M&A Alert - March 1, 2010
Digital Marketing Agency LBi Merges With Bigmouthmedia
Transaction Overview
On February 25th, 2010, LBi International, a global digital marketing agency, announced plans to merge with Edinburgh-based digital marketing firm Bigmouthmedia (recently renamed Obtineo), creating Europe’s largest digital marketing agency in a complicated financial transaction.
Target Description
Obtineo is the new name of Bigmouthmedia, a search engine marketing specialist in Europe, following the commitment of a €40m private placement (approximately $55mm) of new capital by The Carlyle Group, Cyrte Investments and Janivo Holding to fund the combined companies. Bigmouthmedia develops marketing campaigns for clients with specialties in search engine optimization, pay per click, banner display and affiliate advertising campaigns. The company’s clients include over 300 corporate clients, including British Airways, Tesco, Mexx, BT, Cisco, Hotels.com and Topshop. Bigmouthmedia competes with a broad array of digital marketing agencies including Ayima, Greenlight Search, and Razorfish. Founded by Steve Leach in Edinburgh in 1997, Bigmouthmedia currently operates in 30 countries.
Buyer Description
LBi, a public company listed in Stockholm (symbol: LBI) is a global digital marketing and technology agency formed by the merger of LB Icon and Framfab in August 2006. LBi provides digital strategy, branded content, service design, media, CRM, managed hosting and support services for digital marketing. In 1996 Jesper Jos Olsson, Magnus Lindahl, Erik Wickström and Johan Staël von Holstein founded LBI as IconMedialab in Stockholm. LBi is currently headquartered in Stolckholm, and maintains offices in Amsterdam, Atlanta, Berlin, Brussels, London, Milan, Mumbai, New York, and Paris.
LBi is the acquirer in a complicated structure. LBi is offering Obtineo shareholders 25% of the combine company ownership after factoring in two concurrent financings. The first financing is the already committed €40mm (appoximately $55mm) equity financing provided by The Carlyle Group, Cyrte Investments and Janivo Holdings . The second, a €10 (approximately $14mm) million rights offering to existing LBi shareholders which will be fully underwritten by Cyrte Investments and Janivo Holdings in the event existing shareholders of LBi do not subscribe to the full amount. Upon completion of the transaction existing LBi shareholders are expected to own 51% of the combined entity, Obtineo shareholders will own 25% and Carlyle, Cyrte and Janivo will own 24%. The value of consideration paid to Obtineo shareholders is approximately 107mm ($146mm). Obtineo shareholders may also receive a potential cash payment of up to a maximum of €14 million ($19mm), 18 months post merger, in the event that the share price of the merged entity does not trade above €1.65. This is a rather unusual feature in M&A transactions know as a contingent value right.
During the past twelve months Obtineo’s net sales were approximately €37.8mm putting the purchase price multiple at 2.85x revenue. Recent comparable transactions include Unica’s acquisition of Pivotal Veracity (email marketing) in January 2010 at between 4.5x and 5.1x revenue, Adobe’s acquisition of Omniture (online marketing analytics) in September 2009 for $1.7b at 5.1x revenue, and Publicis Groupe’s acquisition of Microsoft’s Razorfish (digital advertising agency) in August 2009 for $580mm at 1.4xrevenue
Strategic Rationale
As more and more companies adopt digital marketing and advertising and become more sophisticated, the capabilities expected from their marketing agency partners broadens. LBi is working to broaden its geographic reach and core capabilities to better serve its clients. The combination makes LBi the largest European-based digital marketing agency with broad capabilities including social media, SEO, PPC, digital media planning, branded content creation, campaign creative, usability, affiliate marketing, copywriting, web design, build, technical design, social CRM, performance measurement and application support.
Architect Partners Observations
Growth via acquisition is common for marketing agencies where talent and clients are sometimes more easily acquired than won. This is a complicated transaction but the fresh capital from Carlyle, Cyrte and Janivo creates a well capitalized global vendor in a digital marketing market with very strong growth ahead.