The takeover premium Verizon Communications Inc. is offering may seem low to AOL Inc. shareholders. But it’s probably the best they’re going to get.
Verizon offered to buy the digital-advertising company for $50 a share in cash, just 24 percent higher than its average price in the previous 20 days. AOL’s stock rose above the offer price Tuesday, signaling that investors view it as low. The $4.4 billion transaction values the business at about 11 times earnings before interest, taxes, depreciation and amortization, making it also one of the cheapest U.S. deals this size in 2015, according to data compiled by Bloomberg.
While AT&T Inc. and Yahoo! Inc. have been seen as possible suitors for AOL, competing bids may be unlikely. AT&T is in the midst of trying to win approval for its $66 billion purchase of DirecTV, the country’s largest satellite-TV service. And Armstrong said last month on CNBC that a merger with Yahoo is a “dead notion.”
“With respect to the purchase price, we find it a bit light,” James Cakmak, a New York-based analyst for Monness, Crespi, Hardt & Co., wrote in a report Tuesday. “Other bidders may come into play, but we believe the likelihood is low at this point.”
Before the deal was made public, analysts were projecting AOL shares would climb to around $48 on their own in the next 12 months, estimates compiled by Bloomberg show. Verizon’s offer gives shareholders a chance to cash out sooner and at a slightly higher price.
AOL closed at $50.52 on Tuesday in New York.
This deal differs from many other recent big acquisitions, in which buyers are justifying paying higher valuations by touting big cost-cutting opportunities. Instead, Verizon is looking to take AOL’s automated, or “programmatic,” advertising technology and pair it with mobile content. This would give Verizon a new avenue in which to grow as its heft on the wireless side makes it challenging to get clearance from regulators to buy more subscribers.
“The goal isn’t to slash apart AOL,” Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co., said in a phone interview. “Everything is converging and this is how Verizon converges. If this works out, they’re going to buy more content.”
Tim Armstrong, who has turned AOL around from an antiquated Internet dial-up company, is going to stay running the business when it becomes a piece of Verizon. The largest U.S. wireless provider plans to start a mobile-video streaming service featuring live TV, original shows and pay-per-view to help it compete with companies such as Netflix Inc. Americans are increasingly spending more time online than watching television the traditional way.
Programmatic-ad buying -- which uses high-powered machines to buy and sell ad space -- may generate $20.4 billion by 2016, or 63 percent of digital-display ad sales in the U.S., up from 45 percent in 2014, according to EMarketer. In addition to AOL’s ad business, it owns news sites Huffington Post and TechCrunch.
“There aren’t any real synergies, but Verizon is not paying a terribly high price, so it’s not a real risky or expensive transaction,” said Chris Pultz, New York-based manager of the Kellner Merger fund. “The stock is trading like someone else may come in, but I think AOL has been known as a seller for some time.”