What Can 24/7 Real Media Fetch in a Buyout?

24/7 Real Media (TFSM-NASDAQ) is a stock that is sitting in a good position as a takeover candidate or on its own.  We have already reported and shown an idea of what the company could be worth in a post Gooogle-DoubleClick online banner ad world.  There could still be plenty of juice left to this one. 

The company boosted revenue guidance from a $255 to $265 million range to what is now $265 to $275 million.  This is only a 5% boost but could be just the beginning with its new overseas venture in Japan.  The company only maintained pro forma operating earnings of $0.50 to $0.55 for the year, but the valuation may be cheap with a forward P/E ratio of about 22 and as the “Google Checker” for any of the other online ad firms.  The company also said “we are assessing strategic alternatives” and that it hired Lehman Brothers as its financial advisor.

We had reported about the interest that should come into the name.  WPP Group in London may be interested and Microsoft (MSFT) may be interested.   But beyond this, who would really be able to work this?  There are many firms that could play the land grab here, and these are merely the US-traded names:   Microsoft (MSFT) is a natural fit and they could outbid almost anyone; Time Warner (TWX) could expand its already strong ad interest; Comcast (CMCSA) as it moves into more content; Yahoo! (YHOO) could but they may pass; IAC/Interactive (IACI) could step up its efforts here; aQuantive (AQNT) could decide this would broaden their base; and ValueClick (VCLK) could eat a competitor and strengthen its base.

There is also the angle that advertisers themselves could steal an instant presence in the online ad world and diversify from their traditional businesses: WPP Group (WPPGY) has already been fingered as a potential buyer. Other ad agencies could make the play too: Omnicom (OMC), Publicis Groupe SA (PUB), and Interpublic Group (IPG).  You might even be able to make the argument that Lamar Advertising (LAMR) could jump from the billboards straight into the online world in one swoop here.

So what is the company worth?  Talk was originally putting WPP interest at $600 million and then after the DoubleClick-Google tie up word came that Microsoft or others may pay up to $1 Billion.  The company has only $73 million in total liabilities and most of those are just current liabilities, so there would not be the need to alter the equity figures by much. 

TFSM had a market cap of $569 million based on an $11.20 stock price and shares already went up as high as $13.00 on the higher bid interest.  $600 million would only be a 5.4% premium to the $11.20 price, which would only be an $11.81 implied price.  That might have been enough a year ago or more, but that probably wouldn’t cut it today.  But a $1 Billion price tag would imply a 76% premium to today’s price, so that would imply $19.75.  Based on where the stock has been on its own and based on any recent history at all that number is still probably too high.  The truth lies somewhere in the middle, but you can at least now quantify what some of this would be.  $11.81 might be a “starting bid value” and the halfway mark in between would be just north of $15.00.

If a buyer does not emerge and based on the current prices and our past articles, an implied “no takeover play” valuation on this name is probably now closer to $9.50 to $10.00.  The online ad world is just worth more than it was just a short time ago.  If this truly does get gobbled up then $15.00, or $800 million, does seem feasible and seems a level that shareholders might not be able to fight too much.  It is very possible that since it has just hired Lehman that the review would take some time.  It shouldn’t be expected that this happens overnight, and today’s drop to $10.72 is evidence that Wall Street doesn’t think this will happen immediately.

Jon C. Ogg
May 10, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.