Today, Kaboose announced that it was in the process of selling all of its assets to two parties. Barclays Private Equity Group has offered to buy the assets of Bounty Group Limited for 54 million british pound sterling and Disney Online has offered to buy the Kaboose online assets for C$23.3 subsequent to the successful completion of the Bounty transaction. Depending upon the exchange rates, the total value of the transactions could range between C$118 and C$123 million. This is an inauspicious ending to a once celebrated Canadian online media story.
A couple of years ago Kaboose was one of the hotter stocks on the TSX. As one of only a few pure online media publishers from Canada, it had the potential to establish a global footprint. And online media was considered one of the fastest growing, potentially profitable industry sectors in the world. With over 90% of its audience in the US, the Company had already crossed the transborder chasm and was beginning to show success. Shareholders benefited.
Management had made a couple of astute strategic move by switching its focus from low-value kids to highly coveted moms, and by acquiring babyzone.com soon after becoming a public entity. Shareholders were pleased that the Company was ranked among the top 3 trafficked websites for moms on the Internet. Only Disney tracked consistently ahead of Kaboose, while once in a while Kaboose would switch positions with Viacom for the number 2 or 3 ranking. It was operating with some pretty heady company. It's only challenge seemed to be increasing CPC rates and revenue per unique user, where is lagged it main competitors.
The strategic objective was to generate high margin revenue by engaging tens of millions of mothers in a parenting dialogue from pregnancy to when their kids turned into sullen teens. In summary, this was a solid strategy for a valuable niche in an exploding market. By the spring of 2007, the stock peaked at $4.00, increasing 167% from its IPO issue price 8 months earlier. Analyst targets, including mine, were in the $5.00 to $6.00 range. Quarterly organic growth rates were consisently above 100%.
And then the U.S. housing bubble burst.
The evidence of how dramatic of an impact the housing bubble had on Kaboose's financial performance did not materialize until the Q4 2007 results were released. Long-term CPG clients began to unexpectedly cancel committed programs and after multiple quarters of double-digit and even triple-digit growth, ad sales contracted. To this day, media sales in the U.S. continue to contract.
In December of 2007, Kaboose acquired the U.K-based parenting club Bounty Group Limited for approximately $140 million on the back of a $115 million bought deal priced at $2.70 per share, and a $25 million credit facility. It was a seemingly fortuitous acquisition because, for the first half of 2008, Bounty performance was substantially better than expected as the U.K economy was yet to feel the full brunt of the U.S. recession. Even as Kaboose's U.S. online publishing revenues continued to erode, Bounty was exceeding expectations and driving operating earnings.
However, investors never really understood the business, and the Bounty performance was not well-reflected in the share price, which continued to decline throughout the first half of 2008, as investors fretted about the state of the the Company's U.S. online ad market.
And then the credit markets crashed. Worldwide.
The impact of the credit crisis is apparent in the Q4 numbers that were reported earlier today. Sales for the quarter totalled $21.3 million, below most analyst expectations, and EBITDA was $5.2 million, which was also somewhat below expectations. FY2008 revenue was $81.9 million, and EBITDA was reported at $12.1 million. Both of these numbers were generally below analyst forecasts from the beginning of 2008.
Despite some executional moves towards a vertical ad network, and localization, CPM-based display ad rates in the U.S. continue to decline, compressing margins. The credit crisis has even taken some of the wind out of Bounty's UK sales. One could suspect that when Management looks to the immediate future, prospects are pretty grim, which is the likely backdrop to the announcements today. With limited Bounty performance reflected, the share price entering 2009 was $0.36 and has bounced around in a range between $0.35 and $0.40 since. With a once stellar balance sheet burdened by long-term debt, and H1 2009 results unlikely to impress, the shareprice is unlikely to move anywhere but down, or best case, sideways. To Management, a C$120 million dollar windfall right now probably seems a lot better than a 2009 grind towards potential oblivion.
Kaboose was designed to be an attractive roll-up business for a much larger media player like Disney (DIS), Viacom (VIA) or NewsCorp (NWS), however the price was supposed to be a lot higher than what was reported today. Maybe Management could have held out for a few more quarters in hopes of a rebound. However, there is so much uncertainty in the market, that it is more likely than not that potential suitors like Disney would stop calling, or that the future price offered would be lower. With the financial stress throughout the media sector, Disney may actually be the only one calling right now.
This may be cold comfort to institutional shareholders that participated in the 2007 financing at $2.70 per share and are long in the stock. Others, who sold KAB shares for tax losses in 2008, and then bought back in again should benefit from a decent windfall.
Kaboose suffered from a one-two punch combination starting with the bursting housing bubble in 2007, and then the credit freeze of 2008. With a grim outlook, an asset sale right now probably looks like the best option to Management. Although there is no Hollywood ending to this story, at least there is some value salvaged.
I own shares of KAB; I do not own shares of DIS, VIA, or NWS
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