FriendFinder Networks Files IPO in Desperation

| About: FriendFinder Networks (FFNT)
This article is now exclusive for PRO subscribers.

Within the carnage of the 2008 IPO market, we have an announcement of a new IPO filing here at the end of the year that will surely generate some interest (maybe curiosity is a better word) as we head into 2009. FriendFinder Networks, formerly Penthouse Media Group (before Penthouse bought the FriendFinder sites from Various for $500 million and changed its name) have filed a registration statement with the SEC for a $460 million IPO which will be offered by Renaissance Securities.

FriendFinder Networks is the company behind Penthouse &, an adult social networking/dating site generating over 20 million unique visitors a month. It's by far the most popular internet property of the company that also runs (4 million visitors), (500K visitors), (325K visitors), (200K visitors), (100K visitors), and (75K visitors). That puts FriendFinder Networks' total traffic per month at about half of what MySpace and Facebook are getting, BUT FriendFinder Networks monetizes with monthly membership fees in addition to a bit of advertising, so in terms of monetization alone, I'd argue the properties together may be more valuable.

I suppose Facebook could begin charging a small monthly or yearly fee (50 million users charged just $2/month is a billion dollar per year business) and they would probably retain a majority of their users, but that's probably a year or two away and only happens if their advertising initiatives fail (or they offer the option in exchange for no advertising and more features... for Facebook Power Users!)

FFN has been profitable for the nine months ending Sept 30, 2008 with revenues of $262.4 million and operating income of $36 million, but the purchase of Various has created a big debt problem. The IPO is looking like a desperate measure to pay it off quickly before foreclosure proceedings. As TMT Analyst, Kenn Registe reports, FFN appears to be in default on its debt due to its failure to maintain covenants. From the S-1:

We have breached certain non-monetary covenants contained in agreements governing our 2005 Notes and 2006 Notes and our subsidiary, INI, has breached certain non-monetary covenants contained in its agreements governing the First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes. We cannot assure you that we will be able to cure such defaults or events of default, obtain waivers and consents, amend the covenants, and/or remain in compliance with these covenants in the future.

This IPO looks like a last ditch effort to avoid having to sell off assets for peanuts. That isn't the only issue. FFN offers large pay outs to affiliates which it derives nearly half of its revenues from. Many of these affiliates that promote the site will stop at nothing to get their ads in front of you, even if it means through viruses. I know I've seen these ads on sites where they shouldn't be and they are obnoxious. In fact, on Dec 6, 2007, they settled with the FTC and agreed to discontinue displaying sexually explicit ads to consumers who are not seeking sexually explicit content.

To top it off, Valleywag reported a few months ago that working at FriendFinder may not exactly be Happyville and the COO apparently threatened to fire everyone. Not exactly what I'd call a high quality IPO, but it will be interesting to watch how this plays out.