WPP - 24/7 Real Media Rumors: A Deal Makes Sense

“No….” was the simple response from David Moore, chief executive of Internet ad firm 24/7 Real Media (TFSM) in response to my e-mail yesterday as to whether he’d like to comment on the story in The New York Post saying that British advertising giant WPP Group PLC (WPPGY) may want to buy the company for $600 million — about a 20% premium to the company’s market cap even after a 17% rise in the stock yesterday.

Analysts, however, seem to feel a deal makes sense in the light of Google’s (GOOG) recent purchase of ad network Doubleclick. CIBC World Markets analyst Paul Keung has written extensively recently that Web advertising is going to consolidate into a business of giant networks, such as GoogleClick, on the one hand, and on the other, smaller niche sellers of ads that can connect advertisers to select audiences, like, say fly fishers or bowling enthusiasts.

In the middle are smaller networks that don’t have scale but also don’t have selectivity, and Keung thinks that these will get bought up because they belong inside the larger operations. Keung’s comment in a chat I had with him earlier was that 24/7 would be one of those smaller networks for keyword and display ads that would make sense as part of a larger operation. Another force that’s pushing the industry to consolidate, opines Keung, is the rise of independent advertising “exchanges,” such as privately held Rightmedia, which has investments from Yahoo! (YHOO) and venture capital firm Sequioa Capital.

Jeffries & Co. analyst Youssef Squali also likes the thought of a deal. He writes in a report yesterday that WPP is one of the old-style offline ad agencies that has lagged competitors in online ads and that 24/7 would be a nice bite-size acquisition to help with that problem — by which I assume he means that $3 billion ValueClick (VCLK) and $2.5 billion aQuantive (AQNT) are a bit much to swallow. Squali says Moore and other management who’ve been around awhile would likely be happy to cash in their chips and that an implied take out price of $10.75 is very good indeed (TFSM shares were at $9.94 after yesterday’s rise).

That would be a multiple of 17x enterprise value-to-Ebitda, which is below the 20x Google paid for Doubleclick, says Squali. And $600 million, he notes, is less than half the $1.3 billion that French ad firm Publicis paid for Digitas back in January, which would be nice for WPP because 24/7 is growing sales at a 30% annual clip versus merely mid-teens growth for Digitas. Furthermore, Squali expects a 24/7 deal would turn up the heat for a buyout of aQuantive and Doubleclick, with the most likely candidates being Yahoo!, Microsoft (MSFT), Barry Diller’s IAC-Interactive Corp. (IACI).

Meantime, so much for Jordan Rohan of RBC Capital’s downgrade of 24/7 on April 17, when he said the stock would be challenged given the company’s lack of traction in the U.S. ad market. Doesn’t matter in buyout land, does it?

aQuantive shares yesterday rose 1% to $32.02 while ValueClick shares rose 1.34% to $30.23.