For digital history buffs, Verizon’s $5 billion sale today of its Yahoo-AOL media group to Apollo is an opportunity to take a stroll down memory lane, marveling at how much the value of the two former internet titans has shriveled in 20 years. But the pitiful amount of money the business fetched isn’t just of academic interest—it's a travesty for Verizon shareholders.
What possible explanation can there be for Verizon to sell a business that generated $7 billion in revenue last year, at what is probably a 10% profit margin, for less than one times revenue? The price implies a 34% drop in the value of the businesses from what Verizon paid to acquire them in separate deals in 2015 and 2017. The combined business has declined a little since then—its revenue shrank 9% between 2018 and 2020, although it grew 10% in the first quarter—but not enough to account for the sale price. And under different management, what will now be called Yahoo might be able to grow even faster, given how well the rest of the digital media sector has been doing.
In a statement, Verizon CEO Hans Vestberg said the business had a lot of growth potential but needs “full investment and the right resources.” Left unsaid is that he didn’t want Verizon to be the one to make that commitment. That’s understandable. Verizon’s telecom business generates nearly 20 times as much money, and buying Yahoo and AOL wasn’t Vestberg’s idea. Meanwhile, Verizon just laid out $45 billion to buy more wireless spectrum, so it’s not exactly flush with cash.
Even so, it’s hard to believe a more comprehensive search wouldn’t have yielded a buyer willing to pay more. Three years ago, when the media group’s former chief Tim Armstrong was still in charge, Verizon could have sold the business for twice’s today’s price. There’s no question Verizon shouldn’t have bought these businesses in the first place, given how far outside its core area of expertise they were and the relatively diminished state of both companies. But Verizon has added insult to injury in dumping them at a firesale price.
APPLE’S EPIC TRIAL
The trial of Epic Games’ lawsuit against Apple over its App Store rules kicked off on Monday. The biggest news of the day? Epic’s earnings figures. And they weren't exactly epic.
Documents submitted to the court showed that Epic’s revenue fell 25% to $4.2 billion in 2019 from 2018 and was projected to fall further to $3.6 billion in 2020, as usage of the company's monster hit game Fortnite waned somewhat. Epic’s earnings before interest, taxes, depreciation and amortization fell 75% in 2019 and were also projected to fall further last year.
Epic is private and hasn’t previously disclosed its financials before now, so the disclosures were a big deal.
The financial details showed that Epic's business did worse in 2019 than initially expected, while the 2020 projections were also revised downward. Still, on the witness stand, Epic CEO Tim Sweeney testified that Epic's gross revenue in 2020 ended up at $5.1 billion, according to the pool reporters in the courtroom. So in the end, the projections appeared to be overly pessimistic.
How Epic's revenue was affected by Apple booting Epic’s main game, Fortnite, out of its App Store is sure to be discussed during the trial. Epic is challenging that move as an antitrust violation.
TODAY’S OTHER MEDIA DEAL
Verizon’s sale of Yahoo–AOL wasn’t the only media deal getting done today. Meredith Corp. said it would sell its TV stations for $2.7 billion, allowing it to concentrate on its digital and magazine properties, which include People, Better Homes & Gardens and Allrecipes.
Like Yahoo–AOL, this is another media bargain—and this one is available to the public. Judging by today’s market price of Meredith stock, Wall Street is valuing the digital-and-magazine arm at around $1.6 billion, or about 5.3 times the last 12 months’ earnings before interest, taxes, depreciation and amortization. (It also works out to be less than one times revenue, similar to Verizon’s Yahoo–AOL sale).
Compare that with J2 Global, owner of a bunch of websites such as Mashable, Speedtest and IGN, which trades at around 12 times ebitda. It seems the market for lesser–known digital properties offers opportunities for sharp-eyed investors.
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