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Tuesday, June 07, 2005

Scripps-Shopzilla deal shows eBay-SHOP deal too cheap?

Media company E.W. Scripps yesterday announced that it would purchase privately-held Shopzilla for $525 million in cash. Meanwhile, Shopping.com's (ticker: SHOP) stock yesterday traded above the $21 level at which eBay (ticker: EBAY) said it would acquire the company. Are the two related? Analysis and quick comments:

The Scripps-Shopzilla deal

  • Scripps, which owns local newspapers, TV stations and the cable TV channels Home & Garden Television and The Food Network, announced that it will purchase Shopzilla - previously Bizrate - for $525 million in cash plus the return of about $35 million in working capital to shareholders.
  • Net price received by Shopzilla shareholders: $525 million plus $35 million = $560 milllion.
  • Scripps stated in its press release that it expects Shopzilla to generate 2005 revenue of $130-140 million and profit of $30-33 million.
  • Deal valuation: 4.1 times 2005 revenue ($560 million divided by mid-point revenue of $135 milllion).

Shopping.com valuation

  • eBay agreed to purchase Shopping.com for $620 million in cash.
  • As of end-Q1, Shopping.com had $143.9 million in net cash.
  • So the aggregate price to eBay is $476.1 million.
  • Shopping.com projected 2005 revenues at $125 million to $132 million (mid-point: $128.5 million) in its last conference call.
  • Deal valuation: 3.7 times 2005 revenue ($476 million divided by $128.5 million).

Quick comments:

  • The lower valuation for Shopping.com is unusual for two reasons:
  1. Shopping.com is publicly-traded and has stronger traffic and brand, and should therefore trade at a premium to Shopzilla.
  2. Shopping.com's 2006 revenue growth should be faster than Shopzilla's since Shopping.com is investing heavily this year in international expansion.
  • On the other hand, Shopzilla's 2005 projected profits of $30-33 million are considerably higher than Shopping.com's projected 2005 profits of $22-24 million. However, Shopping.com's 2005 profits are again depressed by its investments in international expansion, which for example depress its EBITDA margins from 27.3% in Q$ 2004 to 19.7% in 2005.
  • Net net, the Scripps-Shopzilla deal seems to confirm that eBay is getting a rather attractive deal on Shopping.com.
  • Perhaps for that reason, Shopping.com's stock traded above $21 yesterday, suggesting that the market believes that eBay will have to raise its offer.

Who else could bid for Shopping.com?

  • The key loser from the acquisition of the comparison shopping companies is Amazon (ticker: AMZN). (Here's why.)
  • As well as Amazon, other bidders for Shopping.com could include AOL (ticker: TWX), Microsoft (ticker: MSFT), Yahoo (ticker: YHOO), CNET (ticker: CNET), Bertlesman (it already owns a stake in Shopping.com), Overstock.com (ticker: OSTK), Google (ticker: GOOG), IACI (ticker: IACI), and other traditional media companies that have shown an appetite for online businesses like The New York Times (ticker: NYT) and Dow Jones (ticker: DJ).
  • To be an acquirer, the most likely candidate needs:
  1. Acquisiton currency: a reasonably valued stock and/or a cash-rich balance sheet;
  2. Focus on "virtual" (ie. inventory-light) online businesses;
  3. No current presence in comparison shopping;
  4. Appetite for acqusitions.
  • eBay clearly fulfils these criteria.
  • The other company that seems to, but which has barely been discussed, is IAC.

How much more could Shopping.com sell for than the $21 a share offered by eBay?

  • Using the same 4.1 times 2005 revenue multiple that Scripps is paying for Shopzilla, Shopping.com would sell for $677 million, or $21.42.
  • Using a higher multiple of 5x to reflect Shopping.com's market lead and brand, Shopping.com would sell for $768 million or $24.89 per share.
  • Both calculations use a diluted share count for Shopping.com of 31.6 million.

One day SHOP chart below.
Full disclosure: at the time of writing I'm long SHOP, short CNET.

Posted by David Jackson on June 7, 2005 at 08:51 AM in Sub-sector: E-tailing, Sub-sector: Search, ticker: CNET, ticker: EBAY, ticker: GOOG, ticker: IACI, ticker: MSFT, ticker: NYT, ticker: OSTK, ticker: SHOP, ticker: TWX, ticker: YHOO | Permalink


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You are not factoring in dilutive options to the purchase price of Shopping.com. At $21/share, there are 29.66mm basic shares and 2.1 dilutive securities using the treasury stock method. The equity purchase price is then $667mm and the enterprise value is $523mm. Using this math, Shopping.com was sold at a 21x 2005 EBITDA multiple and a 4x 2005 Rev multiple, which is not a discount to the Shopzilla trade on an EBITDA basis.

Posted by: Vince de Baca | June 7, 2005 01:43 PM

So if the appetites of aggressive acquirors is now squarely focused on shopping comparison sites, which one will be the next gobbled up? Will the acquiror be one of those listed here? My company works on behalf of many major retailers in optimizing and transmitting product catalogs to these sites. There is plenty of room to speculate on what directional shifts might follow for the big name comparisons sites these and future acquisitions represent. For retailers who use them as an important advertising vehicle, some insight into the context and strategic objectives around these acquisitions - other than the obvious cash/valuation related ones - would be very interesting. My how the world does change...

Posted by: Lilian Myers | June 8, 2005 05:01 PM

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