/// Exclusive: The $1.2 Billion Inside Story of How Demand Media Almost Went Private Last Week (and Then Didn’t)
According to sources close to the situation, Demand Media was deep into discussions with a private equity firm to complete a deal that would have taken the online content company private for almost double its current value. But Demand abandoned the effort this past week — which was born from an aggressive attempt by Boston-based Thomas H. Lee Partners to purchase the company for a price of up to $1.2 billion. That was due to a number of challenges, including complications related to its financing and the ability to retain executives in its aftermath. The move on Demand by private investors is perhaps no surprise and is part of a wider trend related to some Internet companies whose stocks have a depressed value relative to the worth of their assets. Among companies having been and also being evaluated by private equity firms, whose business it is to turned the undervalued into a goldmine: Yahoo and AOL. And also Demand, which is now worth only $605 million, a market cap that is off 65 percent since it went public in February 2011. Shares now trade at $7.25 each. That depressed share price has been due to a number of issues, most especially changes to Google’s search algorithm to improve results. Called Panda, the changes at the search giant — a critical partner of Demand’s — has cut traffic to its major content sites and also called into question its ability to monetize its scaled editorial efforts. Such a situation is nearly irresistible to PE firms — in this case Lee, which approached the Demand with an initial offer to take the company private at $11.28 a share. The price fluctuated over the course of the negotiations, as due diligence went on, and included a large sum of money for possible acquisitions related to a content roll-up strategy. One source underscored that the board of the Santa Monica, Calif. company had no interest or intention to sell the business, but that the premium was large enough that it engaged. Several sources said that the board threw out an even heftier number that would shut down any interest, but that Lee came pretty close to that price, so talks heated up quickly. The deal from Lee, which included a strategy of splitting up the content arm from Demand’s lucrative domain registar business, included a moderate amount of debt. There were also large cash-outs provisions for major shareholders, as well as CEO and co-founder Richard Rosenblatt. Thus, the two sides engaged intensely in the last several weeks in crafting an agreement, although the devil would prove to be in the details. One big issue is that taking Demand private was still a big financial commitment for Lee — which tried to engage some of its limited partners in the transaction — as well as other investors, including Silicon Valley’s Marc Andreessen. That proved harder than Lee thought, said sources, with some balking at the firm’s ability to make a big enough score on the possible turnaround.
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