Interesting denouement today connects one of the trailblazing sites in viral media and an ambitious team of executives I’ve had the pleasure to meet. The former is eBaum’s World, no stranger to controversy and criticism; the latter is Handheld Entertainment, a company that’s been around for years and has in the past 12 months moved aggressively away from the handheld device market (whose Zuve player has competitors like Apple, Sandisk and Microsoft) into the online media segment.
[Full disclosure: Handheld Entertainment has in the past approached Mojo Supreme about an acquisition, mainly for our WatchMojo.com web video unit].
Some info on eBaum’s World:
Founded in 1998, eBaum’s World is one of the oldest and most successful user-generated content (UGC) sites in the world, generating approximately $5.2 million in revenue and $1.6 million in net income before income taxes in 2006. During the last 12 months, eBaum’s World served more than 2.5 billion unique page views and video streams, with an average time on site per user visit of more than 10 minutes. As a pioneer of viral video, eBaum’s World has helped shape the UGC market with its loyal following and growing community, becoming one of the world’s largest independent online publishers of humor-related content. The company has relationships with such leading media companies as AOL Video, Facebook, FOX Mobile and others.
Today Handheld decided to acquire eBaum’s World:
Under the terms of the acquisition, which is expected to close later this year, HandHeld will pay $17.5 million for eBaum’s World at closing, including $15.0 million in cash, $5.0 million in common stock, which is subject to a $2.5 million one-year hold-back based on achievement of certain financial targets. In addition, HandHeld may pay earn-outs of up to $32.5 million ($17.5 million in stock and $15.0 million in cash) over three years to the owners of eBaum’s World, dependent on the achievement of certain financial and operational milestones of the purchased business.
To finance the deal:
HandHeld has entered into an agreement to sell $24.0 million of three-year, 7.5% convertible debentures with a fixed conversion price stock at $1.90 per share subject to adjustment. Of the proceeds, $15.0 million is for the acquisition of eBaum’s World and $9.0 million is for future mergers and acquisitions, working capital and fees. Other significant terms of the notes include:
- 3.0 million warrants with an exercise price of $1.90 and 2.7 million warrants with an exercise price of $2.09;
- Principal and interest on the debentures in either stock or cash, at HandHeld’s option; and
- Customary registration rights and anti-dilution provisions.
Company insiders are expected to provide $1 million of the $24 million financing.
My Two Cents:
In some ways, I understand management’s approach to building a media company. The idea is most web surfers, regardless of language and age look for comedy. The company first sought to ramp up its new media portfolio by scooping up the major properties that pop up on Google’s first page for humor… but, at some points, the laws of diminishing returns kick in, in my humble opinion.
The company’s current market cap at $30M, the stock has hovered as high as $7.78 in the past 52 weeks and now sits near its 52 week low of $1 at $1.30. To finance the deal, in fact shareholders are diluting themselves once again.
Now say what you want about the reality of those economics; from a strategic perspective, as a producer of premium, rights-owned, professional video content at WatchMojo.com, I think the idea of piling up more and more UGC is not wise, long term (and therein lied a philosophical disagreement in talks, basically).
Don’t take it from me, take it from the marketplace.
Yesterday we heard by way of Tech Crunch that GoFish (more disclosure: GoFish is one of the many distribution partners in our syndication network) was having difficulty finding monetizable content on its site. We have 100 or so clips on GoFish’s site (out of a library of 4,000 clips), within weeks and months we’ll have more and more… and I personally think that is the brass ring is in made-for-web video content, not the TV companies’ content, and certainly not UGC. I also think that file sharing destinations are a hit-or-miss, whereas content is destination agnostic, which runs counter to conventional wisdom and the institutional imperative of the VC world where they’ll invest in yet another file sharing site but they view video content as risky.
Of course, not all UGC sites are created equally. eBaum’s World adds a recognizable brand to Handheld’s portfolio, albeit one that carries both goodwill and a stigma with marketers. The site has in the past received many copyright-violating notices from the very same media companies that represent huge advertising budgets. Of course, YouTube showed that violating copyright, even if unintentionally, need not be a bad thing.
It will be very interesting how this one pans out… the deal is expected to close in the next 75 days and is subject to shareholders’ approval. And, as the Bolt/GoFish deal proved, nothing is a done deal, especially in the murky UGC market.
Finally, the deal is for anywhere from $15M to as much as $52.5M… but as YouTube (disclosure #3: YouTube is another one of our many distribution partners, here’s our old account, and our new one) is showing, monetizing content you don’t own the rights to and advertisers are not comfortable with is no obvious task… so for the time being, this one is a $17.5M deal. Then again, eBaum’s CFO is an experienced finance manager, so I presume the targets are attainable…
Oh, and one last disclosure, sitting on my desk is a licensing agreement for our video library from Handheld Entertainment. Yes, it’s a small world.
Read about this deal on NewTeeVee, hesitated to comment for obvious reasons, but it’s an interesting one if you are into M&A. PaidContent is now running the story, too.
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