HandHeld Entertainment Acquires eBaumsWorld; Investors Yawn

HandHeld Entertainment (ZVUE) has gone to the well one too many times. Every six months or so it announces what is said to be a transformative acquisition and tells investors that positive cash flow is just around the corner. The tactic worked wonders at first.

Now investors know better. When ZVUE announced today that it was acquiring eBaumsWorld.com, the stock barely budged and ended up closing down $0.04 to $1.78 on just slightly-above-average volume. ZVUE will pay $17.5 million, including $15.0 million in cash and $5.0 million in common stock. In addition, HandHeld may pay earn-outs of up to $32.5 million.

ZVUE management describes eBaumsWorld as “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.” CEO Jeff Oscodar said:

Acquiring eBaum’s World demonstrates tremendous progress toward our stated goals of becoming a global leader in digital entertainment, as well as increasing our revenues and helping us become cash flow positive. . . Both the initial and earn-out consideration for this acquisition are based on a 6X pro forma EBITDA multiple, which we believe is a strong value relative to current market multiples for comparable companies and is consistent with our commitment to create shareholder value.

I think this is a great deal — for Eric Bauman. His eponymous site might have generated some income last year, but according to Alexa, it has been in a steady slump since mid-2005. Don’t expect a change under ZVUE’s control. HandHeld management has yet to prove that it can leverage portfolio sites to squeeze out more profits or even more revenues. Then there are the accusations of plagiarism and copyright theft. eBaumsWorld is not a trophy property. ZVUE investors appear to recognize that.

DISCLOSURE: No position.