Internet Brands Gets Dot Com Bubble Valuation

Devan Biswas
20 Sep, 2010
New York City

Internet Brands Inc soared after a private equity deal that valued the company at six times sales and nearly twenty times cash flow. The rich valuation is based on the expectations of rising cash flows from generic sites that lack original content and may face a sudden change in user preference.

[R]1:45 PM Miami – Internet Brands Inc soared after a private equity deal that valued the company at six times sales and nearly twenty times cash flow. The rich valuation is based on the expectations of rising cash flows from generic sites that lack original content and may face a sudden change in user preference.[/R]

Internet Brands Inc. ((INET)) soared 44.9% or $4.09 to $13.20 after the Internet content company agreed to be acquired by private-equity firm Hellman & Friedman LLC.

The deal values Internet Brands at roughly $640 million. Hellmann & Friedman arranged bank financing from Bank of America Corp, GE Capital, Royal Bank of Canada and Bank of Montreal for the purchase of Internet Brands Inc

Shareholders will receive $13.35 in cash for each outstanding share of common stock and the price represents premium of approx 46.5% from closing price on Sept. 17.

The company claims on its site and in presentation to investors that it attracts more than 62 million “organic visitors” a month and has 40,000 advertisers.

The company claims to have 3 million “highly engaged community members,” 10 million web page “content” and 62,000 unique monthly visitors.

The company operates several well know sites names including Gardens.com, Loan.com, autos.com, iFreelance.com and ModelMayhem.com.

The company founded in 1998 by Internet incubator Idealab survived the dot com crash and morphed as acquirer of Internet domain names and sites that rely on stripped content and sites that are member-driven and serve as a platform for message boards.

In 2009, the company generated revenues of $99.7 million and net income of $12.3 million. The revenues have increased from $78 million in 2005 and earnings declined from $13 million.

Cash flow from operations has been nearly flat since 2007 and hovered near $36 million and free cash flow has increased from $23 million in 2007 to $35 million in 2010.

The deal values the company at more than 6 times revenues and 20 times cash flow based on 2009 data.

The deal is not cheap and the portfolio of the company’s assets is not that unique. The company owns a collection of sites in the travel, career, automotive, health, money and business and home-related sectors.

Most of the Web sites operated by the company have been acquired in the recent past and are generally aggregator of content and lack stickiness. For example, the sites like FinWeb.com and Mortgage.com and other sites have a collection of links and generic content.

The company in its presentation to investors claimed to generate 36% of its revenues from impression advertisements and 45% from clicks on the ads that are most likely served by Google ad servers.

The increase in monthly unique visitors from 4 million at the end of 2005 to 62 million at the end of 2010 failed to generate similar increase in revenues and earnings. Most of the traffic what the company claims to be organic, meaning people typing the name of the site, in fact may be generated by default results from the search engine links.

The company has set the target of operating at least 200 Web sites by 2015 and each generating $2 million revenues from the current 100 sites that each generates $1 million.

The deal values the company at $640 million and after deducting the $59 million in cash the company value is close to $580 million.

Most private equity funds generally look for 15% return on capital. To do so, the company has to annually generate $75 million in free cash flow or nearly twice the current rate.

The deal metrics are very difficult to justify on the face of the size of the sales and cash flow. If the company goes on an acquisition spree and acquires 100 new sites it may reach its goal set for 2015 but is not likely to generate returns that investors are hoping for.

Moreover, the sites owned by the company are generic in nature and generally appear to rely on content from other providers or end up as a default links from search engine.

The company claims to have 62 million unique visitors, it will be good to know how many are repeat visitors for most of its properties. These kinds of sites are prone to lose the traffic and membership in a hurry.

The expectation of the stable cash flows from the portfolio sites that are so generic and fund the acquisition on bank financing reminds era that passed only a decade ago.