:

Experiential: The combined company will have a strong conferences-and-events business known for Code Conference, Vulture Festival, PopSugar Play/Ground, NowThis Next, and the first-ever Pivot MIA event coming this February.

I bolded that part, but I think it’s important. Pivot started as a podcast, but they’re now taking it live by hosting an event in Miami. It’s being structured as an exclusive, apply-to-attend event, where attendees will need to spend $5,500 for a three-day experience. It’s hard to say how many people can come to this, but with tickets that expensive, there’s an obvious margin baked into this.

Why am I paying so much attention to just one event? As a revenue driver, it’s probably not significant. But my guess is they can create additional brands similar to Pivot. This IP can be monetized like the Pivot MIA event, but there are other ways as well that are equally as exciting.

There is obviously a lot more to this deal than just those two things. But they are two things that I am paying particular attention to. Others might focus on synergies—aka cost-cutting—but my interest is how these mergers add value rather than just through cuts.

The big question I had when I saw this was what would happen with Group Nine’s SPAC. If you don’t recall, I wrote back in December 2020:

That is a lot of words to say something pretty straightforward… Group Nine is looking to raise a bunch of money so that it can acquire itself; however, at the same time it is acquiring itself, it will also acquire another company.

Since it raised the $230 million, it has been sitting on the sidelines waiting to do some sort of a deal. And yet it hasn’t. I’m honestly pretty shocked that the team never found something to buy during the insanity of 2021, but here we are at the end of the year, and that SPAC still exists.

In a letter to the team, Jim Bankoff wrote:

With regard to our future, it’s important and reassuring to know that we have control over our destiny and, given the financial strength of our combined company, the flexibility to take our own path. As we discussed in our last all-hands, we have no immediate plans to go public, although we’ll always continue to evaluate opportunities that are in the best interest of all of our stakeholders, including our employees.

I’m calling that bluff. An all-stock merger is great and all, but it just kicks the can down the road again and again. At some point, investors are going to want some sort of a liquidity event. And that Group Nine SPAC is a great opportunity to take the companies public.

But the big elephant in the room is BuzzFeed. BuzzFeed saw its market cap crater over the past week from a $1.5 billion launch to $832 million as of Monday. Obviously, the public markets have not been overly kind to BuzzFeed. As many have suggested, how BuzzFeed performs will dictate what the rest of the players do.

But Vox and Group NIne are not BuzzFeed. If the “$100 million in profit” in 2022 is legitimate EBITDA and not adjusted to hell, then this business looks dramatically different. BuzzFeed was promising 2022 adjusted EBITDA of $117 million, but it also promised $57 million in 2021 and as of Q3, it had only generated $2 million.

Here’s what I think will happen with Vox and Group Nine. The merger will close in early 2022. They’ll get the integration taken care of, get any cost savings accounted for, and push toward that big 2022 of $700 million in revenue and $100 million in profit.

In mid-to-late 2022, they’ll then merge with the Group Nine SPAC. There are two reasons for this timing.

First, it gives BuzzFeed a few quarters to get things figured out as a public company. Ideally, it can fix the narrative and start growing again. Then Vox/Group Nine can enter a different type of market than exists today. Trying to merge with a SPAC today would result in a massive cut in a similar way to what BuzzFeed experienced.

It’s particularly bad because BuzzFeed is currently only trading at about 1.27x 2022 expected revenue. If Vox/Group Nine expects $700 million in 2022, then it would go public at only $890.5 million. That’d be a colossal disappointment to all investors considering both companies were at one point valued at $1 billion apiece. If, however, BuzzFeed could get to a 3-4x revenue valuation (a stretch in my opinion), then Vox/Group Nine would trade at anywhere from $2.1-2.8 billion. While I don’t see this happening in the next 12 months, any progress toward multiple growth would make all investors feel better.

Second, it honestly doesn’t have much of a choice. When a sponsor raises a SPAC, it usually has up to two years to deploy that capital. By January, we’ll already be about a year into its fundraising. Therefore, it has one more year to pull something off. Assume that it doesn’t want to wait until the last possible second and that’s why I think we’ll see something happen in late Q3 or early Q4.

This is a good deal for both parties involved. They both need each other to get to one side of the barbell. And it acts as a nice precursor to them using that Group Nine SPAC in 2022.

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