CNET: Dead Money, Regardless of Takeover Talk

A group of investment funds led by Jana Partners has accumulated a 21% stake in media technology company CNET Networks (CNET) and has stated its intention to amend the company's by-laws to increase the size of the board of directors to 13 and to nominate seven directors to stand for election at CNET's 2008 annual stockholder meeting.

In defiance of those efforts to shakeup the company, current management responded Monday morning by saying that it has already taken drastic steps to help steer the ship in the right direction by focusing on its core brands, disposing of underperforming assets, overhauling its executive management team with industry leaders, making strategic acquisitions solidifying the company's leadership in key categories and geographies and adding two independent members to its Board.

But ultimately, all of those actions have failed to boost the stock price. As a turnaround of the company has floundered, a takeover seems to be the best option for frustrated and beaten up shareholders who are looking for someone to turnaround this depressed asset. Jana Partners, headed by Barry Rosenstein, makes a definitive case for the underperformance of CNET and why change is needed at the top.

Despite owning leading web properties including technology, food and gaming review franchises, CNET has failed in recent years to create shareholder value. In 2007, CNET shares rose less than 1% versus gains of approximately 15% for CNET's stated benchmark, the Interactive Week Internet Index, and 10% for the NASDAQ Index.

For the three years through 2007, CNET shares fell approximately 19% versus gains of approximately 32% for the Interactive Week Internet Index and 22% for the NASDAQ Index.

But the proposal won't have a chance as it stands now because CNET has determined the proposal improper under the company's by-laws - no shareholder can propose amendments unless they have owned $1,000 worth of shares in the company for at least one year. Yet shareholders don't have the patience to wait any longer and time is not on the company's side. Standard & Poor's equity analyst Scott Kessler recently lowered his 2008 earnings estimate to $.18 per share from $.22 per share as he lowered his rating on CNET from "sell" to "strong sell." In the second downgrade of the new year, he cautioned that as competition increases, the company may lose market share over the next two years.

With a tough environment, weak outlook and little change in store, CNET remains dead money.

Comments

[Long-ShortGuy]

From ThinkEquity analyst Bill Morrison's note today:


Valuation.

We derive our $7 single-point target price for CNET using an EV/EBITDA valuation methodology, which we support with a fully taxed free cash flow-multiple-to-growt... framework. We normally prefer to focus on free cash flow first due to our belief that it is generally the best measure of sustainable shareholder value creation and note that our free cash flow valuation work points to a target in the $7 range. However, with a company such as CNET, which is a likely acquisition target and not paying a full tax rate, we believe an EV/EBITDA approach is a more-appropriate valuation methodology and likely to produce more effective comparisons with its peers.

EV/EBITDA

Shares of traditional media companies with similar cash flow attributes to CNET have historically traded at 8-12x forward-year EBITDA multiples for cash flow growth rates in the 10-15% range. Shares of online media stocks in our coverage universe are currently trading at an average of 10x our 2009 EBITDA estimates, with average cash flow growth rates over the next few years in the 23% range. By comparison, CNET shares are currently trading at 10.5x our 2009 EBITDA estimate, and we expect CNET to grow its cash flow at an 11% CAGR over the next three years. Balancing its lower growth profile with its higher-quality assets, we believe CNET shares should trade at an EV/EBITDA multiple in the 10x range, toward the middle of the historical range described above. At 10x our 2009 EBITDA estimate of $102 million, CNET stock would trade at a target enterprise value of $1 billion. After adding in approximately $72 million in net cash that we expect the company to have accrued by the end of next year, and adding $80 million for the net present value of the CNET's NOL position, we arrive at a target equity value for CNET's stock of $1.2 billion, or a price target of approximately $7."