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.