Handheld Entertainment Adds Ebaum’s World To Its Web Communities Portfolio

Last Thursday, we saw another major deal in the internet video space when Eric Bauman agreed to sell Ebaum’s World for anywhere between $17.5 - $50 million, depending on performance considerations.

The site was purchased by a small company named Handheld Entertainment (ZVUE). Handheld is a microcap company that makes a low end mp3 player. Over the last 9 months, it has had a pretty rough run in the market. After announcing the acquisition of Dorks.com for $1.5 million last November, the company saw its share price spike to $7 per share before settling to a little under $2, prior to the Ebaum purchase.

During that time, the company also purchased Putfile for $7.1 million, FunMansion.com for $1.1 million and Yourdailymedia for $1.06 million. By themselves, these sites seem trivial, but collectively, the traffic does start to add up. Before the Ebaum purchase, I had never heard of Handheld, but over the weekend, I dug into its conference call announcing the buyout and found a lot of good video stats buried in the presentation.

Ebaum’s traffic is incredibly sticky. It averages close to 22 page views per visit. Of all the video sites, it's ranked #2 in the amount of time that users spend on the site, #8 in terms of traffic. With Nielsen changing the way it measures traffic, this could add an edge in attracting advertisers.

Ebaum averages about 3.2 million unique visitors per week. A lot of these visits come from organic traffic. It estimates that 65% of its visits are repeat visitors. To help put this number into perspective, on Local.com’s (LOCM) most recent conference call, it said that it was getting a measly 10% of its traffic from organic sources. This is an important number to keep an eye on because when you have to buy your clicks, it eats into profitability.

The number of 18 - 35 year olds that visit the site each week is the same number that tunes into CSI or Law and Order each week. I found this stat to be the most fascinating. As media continues to develop, these micro communities will play an increasingly important role in media. I don’t have any data to back it up, but I would bet that the 18 - 35 year olds who are visiting Ebaum’s World are the ones who are less likely to be watching Law & Order to begin with.

Handheld paid 6 times EBITDA for the site. If the site quits making money, then Bauman’s piece would be capped at the $17.5 million. If it does earn money, then he can earn another $27.5 million from a 60/40 split of the earnings. As part of the deal, Bauman will end up owning 2.5 million shares of the company. These will vest over the next 3 years.

Prior to announcing the deal, Handheld not only secured financing that shareholders are allowed to vote on, but actually priced the warrants at a premium (albeit modest) to the current share prices. I still don’t have a good handle on the full impact the warrants will have on the company’s capitalization, but I can’t remember the last time I saw a microcap company actually price a private placement deal above market, let alone secure financing that didn’t have complicated contingencies attached. This shouldn’t be all that unusual, but sadly it is.

Ebaum’s World earned $5.2 million in revenue last year and $1.6 million in net income. Personally, the ads are a little too aggressive for me, but it apparently hasn’t stopped others from spending time there. While the ads can be spammy, they also appear to be quite profitable. $1.6 million isn’t a huge number, but it does prove that online video can make cash.

With any microcap stock there is always a high degree of risk and over the last 9 months, Handheld investors have had to learn that lesson the hard way. While I do think that there are some legitimate questions about the company’s hardware business, after the haircut it has taken, it’s hard to argue that this isn’t priced in.

Between the Ebaum purchase and its past acquisitions, the company has developed an impressive portfolio of web communities. The challenge now is to find cost synergies and better ways to monetize these impressions. Because of the uncertainties surrounding its business model and the complexities of its previous financing, it’s hard to know how to value this one early on, but it’s one that might be worth keeping an eye on, even if it’s just for the juicy online video statistics.