BuzzFeed's Stock Price Plunge Suggests Their SPAC Deal Had Irrational Valuations

Summary

• BuzzFeed and Complex Networks went public via a SPAC.
• The stock price has dropped about 40% since the deal was completed.
• Recent financial results clearly indicate to me that the negotiated valuations were too high.
• They focus too much on editorial content and target group market share while not focusing enough on profits.
• Even at much lower trading prices, BuzzFeed stock is not a buy.

Bennett Raglin/Getty Images Entertainment

The recent BuzzFeed (NASDAQ:BZFD) deal shows that the general stock market is way overpriced and that there are inherent problems with SPAC deals. The negotiated terms of the combination of Buzzfeed and Complex Networks with the SPAC, 890 Fifth Avenue Partners, established valuations that were unrealistic, given both companies' terrible track record and near-term outlook. The valuations reflected the irrational pricing of many other companies in today's market. Even after the plunge in price, I feel that BuzzFeed stock is not a bargain.

Problem With The SPAC Deal

Investors in the SPAC-special purpose acquisition company, 890 Fifth Avenue Partners (ENFA) were boxed in under the terms of the combination. 890 public shareholders would only get 15.8% of the new BuzzFeed company, assuming no redemptions. Many investors estimated that the actual value of the new stock would be worth much less than the $10 used in negotiating the deal, but if the shareholders voted down the combination then they would not be able to redeem their stock for about $10 under the terms of the original SPAC IPO. This is a problem with SPAC deals-shareholders are often forced to vote "yes" even if the combination deal is horrible for the SPAC shareholders.

890 shareholders approved the combination at a December 2 shareholder meeting and about 94% of them elected to redeem their stock. Ironically, some shrewd traders kept their stock expecting a short squeeze because so many shares would be redeemed that there would be a very limited number of shares available to maintain the original ENFA short sales. BuzzFeed stock did rise above $10 to over $13 when it started trading on December 6 and some of these shrewd traders sold into the squeeze, but then it started dropping. The stock now trades for $6.02.

SPAC deals are often used for two goals-to go public and to raise cash. Complex Networks combined with BuzzFeed did result in going public that will allow their investors to eventually trade their new Buzzfeed stock after the 180 lockup period. So the first goal was achieved, but the public stock is trading far below their expectations. The second goal was not really achieved. Because of redemptions only about $16.2 million cash from the merger is available for the newly combined company instead of the $287 million hoped for with no redemptions. In addition, it is unlikely they will raise $110 million via their public warrants.

A Look At The "Old" BuzzFeed

The "old" BuzzFeed has three sources of revenue: advertising, content, and commerce. Content revenue has been dropping for the last few years because they lost a major customer. Commerce has been growing, but this is a very competitive area.

The 3Q revenue of $90 million includes $9.2 million from HuffPost, which it purchased earlier this year from Verizon (VZ), so the real revenue increase from 3Q 2020 for prior operations is $5.7 million or about 7.6% instead of the 20% shown below. This is not much better than the rate of inflation of 6.2 %. The nine-month revenue of $251.8 million includes $19.1 million from Huffpost, which means that the increase was 17% instead of 27%.

"Old" BuzzFeed Sector Revenue

Source: Form S-4

"Old" BuzzFeed 3Q Sector Revenue

Source: 8-K

"Old" Buzzfeed Historic Income Statements

Source: Form S-4

3Q "Old" BuzzFeed Income Statement

Source: 8-K

BuzzFeed is considered left-leaning in their reporting and editorial content. While being left-leaning is no problem, in my opinion, if there is some balance that engages readers from across the political spectrum because even right-leaning readers like to read different points of view. That is BuzzFeed's problem-there is much balance, and may help to explain why they have not been able to grow. They are not a start-up. BuzzFeed has been around since 2006 and HuffPost, the former Huffington Post, started in 2005.

Their stated editorial guideline standard is that "we firmly believe that for a number of issues, including civil rights, women's rights, anti-racism, and LGBT equality, there are not two sides". Some followers of strict religious doctrine and other more conservative groups may strongly disagree with that assertion. In the same paragraph, BuzzFeed's management stated "but when it comes to activism, BuzzFeed editorial must follow the lead of our editors and reporters who come out of a tradition of rigorous, neutral journalism that puts facts and news first". Neutral? They are not neutral, in my opinion, and that is a major problem when trying to report news. This is why much of the public has a negative view of media. News reporting and editorial opinions have merged together. This has turned off some readers, both liberal and conservatives, and until there is a change in BuzzFeed's content standards it is unlikely they will achieve much success growing their various platforms, in my opinion.

Revenue from advertising on media platforms continues to be challenging. Even Seeking Alpha has had to make major changes by charging a premium fee to view content and changing how contributors are paid because advertising revenue has become very difficult to grow. BuzzFeed has had $363 million in total losses since it started. In my view it's clear their business model is a failure. Perhaps too many of their writers view their employer to be a "non-profit" entity that exists solely to achieve social changes and not to make money for capitalist shareholders.

CM Partners/Complex Networks

While most of the attention has been on "old" BuzzFeed, Complex Networks/CM Partners is also part of this deal. They are being acquired for $200 million cash and 10 million shares of the new BuzzFeed. I just do not see how this entity can be valued at $300 million ($200 million cash plus 10 million shares @$10 per share) given their financial results. The reality is who really cares what percent of a target market they reach if they can't show a profit high enough to justify their valuation.

Since their target market is much younger than I am, it would be inappropriate for me to give a review of their entertainment network and platforms, but their financial results have been terrible the last few years. They are not really some start-up venture. They were started in 2002 and has transformed over the years. There has been many additions to operations, but not much addition to their bottom line.

3Q Income Statement-Complex Networks/CM Partners

3Q Sector Revenue and EBITDA-Complex Networks/CM Partners

Source: 8-K

Management's financial projections contained in their Form S-4 are almost laughable. Adding revenues from Buzzfeed and CM Partners/Complex Networks for nine months total a little over $336 million, but their projection in their S-4 that was estimated a few months ago for 2021 was $521 million. This would mean that their 4Q revenue would have to be about $185 million. Their 3Q combined revenue was only $121 million, so their revenue estimate seems to be too high. Their 2021 $57 million EBITDA project is even more unrealistic, in my opinion, since total EBITDA for nine months is only $1.997 million (Buzzfeed $7.307 million and a negative $5.310 million from Complex Networks). The company would have to report about $55 million EBITDA for 4Q to reach their estimate-very unlikely.

Management's Projections

Source: Form S-4 page 93

Given that their 2021 estimated numbers are so far off the likely results, it makes the numbers for years further into the future to be very questionable. Their EBITDA margin for the first nine months of 2021 is less than 1%, but they are forecasting profit margins of 24.7% in 2024. Assuming that their 2021 forecast is actually correct, the EBITDA growth of $57 million in 2021 to $263 million in 2024, would require a 38% profit margin on the additional revenue, using their revenue growth projection from $521 million in 2021 to $1.063 billion. In my opinion, this would be a difficult metric to achieve, especially since management has never given detailed seasons to defend these numbers. There have been no very specific operating or financial changes they are expecting after the merger to support their high growth estimates. I cringed when I read their multiples based on revenue contained in the S-4 filing trying to justify their valuation numbers. Valuations based on EPS, EBITDA or even cash flow could not support these unrealistic valuations for either BuzzFeed or Complex Networks.

The new combined company will have $150 million cash available from a convertible note. The note will have an 8.5% interest rate instead of 7% because the cash from 890 Fifth Avenue trust account is below $244 million. Redwood Capital and CrossingBridge Advisors were the primary buyers of these notes. As noted above, they will only have about $16.2 million cash from the SPAC trust account instead of about $287 million they were originally hoping to have because of redemptions. In addition, they have to use $200 million cash to pay for acquiring CM Partners/Complex Networks. Without more cash, it is very unlikely they can achieve much, if any, growth in EBITDA.

Besides less cash from the SPAC trust account, it seems much less likely there will be future cash raised via warrants being exercised. Warrants and common stock were part of the 890 Fifth Avenue units issued earlier this year. There are 9,583,333 public warrants outstanding, which can be exercised after January 14, 2022 (12 months after the SPAC IPO closing) at $11.50. I think the $110 million cash via exercising the warrants is unlikely given the current and forecasted future BZFD stock price.

Assuming maximum redemptions there would have been a little over 153 million total shares outstanding, including shares issued via warrants and convertible notes. Adding about 1.6 million shares for those shareholders who decided not to redeem their share and subtracting out warrant and convertible note shares, the total Class A and Class B shares outstanding (Class B shares have 50 votes compared to 1 vote for Class B) would be approximately 132.8 million shares. The current market capitalization is around $800 million using the latest stock price of $6.02.

Conclusion

Effectively two companies went public-BuzzFeed and Complex Networks. Both companies have had horrible financial histories and I don't think that their futures look any better. Management's financial projections seem unrealistic, especially since they will have much less new cash than they expected because of the massive redemptions. With less cash, it will be difficult to expand. I have to wonder at what revenue level will they become profitable enough to justify their current market valuation. This may seem extreme, but in my opinion, their current business model will never generate enough revenue/profits to even survive long-term without some new capital infusion.

I started writing this article on December 7 and as I continued to work on it on Thursday, BZFD stock price was dropping faster than I could type. Even at $6.02 I do not think the stock is a buy unless you are just willing to invest your money into a "non-profit" company that is promoting a certain agenda. For those who invest to actually make money there are other potential profitable long-term investments.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.