It would be too easy to dismiss MySpace as a lost cause, and that’s precisely why several investor groups are attracted to it.
As first reported in The Wall Street Journal and confirmed by Adweek, the auction for the deflated social network is nearing a close. Final round bids from a small group of private equity investors are due within the next 10 days, sources said.
Industry observers have scoffed at News Corp.’s $100 million asking price, especially when considering the company’s lofty $580 million valuation as recently as 2005. And they aren’t just kicking a social network while it’s down—Myspace has been hemorrhaging users, shrinking ad revenue, and losing traffic. The company’s unique visitor count dropped 49 percent from this time last year, and in Q4 of 2010 MySpace lost $156 million. Even its core users and traffic creators—bands and music fans—have abandoned the site, as evidenced by the avoidance of music industry startups like social ticket agent Ticketfly.
“For anyone but strategics, or maybe I should say chemically impaired strategics, this would seem to be a totally toxic asset to combine anything at all with,” said one industry private equity investor who is not planning to enter the bidding.
But despite the appearance of a sinking ship, bidding parties remain surprisingly optimistic. Two sources who have considered making an offer told Adweek the property’s remaining 50 million to 60 million active users and powerful platform make it attractive, regardless of its slide into irrelevance. And while some in the market argue that the entanglements of MySpace’s many messy contracts and agreements with the music industry make the deal unattractive, those same two sources say that the company has done a good job of, in the words of one, “cleaning those problems up” prior to its auction. In other words, at least a few planning to ante up are drinking the News Corp. Kool-Aid.
What's notable is the nontraditional makeup of the bidding pool. One potential suitor, Redscout Ventures, is the new investment arm of brand strategy house Redscout. The firm recently told Adweek it planned to invest a maximum of $100,000 of startup capital in each worthy investment opportunity. But in this case, Redscout would likely partner with private equity giant Thomas H. Lee Partners in a bid that could well top News Corp.’s $100 million asking price. For its part, THL’s media investments have been a mixed bag. Among them are Clear Channel, which has struggled to service its debt payments and required several refinancings to comply with loan obligations; and Univision, which was purchased at such a frothy valuation, and with so much debt, that it was forced last year to take on a convertible bond and equity investment from its competitor Televisa. Meanwhile, the company has profited handsomely on its buyout of Warner Music, which floated a small amount of shares on the public markets in 2005, just one year after it was taken public.
Criterion Capital is also expected to make a bid, the Journal reported. But at MySpace’s $100 million price tag, such a deal would almost triple Criterion’s assets under management. The San Francisco-based hedge fund is best known for acquiring a different social network that failed under conglomerate ownership: teen-focused Bebo, which AOL purchased in 2008 for $850 million, and was sold to Criterion a year ago for a reported $10 million. Last month, Criterion unveiled a Bebo redesign and announced that it had stopped the bleeding, cut the fat, turned the corner, and any other corporate cliché that means “fixed it.” Bebo, it appears, is now cash-flow positive.
Media buyout firm Providence Equity is also expected to enter the MySpace sweepstakes. Providence is one of the largest media-focused private equity firms and is currently in the market soliciting investors for a new $8 billion fund. After suffering losses on investments in traditional media assets like Metro-Goldwyn-Mayer, which went bankrupt last fall, the firm has been aggressively seeking digital media properties, including a high-profile play for video-streaming site Hulu.
Venerable media investment banker Allen & Co. is running the auction, which started in late February with a wide bid solicitation of 20 to 30 potential suitors.