Groupon Buys LivingSocial, a Rival Once Valued at $6 Billion

  • Deal provider reports quarterly loss in line with estimate
  • Shares continue slide in early trading in New York Thursday

Groupon Inc. agreed to buy LivingSocial Inc., absorbing an old rival in the once-fierce war between companies offering daily deals via e-mail.

The acquisition didn’t impress Groupon investors, who sent shares down as much as 19 percent to $4.27 Thursday despite an earnings report in line with analysts’ estimates and a more optimistic forecast for the rest of the year. The selloff marked the biggest intraday drop for Groupon in six months.

The amount of the purchase isn’t material, Groupon said Wednesday, and the transaction should close next month. Inc.-backed LivingSocial had cut more than half its workforce in March, part of a downward spiral from the headier days of 2011, when it was valued at $6 billion in a funding round.

Just as Groupon has been moving away from its daily-deal roots, converting itself into an online marketplace, LivingSocial had turned to a strategy involving credit-card discounts at restaurants. The acquisition will be a good fit because it will expand Groupon’s customer base and because LivingSocial also provided deals for local businesses, Groupon Chief Executive Officer Rich Williams said.

“It couldn’t be more down the center,” Williams said in a phone interview. The CEO has led a major restructuring at Groupon that included staff cuts and exiting operations in almost a dozen countries. Further divestitures will continue into 2017.

Amazon invested $175 million in LivingSocial in 2010, then took a $169 million charge in the third quarter of 2012 due to the declining value of the company after consumers and retailers lost enthusiasm for internet coupons.

Groupon itself has lost much of its luster since the early promise of e-mail deals proved difficult to convert into a large-scale business. Valued at $16.7 billion when it went public in 2011, the Chicago-based company had a market capitalization of $3.02 billion at Wednesday’s close.

Third-Quarter Results

Groupon’s third-quarter loss of 1 cent a share, excluding some items, met the average of analysts’ estimates compiled by Bloomberg. Sales rose 1 percent to $720.5 million, exceeding the $709.1 million average projection.

Sales will reach at least $3.08 billion this year, with adjusted earnings before interest, tax, depreciation and amortization of at least $150 million, Groupon said, raising both forecasts.

Groupon plans to exit 11 countries, focusing only on 15, as it streamlines international operations. Last year, the company sold a controlling stake in Ticket Monster, a South Korean e-commerce site. About two-thirds of 2015 revenue came from North America, and much of the rest from Europe, the Middle East and Africa.

Since Williams took over, he has worked to increase Groupon’s marketing budget, particularly in North America. In the third quarter, marketing efforts helped acquire 1.2 million active customers in the region, its best performance in more than three years. Local billings also increased 10 percent year-over-year, according to the statement.

“What we are seeing there is just solid execution against our strategy,” Williams said.

Still, UBS analyst Eric Sheridan said he remains cautious about Groupon’s ability to balance marketing investments with sustained North American customer and revenue growth.

“We are also looking for greater clarity around the timeline of country exits (to be announced with next quarter results) and the impact of the LivingSocial acquisition on FY2016 results and beyond,” he wrote in a note to clients Thursday. Sheridan has a sell rating on the stock.

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