AOL Gets Social with Bebo

Here are some expert opinion on AOL-Bebo deal.

Jessica Reif Cohen, Merrill Lynch

AOL announced the acquisition of social networking site Bebo for $850mn in cash. With 4.8mn unique users and 1.2bn monthly page views, Bebo is the third largest social network in the US and a leading social network site in the UK. AOL’s price values Bebo at a low to mid teens revenue multiple (Bebo lacks material profitability). Bebo’s revenue is no more than $50-$75mn currently (and perhaps less) and that EBITDA is negligible. Strategically, the Bebo acquisition seems to be a very good fit for AOL. It will significantly improve its position in social networking and helps drive improved scale for Platform A, its online advertising platform. In addition, Bebo could both benefit from AOL Instant Messenger’s (AIM) huge installed base and potentially allow AIM to finally realize some of its revenue potential. The acquisition also provides AOL with an improved footprint internationally, a key strategic initiative for the company. However, AOL/TWX does not have a strong track record of integrating acquisitions, as highlighted by its struggles to integrate its various advertising platform acquisitions over the past year. There also remains significant concern about the long-term monetization opportunities for social networking in general, as underscored by Google’s disappointing results in this area.

Doug Creutz, Cowen and Company, LLC

Bebo acquisition furthers AOL’s strategy to transform itself into a content-driven advertising platform. While it is unclear how this plays into a potential spin-off of AOL, a break-up is unlikely to serve as a catalyst for TWX share appreciation. The Bebo transaction value reflects premium and hefty growth assumptions. Bebo currently earns annual revenue in the $30MM-50MM range and minimal, but positive, EBITDA. As such, the price AOL paid reflects both a significant premium for entry into the hot social networking space and assumptions on the part of management that AOL will be able to drive significant incremental monetization through its proprietary advertising platform. Bebo is currently the third largest social networking site in the U.S. after News Corp.’s MySpace and independent Facebook, however it lags both by a significant margin. Though Bebo has good technology and experienced leadership, the social networking business is driven by user scale and networking effects. It is unclear how combining a second-tier player with AOL’s struggling business model generates value. The transaction is unlikely to create significant economic value for Time Warner.

Imran Khan (JPMorgan)on the earlier YHOO-Bebo deal

Yahoo! has an agreement with Bebo to manage display advertising for the social networking site in the U.K. and Ireland. Bebo is a privately held social networking site targeted at teenagers and young adults. According to comScore Networks, Bebo was the U.K.’s most popular social networking site in July07, with 10.6M unique visitors in the U.K. and Ireland, and 18.2M worldwide. While the financial terms were not disclosed, this partnership will generate ~$16M in F’08 revenue for YHOO (revenue contribution assumption is based on a $1.00 CPM, 80% TAC and 50% Y/Y page view growth rate).

Jeffrey B. Logsdon, BMO Capital Markets

Bebo is the No. 3 social networking player in the US and has an even better position in a number of other English speaking countries (UK, Ireland, New Zealand, etc.). Bebo intends to launch in other European countries over the next six months. When combined with AIM and ICQ, AOL will now have 80 million unique users in the social networking-communications-entertainment segment. The acquisition compliments and enhances AOL’s Platform A display advertising focus and can leverage its behavioral and contextual marketing opportunities. This deal will likely dampen speculation that the AOL advertising businesses will be sold in the near term.

Benjamin Swinburne, Morgan Stanley

This acquisition is not inconsistent with the restructuring thesis of TWX, a restructuring that may include the monetization of some or all of the pre-existing AOL assets. While online advertising is expected to slow in ’08 versus ’07 in the U.S., social networking growth is expected to accelerate. According to eMarketer, global ad spending on social networking was $1.2 bn in 2007, and should grow to over $2 bn in 2008. This acquisition places TWX in this growing segment of online advertising. Questions remain regarding the near-term appetite for advertisers to shift meaningful levels of their existing budgets to social networking sites (particularly in the current weak ad environment), which is why social networking advertising growth has lagged usage growth. TWX, like NWS and its MySpace asset, hope the targetability of the advertising on social nets (users effectively volunteer their consumer tastes for advertising use) and their existing relationships with advertisers are synergistic. Bebo.com averaged 22 mm unique visitors (UVs) in January according to Comscore. Roughly 80% of its UV’s in January were outside the U.S. Bebo.com’s engagement level modestly exceeds its social networking competitors, averaging over 215 minutes per UV per month in January according to Comscore. In the last year, Bebo.com’s page views have grown 33% to 11.4 bn according to Comscore. At $850 mm, TWX is paying roughly $38 per monthly UV (using January’s 22 mm UV’s) which compares to private market value of MySpace of $35-40 using the average UVs in 4Q07. MySpace has been widely viewed as a successful acquisition, given the search agreement NWS struck with Google soon after acquiring it.

Heath P. Terry, Credit Suisse

With the Bebo acquisition, AOL hopes to grow its presence through the integration of AIM and ICQ, monetize the site utilizing Platform-A, and expand internationally. Bebo has the Open Application Platform in which content and application providers can monetize through advertising. Bebo has recently launched a Polish site and is testing local sites in France, Germany, Italy, Spain and Holland to launch in 5 to 6 months. Social networking is one of the fastest growing areas in the Internet properties, attracting media companies for a high audience engagement level in a new media platform. News Corps acquired Myspace for $580M in 2005 and has a deal with Google for a guaranteed payment of $900M through 2010. Microsoft paid $240M for 1.6% stake in Facebook in 2007. This gives AOL, particularly Platform-A, a rapidly growing inventory to apply its integrated effort in targeted marketing and ad utilization. While Bebo has a growing international presence and a smaller position in the U.S., AOL will face the same early-stage monetization challenge that Google, Microsoft, News Corp and Facebook have. That said, the price paid seems to account for these challenges.

Michael C. Morris, UBS Investment Research

In announcing the acquisition, AOL management highlighted that the acquisition puts the company in “a leading position in social media” and noted Bebo’s “fast-growing worldwide user base.” There are two significant potential benefits from a Bebo-AOL combination: (1) The ability to directly monetize the Bebo inventory through Platform-A. AOL notes that Bebo will allow AOL to offer advertisers even greater reach and marketers significant insights into the desires and needs of consumers. (2) The ability to use AOL’s existing products, most notably AIM, to drive increased traffic to Bebo. AIM has 23.9 million domestic unique monthly visitors versus 4.4 million for Bebo. Providing a direct connection from AIM to Bebo could drive higher Bebo traffic. However, there is a lack of several key pieces of information to connect the dots to true economic growth, because: (1) The company has not commented on Bebo’s current advertising relationship with Yahoo (for video and display advertising, entered in September 2007). When will this end? Will there be any incremental cost to terminating the relationship? (2) Management has asserted that Bebo has a “fast-growing worldwide user base” although comScore indicates that users have only grown 8% over the past six months to 21.3 million monthly unique visitors. Bebo’s Engagement Levels Trail Competitors and Are Flat or Falling.

According to advertising agency, Omnicom, “visits per day” is the metric most highly correlated to return on investment by advertisers as calculated by sales. As a result, sites with higher visits per day have higher engagement and will ultimately be best positioned to command higher CPMs or cost-per-click. Bebo’s engagement, as measured by visits per day, is below that of its primary competitors and has been declining since mid-2007.