Friends Reunited - is it worth just £20M?

Following on from my blog of yesterday on the potential for a sale by ITV of Friends Reunited, I note that JP Morgan is suggesting that the business is worth  just two times Friends Reunited revenues of £18.9 million, making the business worth approximately £38 million on paper.  Well valuations are calculated in many different ways, whether it is a multiple of turnover as in the case above or as a multiple of earnings or profits. When I looked at the Friends Reunited books back in 2003, the percentage profit was phenomenal, in the region of 80% plus, if my memory serves.  This was due to the fact that costs were very tightly controlled amongst the then 10 employees including the founders, and the low cost of the infrastructure.  It would be interesting to know how the cost base has changed since 2003 after Mr Murphy's involvement and since the unique user numbers are well down on three years ago when it was sold to ITV. My belief is that Friends Reunited still has a very strong web and non-web brand recognition and has the potential to make a very strong financial return whoever decides to buy it, if they are able to give the management the freedom to develop the business.  It has been suggested that Friends Reunited are in the same space as MySpace or Facebook.   Well it is worth noting that neither of these companies are profitable yet and keep generating huge losses whilst having multiple billion dollar price tags bandied about.

Friends Reunited is a very sound business and has extended well into the genealogy and dating markets.  It has the potential to make profitable business and out live some of its more flashy rivals and maybe even ITV!

As for JP Morgans, well they announced a $1.3 billion loss in January 2008.  I wonder what they will come out at the end of the credit crunch and given that they claim to have avoided the worst of the problems seen elsewhere.

Friends Reunited would probably make a very good fit for Barry Diller's IAC, which also owns Ticketmaster and Ask.com and continues to acquire assets being knocked down and sold by less able corporations.  Just as long as they let the Friends Management run the show, the business model could make an excellent return for them.  At £20 million Friends Reunited would be a steal.

Friends Disunited! Breaking up is so expensive……

It was reported in the weekend papers that ITV is to sell Friends Reunited.  ITV bought Friends Reunited back in December 2005 for an eye-watering £175 million ($280 million).  According to the story in the Sunday Telegraph, “Analysts believe that Friends Reunited is now worth significantly less because of intense competition from rivals such as MySpace and Facebook” or just maybe they overpaid in the first place.  Back in 2003, one of the major accountancy firms, BDO Stoy Hayward, was looking for a buyer on behalf of the original founders Steve and Julie Pankhurst and co-founder Jason Porter.  I was asked by a client to review the business and come up with a valuation.  The business was hugely profitable although there was obviously need for significant investment in their infrastructure.  However, the most “toppy” valuation I could come up with was in the region of £30 million which was higher than market sentiment suggesting a £25 million price tag.  In the event, Friends Reunited decided not to sell and brought in former Financial Times chief Michael Murphy as part of a global expansion plan.

This was a phenomenally successful move since Murphy increased the business’ valuation from £30 million to £175 million in just over two years.  The spirit of 1999 seemed to be in the air again!  Heady days indeed and at the time ITV said that the Friends’ team would have a leading role in developing ITV’s online and broadband strategy.

Sadly it hasn’t worked out as everyone had expected and yet another smart internet business failed to develop into a major force within the big company corporate world of ITV.  Now ITV will pay the price in what is likely to be a fire sale of the asset at a knock down price.  I wouldn’t be surprised to see Steve and Julie Pankhurst looking to use the money ITV paid them to buy back the company for a much lower figure.

I wonder whether ITV is still using the same analysts that thought £175 million was a good deal!  Well it would seem they maybe since today ITV is suggesting that the downturn in TV advertising revenues is temporary and is just down to the deepening recession.  Sadly anyone who follows new media with more than a passing interest will know that Google had their lunch last year and recession or not I just don’t see the Internet juggernaut altering course from taking a greater share of the converging TV and Internet advertising markets.

However, one potential future of TV lies not in traditional broadcast, but in the selective world of view-on-demand via the broadband Internet and content will be the key to its success.  Whilst we are all happy to catch an amusing 30 second clip of a cat flushing a toilet on YouTube, it is hardly compulsive viewing and unlikely to attract advertisers.  In reality, view-on-demand of quality content available at the user’s convenience is an attractive offering and one ITV is well placed to deliver.  ITV is content rich with access to a significant back catalogue and a continuing, although diminishing, commitment to developing new content.  Content will make Internet TV and IPTV fly.  As for the advertising model that is evolving for video content such as pre-rollers and mid rollers etc, the pricing level will be fundamental different from the millions of pounds once paid for a 30 second slot during Coronation Street and far closer to the Internet pricing model.

So as traditional broadcast advertising continues to decline, ITV must act quickly to build a content rich Internet based future.  The recent Kangaroo controversy is just a side show and quite frankly a waste of money for ITV as I believe was the development of the iPlayer a waste of licence payers money when there exists many fully developed home grown alternatives such as Vividas.  ITV should use some of the funds they get for selling Friends Reunited to look to develop content in collaboration with some of the current alternative Internet TV channels such as Joost, Blinkx or even Wii TV.  ITV could get into these areas with a much lower level of investment than the grand gestures of 2005 and they have the potential to offer a much more interesting future than managing decline!