How do you accurately value a social media company? More important, how do you accurately value an oil and gas company that is about to be merged with (become) a social media company?
That is the question facing investors of Primary Petroleum (PETEF) currently an oil and gas company, who is in the midst of a becoming a social media company.
In November 2013, Primary Petroleum announced a planned merger with social media KEEK in what had many investors (myself included) wondering if Mike Marrandino (CEO of Primary) had completely lost his mind. What the heck does the CEO of an oil and gas company know about social media and why would he do this to his investors?
The answer is actually much simpler than one would think and may just set Mr Marrandino out to be a true genius.
The market seems to have lost all interest in oil and gas juniors over the past couple of years. Look for example at Dejour Energy (DEJ) down 67.92 % from January 2012, Samson Oil and Gas (NYSEMKT:SSN) down 74.76%, Lucas Energy (NYSEMKT:LEI) down 54.7%, Royale Energy (NASDAQ:ROYL) down 43.4%, or the hundreds of other spec or even junior oil and gas companies. These were the bedfellows of Primary and the options for Mike Marrandino to consider an alliance with to advance shareholder wealth.
Instead, he chose to look outside the box, or, outside the box came to find him and he decided upon a merger with a private social media company based out of Toronto Ontario called KEEK.
KEEK is a unique social media platform that allows users to easily create 37 second videos (or KEEKs) combined with 111 characters of text and share them with friends and followers via Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Tumblr. The application is also available for mobile devices including iPhone, Android, Blackberry 10 and Windows 8. The beauty of KEEK is that it is easy for anybody to instantly create, share and respond to each other and has been rapidly growing within the 13-25 year old market and attracted celebrities including the entire Kardashian clan as well as pop star Demi Lovado.
Why is this a good deal for shareholders of Primary?
KEEK needs the money that Primary currently has in its bank account. With over 60 million users and a past growth rate of 250 000 per day, their servers couldn't keep up without upgrades and they have eaten through their past cash infusions ($30 million to date).
Primary had looked at over 70 oil/gas companies to form an alliance with and realized each simply wanted Primary's bank account (+/- $15M) and land base (+/- 300K acres) to help pay off their own debts and would provide little to no value to Primary shareholders.
A merger with KEEK on the other hand, gives the shareholders of Primary what may be a once in a lifetime opportunity to get in on the ground floor of a social media company that is usually only available to institutional investors as the early investors in KEEK had been, including the likes of Pinetree Capital (PNV.V), Alpha North Asset Management, Plazacorp Ventures, AGF Investments and Cranson Capital.
Due to KEEK's desperate need for cash, Mike Marrandino was able to negotiate terms that are highly beneficial to Primary shareholders even though it will require the issuance of approximately 190 million shares of Primary stock to get the job done. The merged company would result in Primary shareholders owning approximately 43.5% of the new amalgamated company.
Establishing value …
Valuing a social media company with no revenue and subsequently no profit may be somewhat difficult, unless you consider using the only available metric to make comparisons to peers in the social media space - the number of registered users.
For example, Facebook has a market cap of just over $133 billion with what is last reported to be a user base of just over 1 billion users or an astounding $100-$125 per user - granted, Facebook also has earnings of approximately $0.39 per share. Twitter with a market cap of $33 billion has an estimated 645 million users or $51 per user - and although has a revenue model, has losses of $0.20 per share.
I don't think it even remotely reasonable to compare KEEK to Facebook or Twitter with their massive market appeal, name recognition and most important - revenues, however I think it safe to compare them to Snapchat, who, for all intents and purposes would be their nearest direct competitor in terms of services provided - even though, there is no other app that directly competes with the services offered by KEEK.
When one considers that Facebook recently offered an outrageous $3 billion dollars to purchase Snapchat, it is not hard to suggest that Primary shareholders are getting a ridiculous discount at an estimated $19 million dollar price tag for KEEK.
Although Snapchat will not confirm their number of users, in October it was estimated to have approximately 26 million US users likely making it the most recognized name in the United States, but KEEK is the top app throughout most of the rest of the world, with over 60 million world wide users. Both companies are still attempting to put together a revenue model that works so are still requiring outside funding. Recent reports suggest Snapchat is looking to raise an additional $60 million through private funding.
If Mike Marrandino has his way, KEEK will be generating revenues in the very near future and with a 36 second video format in addition to 111 characters of text, the marketing opportunities are absolutely limitless.
Thinking about Snapchat's outright refusal of Facebook's $3 billion dollar offer, less registered users (approx 27 million) and still attempting to earn its first dollar in revenue, is a $1 billion valuation for KEEK with its 60 million users and growing reasonable?
I guess that's a question that only you, the market can answer but looking at the star studded team being put together to manage KEEK, it would seem Mike Marrandino is very determined to make that a reality.
One thing seems certain going forward. Unlike the oil and gas business where management tends to keep information secret in terms of how successful a well is or how profitable specific acreage may be (as they seem to always be working to acquire additional leases, therefore keeping information to themselves), there is sure to be a tremendous amount of publicity and media around the new KEEK. Management understands the importance of keeping a social media company in the spotlight and the way to do that is to continue to keep the market informed via press releases which in turn can relate to trading opportunities.
Of course, there are risks involved going forward as this deal has not yet been finalized. Even though it seems likely that the shareholders of both KEEK and Primary are going to approve the merger at the respective special meetings scheduled for March 04, 2014, it will still require the blessing of the TSX Venture exchange to become a reality.
Considering the rather quick release of trading by the TSX-V (in relation to other companies that have requested a listing change of business being halted for anywhere from 6-12 months) it appears that it too realizes the necessity to bring fresh opportunities to market. The TSX-V apparently recognizes the same thing that Mike Marrandino has -small or micro cap oil and gas companies are simply out of favour with the market at this time and the social media/tech space is gaining attention at an alarming rate. The TSX-V would like to take advantage of this opportunity to attract a more diverse set of listings and could use this merger (reverse take over) as its poster child for encouraging new listings within the social media/tech space.
A further potential negative to some investors is the number of outstanding shares (estimated to be around 372 million fully diluted) after the deal completes. Although nothing has been made public, there is always the potential that a reverse split could occur to meet a couple of objectives. First, it would dramatically reduce the float - I would expect if it did occur it would be in the range of 5:1 dropping the outstanding to a much more manageable 70 milllion shares. In addition, a reverse split, could expedite the increase in share value to the $5 mark in which it would attract the attention of larger institutional investors.
Another possibility of course is the necessity to raise additional capital until a revenue model is in place that can pay the bills. This should be delayed by the sale of Primary's 300k + acres of land that they plan to divest with shareholder approval. At this point, it is not known how much Primary will be able to get for this land, but I would think that $8 - $15 million would be a pretty safe benchmark or $25 - $50 per acre.
As we are about to end the Year of the Snake, the only real question in my mind is will 2014 be the Year of the KEEK?
Disclosure: I am long PETEF, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.