This article has been written in light of recent rumors in the market related to the sale of Ancestory.com (ACOM). We are of the opinion that the said transaction will have an upside of 50-85% for the ACOM's stock.
We believe that if a social networking company like Facebook (FB) that can enjoy synergies from the business model of Ancestry.com were to purchase it, it would be willing to pay a significant premium to the current market price.
Ancestry.com was founded in 1983 as a publisher of genealogical books and magazines; it evolved into an online family-history research and data website helping customers trace their geological roots. Currently, it is the world's largest online family history resource.
The subscribers of Ancestry.com use the proprietary Web-based services and content collection of Ancestory.com to build their family trees, research their family histories, upload their own records, collaborate with other subscribers and publish and share their stories. Over 95 million pieces of content, such as photographs and scanned documents have been uploaded by the users. The increasing pool of user generated data adds color and context to the family histories assembled from the institutional content available through the services of Ancestry.com.
The company has been reporting profits since 2007. Ancestry.com is trading at P/E multiple of 18.40, compared with a median P/E multiple of approximately 43x for companies in the U.S. Internet and e-commerce industry (Bloomberg.)
Analysts have projected that the revenue of Ancestry.com will hit a record $528 million in 2013, a 32% YoY increase. Its net income is also expected to reach at $85.6 million next year based on the consensus estimates.
According to data compiled by Bloomberg Ancestry.com is generating higher free cash to equity than 96 percent of the companies in the U.S. Internet industry. The free cash flow yield of Ancestry.com is 11% for the last 12 months which is significantly higher than the Facebook and Netflix Inc.'s (NFLX) yield of 2.8% and 5.3% respectively.
As announced by the company, Ancestry.com had 1.87 million paying subscribers as of March 31, up 10% from the subscriber base of 1.7 million as on December 31, 2011.
Cancellation of sponsored show
The stock price of Ancestry.com has dipped 30 percent since February, after reaching a 52 week high of $33.09 , after a TV show "Who Do You Think You Are?" was not renewed on NBC network. The show had generated user interest in Ancestry.com and attracted new subscribers.
Since its initial airing in 2010, "Who Do You Think You Are?" had aired in the 1H of each year. As a result, Ancestry.com had been recognizing additional product integration expense in the 1H, reducing their operating margins and net income compared to the 2H. Ancestory.com has also experienced a higher number of gross subscriber additions during the 1H due to the increased interest received as a result of the show. The cancellation of the show would result in the loss of potential subscribers and have a negative impact on the revenues. However, these concerns have already been discounted by the stock price.
The revenues of Ancestory.com have increased by 21%. However, the earnings of the company have increased by 51%, due to a 40% decrease in amortization of acquired intangible assets. The cash balance of the company has remained relatively flat, even though there was an increase of 12% in cash flow from operations, due to the company completing two acquisitions for a total of approximately $11.7 million.. These acquisitions included DNA assets of 'Sorenson Molecular Genealogy Foundation', a non-profit organization with a diverse collection of DNA samples and corresponding genealogical information and 'We're Related, LLC', which operates the We're Related Facebook application.
In April 2012, the company entered into a definitive agreement to acquire Archives.com, a family history Web site, for $100.0 million in cash. This will help the company to add a differentiated service related to family history.
Also, in April 2012, the company's board of directors authorized the repurchase of up to $100.0 million of its outstanding common stock which represents 10% of the market capitalization.
The widely speculated potential buyers for Ancestry.com include;
1) Private Equity firms that may be interested in a leveraged buyout (LBO) based on its attractive valuation and lack of debt.
2) Facebook and Google (GOOG) may be interested in acquiring Ancestry.com to capture its subscription based cash flow and revenue.
Facebook and the other social networking sites
We anticipate that the Intellectual property of more than 8 billion historical records uploaded by Ancestry.com and over 95 million pieces of data, including photographs and scanned documents uploaded by its subscriber base, may appeal to Facebook and other social networking sites. We are of the opinion that an existing social networking site may integrate the said data with their own to offer additional services.
Stock Price performance
The stock price has rallied more than 15% to close near $26 since its sale news was reported by Bloomberg etc.
Acquisition Multiple of Ancestory.com
The IPO for Facebook was done at a P/E of over 100x. For Linkedin (LNKD), the IPO was on the P/S multiple of 17.5.
Looking at the recent transactions done in the social media space, we think ACOM price to earnings multiple of 18x is at a significant discount, especially when compared to Facebook's acquisition of Instagram or Zynga's acquisition of OMGPOP.
Even if the sale of Ancestry.com is done at a discount of 50% to the forward industry P/E, the acquisition price would be $39/share. If the sale is done at the P/S multiple used for Linkedin IPO, ACON can trade in north of $48.
Companies like Facebook,Google will view Ancestory.com as synergistic in nature.