Tech

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

The Sidebar of Shame may need a sugar daddy of its own.

The parent company of U.K. midmarket newspaper Daily Mail is struggling to keep investors happy, despite the soaring popularity of its MailOnline website. A clickable cocktail of Kardashians and sports gossip (famously found down the right side of the homepage) has made it the second-biggest U.S. online newspaper outlet, lagging only the New York Times.

Now, the ailing U.S. internet group Yahoo looks like it could be a surprise solution to the challenges facing Daily Mail and General Trust Plc, but a tie-up faces plenty of hurdles.

The freely available Daily Mail website generates about 80 million pounds ($114 million) of revenue from ad sales, and has a distinct editorial identity from the newspaper, though takes its copy. The glamour sits awkwardly within DMGT, which has been steadily diversifying into events management and business-to-business publishing, industries that are not known for a brisk trade in coverage of wardrobe malfunctions on the red carpet.

In the Mail
DMGT has trailed the index lately on concerns that online advertising isn't offsetting print declines

The incongruity might be tolerable to shareholders, led by the Rothermere family, if the website was successfully turning revenue into heaps of profit. But the operation isn't breaking even, according to a person familiar with the business. One issue is that it has not been as successful at monetizing web traffic in the U.S. as in the U.K. and Europe, as analysts at Liberum note.

Against that backdrop, DMGT's confirmation on Monday that it is in talks to be part of a consortium bid for Yahoo is understandable. A tie-up with Yahoo would further broaden the MailOnline's content offering and give access to better ad-selling capabilities. Yahoo is the fourth-biggest seller of online display ads in the U.S. after Facebook, Google and Twitter, bringing in about $1.24 billion last year, according to research firm eMarketer.

Yahoo's U.S. ranking in online display ads:

4

It's a solution, but is it the best solution for both sides?

Yahoo's core advertising business, which analysts estimate is worth about $4 billion to $6 billion, is shrinking. So not only would DMGT be teaming up with a company with its own challenges and inefficiencies, a potential bid is a stretch given its market capitalization of $3.4 billion and net debt at more than twice Ebitda.

Shine Comes Off
Yahoo is losing ground in the online display advertising market globally to newer players
Source: eMarketer. Data show annual revenue.

A DMGT share placing to fund a deal looks tricky as it would dilute the Rothermeres. So private equity would have to stump up a big check.

The more attractive scenario would be folding MailOnline, which analysts value at around 500 million pounds, into a new company containing some of Yahoo's assets. It's a fair assumption that Yahoo's assets would comprise the bulk of such a deal, leaving DMGT as a minority investor. Still, it would be the beginnings of a full separation or sale of the website from the parent, helping hone its focus on its moneymaking B2B operations. 

Even then, a fiddly transaction with DMGT might not be the best option for Yahoo, which has attracted interest of deep-pocketed Verizon Communications and Twitter, among others. These may deliver cleaner and higher bids. 

DMGT will need to convince its prospective buyout partners that there's plenty of value in the combination -- enough to see off the many other suitors circling. It's unclear yet whether it will be able to do this. And if it can't do it with Yahoo, it'll have to hope someone else comes along.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net