BuzzFeed will press on with ambitious plans to build an online media giant despite the exodus of nearly all investors from its Spac fund as it prepares to go public.
Investors in the Spac taking BuzzFeed public have pulled 94 per cent of their money out, signalling scepticism over the media group’s prospects and underlining how far Spacs have fallen from favour.
“The expression, ‘in the short term the stock market is a voting machine, in the long term it’s a weighing machine’, I think there is truth to that”, BuzzFeed founder Jonah Peretti told the FT. “Digital media still has a little bit of a hangover from the bursting of the hype five years ago. My opinion is that it should be valued more highly than the market is right now.”
Spacs work like blank cheques: they raise money from investors and list on the stock market, with the promise of finding an attractive private company to merge with. Because shareholders do not initially know what company the vehicle will buy, they can pull their money out if they do not want to invest in the chosen target.
After raising $288m from investors earlier this year, special purpose acquisition vehicle 890 Fifth Avenue Partners announced its merger with BuzzFeed in June. The company will end up receiving only $16m from that original pot plus $150m from a convertible bond.
“It doesn’t change our strategy”, said Peretti. “I’m not an expert on Spacs, I just see Spacs as a means to an end for us”.
The company’s shares are set to start trading on the Nasdaq exchange on Monday. BuzzFeed, which is known for its listicles, has prepared a quiz for the occasion called: “Should you buy BuzzFeed stock?” The quiz is “purely satirical”, Peretti said.
Peretti created BuzzFeed 15 years ago as a laboratory to see what kind of content would become popular on the internet. The website grew quickly, winning over younger audiences with stunt videos, such as exploding a watermelon with rubber bands, and viral posts like “The Dress”. The company has also invested in journalism, for which it won a Pulitzer Prize.
But the online media sector has struggled financially. Peretti wants to use cash from the public market to roll up smaller players into a mega group. “When you have these private companies that have all taken [venture capital] investment and everyone is imagining what they’re worth, it’s hard to do a transaction,” he said. “Being public is going to make it a lot easier.”
BuzzFeed recently agreed to buy Complex, a digital publisher focused on streetwear, pop culture and sports, for $200m in cash and $100m of equity, after last year acquiring HuffPost.
Peretti had last year looked to do a traditional IPO but scrapped that plan once the pandemic hit. In June, BuzzFeed agreed a deal with 890 Fifth Avenue Partners to go public at a $1.2bn valuation, or $1.5bn including Complex. The company secured $150m through convertible bonds, instead of typical private investment in public equity (Pipe) financing, a move dubbed “the kiss of death” by Michael Ohlrogge, a corporate finance professor at NYU Law School.
“The ideal is you find Pipe investors at $10 each. If you can’t do that, you give them a discount. If you still can’t do that, you try to sell them convertible notes,” he said, adding that the up to 8.5 per cent interest BuzzFeed’s investors can earn shows that “it’s going to be even more a rocky deal than most Spacs”.
Peretti also agreed to put aside 1.2m BuzzFeed shares, some of which would be ceded to shareholder NBCUniversal if the stock price falls below $12.50.
Spacs, previously Wall Street’s hottest investment product, have plunged in popularity in recent months. Investors have been withdrawing cash at increasingly higher rates while Pipes have also dried up, forcing companies to find more expensive funding sources.
The average redemption rate during the third quarter was 52 per cent, up from 10 per cent during the first three months of the year, according to Dealogic figures.
BuzzFeed’s Spac allows early investors, including NBCUniversal, to finally cash in. The start-up, founded in 2006, attracted more than $500m from venture capitalists and media companies, who heralded BuzzFeed as the future of journalism. However BuzzFeed and its peers struggled to live up to the hype, resulting in a period of slashed valuations, lay-offs and consolidation.
BuzzFeed’s public market debut comes as the company is locked in a years-long battle with its journalists, who have unionised, over wages. Some of these employees walked off the job on Thursday in protest.
“There is a natural tension over how to reward people who are doing such important work for the world, when there are also financial realities to what we can afford as a company”, Peretti said. “A Pulitzer doesn’t come with revenue, and that’s OK, it’s part of the mission . . . But we also need to make sure we keep fiscal rigour.”
BuzzFeed fared better than expected during the pandemic, ending 2020 with $4m in net income, compared to a $29m net loss in 2019.
BuzzFeed projects it will double revenue from $520m this year to $1.1bn in 2024, helped by its fast growing commerce business, through which it sells products ranging from spatulas to sex toys.
“Digital media was overhyped, and then under-appreciated, and now is in a place where it will be evaluated more like a business,” Peretti says. “Not ‘Is it hot or not?’, but what kind of growth and revenue and profit is it delivering? We made half a billion dollars in revenue this year.”