Huffington Post Could Be The Next Target for Private Equity


May 20, 2015

One of the week’s biggest business news has been the announcement on Tuesday that Verizon is acquiring AOL. The announcement by the two prominent US companies created big headlines and launched speculation over a number of possible spin-off deals.
The most prominent was the talk that AOL might be interested in selling off Huffington Post. According to analysts, the news media outlet might be on its way to the hands of private equity, as it might not fit well with Verizon’s strategic plans.


The Verizon-AOL deal is big news on its own, especially as the $4.4billion all-cash acquisition is another big deal without the backing of the big banks. This year has already seen one such big deal, as private equity-backed deal of H.J. Heinz and Kraft Foods Group went through earlier.


The Rumours Emerge
On Wednesday, a number of analysts and newspapers reported that AOL might not only be entering a deal with Verizon, but that the company might be negotiating a deal to sell Huffington Post.


According to a Recode’s Kara Swisher, the company has held serious discussions with the German media conglomerate, Axel Springer. But the deal would most likely have a private equity aspect as well. Numerous firms have reportedly expressed their appetite to buy the company.


Swisher wrote, “Sources said the Huffington Post has been valued at above $1 billion in this scenario, which would either be a complete sale or, more likely, structured as a joint venture.”


Huffington Post is a big, respected media outlet and could be a lucrative opportunity for a private equity firm. The Wrap cited an anonymous expert who told the website Huffington Post’s “name is probably more valuable than the actual product”, which hasn’t been enough to deter potential buyers in the past.


AOL bought Huffington Post in 2011 in a deal worth $315 million. The talk of a $1 billion price tag for the outlet would be quite an opportunity for AOL or Verizon.


Not Fit for Verizon
Many believe the spin-off would be likely, as analysts don’t see Huffington Post as a good fit for Verizon. Many believe the company is far more interested in other aspects of AOL. In the long-term strategic approach, this could well be the case.


Not all analysts agree with this view. Jesse Redniss, digital expert and co-founder of technology advisory company Brave Ventures, told the Wrap, “To me it wouldn’t make sense that they would immediately abandon something like Huffington Post, which is still a very valuable asset, because in the past they haven’t been able to monetize it to its fullest extent.”


Needing Funding
Huffington Post could benefit greatly from a private equity venture, as the company is desperate for more investment. The content costs of online news organisations have gone up and monetisation of assets is increasingly important for the firms to survive.


Big competitors to the company have been able to attract a lot of funding in recent months, so Huffington Post could do with a cash injection. Its rival Buzzfeed, for example, recently announced it received $50 million from venture capital firm Andreessen Horwitz. According to the reports in August, Buzzfeed was valued at $850 million by the venture capital firm.


The company is not part of the biggest revenue stream for AOL. The first quarter results for AOL show that the “Brand Group”, including Huffington Post and TechCrunch, managed to grow its revenue by 8% during last year. For AOL’s “Platforms Group” the growth data showed an increase of 21%.


Despite this, the “Brand” bracket did manage to post operating income of $13million, while “Platforms” lost $10 million.


Likelihood of a Private Equity Deal
Much of the future for Huffington Post rests on the decisions of Arianna Huffington. She’s been very keen to see the company grow globally and would likely support a deal that would boost this opportunity.


But private equity firms might ultimately see the deal unprofitable. Fortune’s Dan Primack wrote on Wednesday, “Private equity typically uses leverage to buy companies, and then relies on cash-flow to cover debt interest and repayment”. But the company isn’t considered very profitable and “an independent HuffingtonPost might need to add all sorts of back-office expenses that it currently only pays for partially via shared service arrangements.”


Furthermore, OAL’s CEO, Tim Armstrong, denied some of the earlier reports in a later Business Insider article. He said, “HuffPost will always be a cornerstone of AOL. The Verizon deal allows us to accomplish many of the things we were talking about doing with other partners in terms of scaling HuffPost.”


Yet, his comments didn’t entirely remove the possibility of outside investment. For many analysts, a private equity firm might make a smaller investment move into the company at some point. A joint venture between companies may also be an option in the future.


Interestingly, Kara Swisher believes the official OAL line might be to deny the rumours, but that doesn’t necessarily mean it wouldn’t happen somewhere down the line. According to her, the team denied even the Verizon deal until just a few days ago.


Lucrative Digital Marketing
Furthermore, it must be noted that digital advertising revenue is on the rise and platforms, such as Huffington Post, are the beneficiaries. According to a recent Ad Age article, eMarketer’s data shows “marketers are expected to spend $58.6 billion on digital advertising in the U.S. this year.”


Preqin’s data from 2014 also shows that venture capital and private equity poured around $683 million into these digital media companies. The amount was more than double the investment a year earlier and this year might not be any different.


It remains to be seen how the situation will develop. Considering that private equity firms are currently sitting on a lot of dry powder, news of investments and acquisitions in the media industry wouldn’t come as a surprise. It’s also possible that AOL’s other media properties like Engadget and TechCrunch could face a sale, although these have so far stayed out of speculative talks.


But as many analysts agree, if a sale were to be announced in the coming months, it is more likely to be a private equity-led consortium rather than a single firm.


If you want to find private equity opportunities, check out the DealMarket platform.

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