A Group Nine and Refinery29 merger would face challenges

Rumors are still flying about a potential tie-up between Group Nine Media and Refinery29, which like other VC-backed companies have struggled to live up to their valuations, last pegged at $500 million each. But such a merger would face steep hurdles, according to M&A experts.

Chatter about a deal circulated earlier in the year after BuzzFeed CEO Jonah Peretti floated the idea in The New York Times. Digital media companies including BuzzFeed, he stated, could gain leverage over titans like Facebook by combining forces.

Read more: Billions from VC companies like Lerer Hippeau and Lightspeed fueled the rise of digital media and stoked crazy expectations for growth — here’s why insiders say that approach is killing companies

The logic for a merger is simple. Venture-backed digital media companies, once flush with cash, are struggling to reach profitability. They can’t raise more money because venture capitalists have lost interest in funding them, industry watchers say. Merging would be a way for companies to erase their losses and keep operating while they figure out a new, sustainable business model.

The financial pressure has led some digital media companies to consolidate already. One active buyer is Bustle Media Group, which recently purchased Mic and Gawker for a fraction of their peak valuations. Those remaining are trying to diversify their revenue mix away from advertising and into events, e-commerce, subscriptions or long-form video.

Group Nine wouldn’t comment for this story. A Refinery29 spokesperson said: “We are having discussions with our industry peers about opportunities to come together; however, there are no immediate plans to do so at this time.”

While there may be logic for it, a Group Nine-Refinery29 tie-up would be hard logistically to pull off.

‘The hardest deals to get done’

The most likely outcome for a merger between money-losing companies is to combine in a stock deal where no money changes hands. And that’s not a pretty scenario, experts said.

The people interviewed for this story said they didn’t have direct knowledge of any sale activity. They spoke on the assumption that Refinery29 and Group Nine are still losing money and don’t have cash on hand or the ability to raise money for a deal.

Refinery29 has said it isn’t profitable yet and is out trying to raise $20 million, according to an SEC filing; Group Nine hasn’t said, but it’s widely assumed that it isn’t profitable.

“All-stock transactions for money-losing companies are the hardest deals to get done … and it is all emotion,” said Corey Ferengul, who has led multiple deals as a buyer and seller over the years and is currently CEO of ad-tech company Magnetic. “And good luck valuing money-losing companies in an industry changing so rapidly.”

In a stock sale, the companies would combine and the acquired company would get shares of the combined company. But they’d have to agree on their respective values, which is tough because there’s no straightforward way to do so.

Everyone’s losing money

It’s also hard to get investors to agree on the value when the combined company (and their stakes) would be worth less than they were pre-merger.

The buying company would be incentivized to value the one it’s acquiring as low as possible. The acquirer, for its part, would fight to keep its value as high as possible. It might argue that it should be valued high based on its contribution to the combined company’s success over time. (Observers assume that Group Nine would be the acquirer in this scenario because it’s the bigger of the two. It was formed through a previous rollup of four companies: Thrillist, NowThis, The Dodo, and Seeker.)

Either way, it’s not a happy ending for anyone.

“They both end up with a small piece of a company and the stock would be less valuable than the last one,” a longtime media operator said. “It creates an outcome that’s not great for anyone involved.”

A further complication comes in when there are multiple investors involved. Group Nine has raised $140 million in two rounds from Discovery Communications, along with (Business Insider parent) Axel Springer, and venture-capital firm Lerer Hippeau Ventures. Refinery29 has raised $125 million as of 2016 from Turner along with Scripps, Stripes Group, Floodgate, Lead Edge Capital, First Round Capital, Lerer Ventures, and the Hearst Corp.

All the investors will see their investments dwindle, but each may have different appetites for losing money, which will impact their willingness to approve a deal. It depends on the terms of ownership, but usually just a majority of shareholders of each company has to approve a merger, although if it’s more, that makes a deal harder, M&A experts said.

There are other reasons for investors to balk. It’s typical for managers to be offered financial incentives to help get the deal done and/or stay on to help take the combined company forward. That can stoke resentment from shareholders who feel like they’re already giving up a lot, though.

There will be blood-letting

Another difficult step is figuring out how the combined company will erase its losses, get profitable, and grow — even if the growth isn’t as much as the investors initially hoped for.

The obvious path is to make massive staff cuts. But both companies will argue all their people are essential as neither wants to give up any more of its own staff than it has to.

On the other hand, a merger could be the best alternative, said Reed Phillips, managing partner of investment bank Oaklins DeSilva+Phillips.

“It makes immense sense for these two companies to combine because you can immediately reduce costs and extend the lifelines of both companies,” Phillips said. “If the companies cannot sell now, a combination is the next best alternative and the logic should be easily explainable to investors.”

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