As BuzzFeed Inc. was exploring plans to go public earlier this year, it ran into a problem: Executives at the digital-media outlet’s biggest investor, NBCUniversal, thought they were getting a bad deal.
At issue was BuzzFeed’s plan to merge with a special-purpose acquisition company, or SPAC. Executives at NBCUniversal were frustrated that the deal valued BuzzFeed at $1.5 billion, below the level where it had invested years earlier, people familiar with the situation said. The unit of Comcast Corp. CMCSA -0.74% was facing a substantial loss on the deal, while earlier investors would come out ahead.
NBCUniversal ultimately approved the deal after reaching an agreement in April with BuzzFeed Chief Executive Jonah Peretti that guaranteed it concessions while still leaving it facing a loss of roughly $100 million, the people said.
Tensions erupted during a BuzzFeed board call in the closing stages when Patrick Kerins, from early investor New Enterprise Associates and a proponent of the deal, launched into a tirade at NBCUniversal, criticizing its posture in the negotiations and the concessions it had won, people familiar with the deliberations said. He raised his voice as NBCUniversal executive Maggie McLean Suniewick listened in, they said.
Mr. Kerins declined to comment. NBCUniversal said in a statement it supports the deal. “I’m confident our investors, partners and shareholders will be pleased with the results,” Mr. Peretti said in a statement on the deal.
SPACs are shell companies that raise money and trade on a stock exchange with the sole purpose of merging with a private firm to take it public. Combining with a SPAC is typically a faster way to the public market than a traditional initial public offering. Such deals have exploded in popularity this past year, but can come with significant trade-offs for the stakeholders involved.
The complexity of BuzzFeed’s SPAC deal and the concessions it gave NBCUniversal show some of the challenges facing companies that choose to go public this way. Shares of many companies that merged with SPACs have fallen in recent weeks, fueling investor caution.
“Sentiment has gone from red hot to ice cold,” said Julian Klymochko, who manages a SPAC-focused fund at Accelerate Financial Technologies. “There are a lot of deals out there that won’t be successful.”
To secure the SPAC deal, Mr. Peretti signed off on terms that could put more pressure on BuzzFeed if the shares don’t rise once the merger is completed. He offered some of his own stake to NBCUniversal if the stock doesn’t hit a certain level, according to regulatory filings and people familiar with the deal. BuzzFeed also agreed to convertible-debt financing that comes with a 7% interest rate if the stock doesn’t reach a certain level. In most other SPAC deals, companies raise money by selling equity.
The 7% rate is similar to rates paid by some other companies going public through SPACs but above the average levels for riskier corporate debt and convertible bond sales this year, figures from FactSet and Dealogic show.
As with many SPAC mergers, BuzzFeed didn’t place restrictions on investors withdrawing their money before the deal is done, which means it doesn’t have full visibility into how much cash it will have on its balance sheet after the merger.
Mr. Peretti said in a statement that BuzzFeed reached major milestones during a difficult period including deals to acquire digital publishers HuffPost and Complex Networks.
“The facts are that in the middle of a pandemic, BuzzFeed adapted to the market to become a profitable company, acquired HuffPost, signed a deal to go public and acquire Complex, and expects a year of significant growth,” he said.
Investor Adam Rothstein, the SPAC’s executive chairman, said in a statement that BuzzFeed will have a healthy balance sheet in any withdrawal scenario.
A person familiar with BuzzFeed’s decisions said the company raised convertible debt rather than equity so it could offer potential investors larger percentages of the company.
Mr. Peretti’s gambit could pay off if BuzzFeed delivers strong performance and its stock rises. A rebound in the digital advertising market this year could buoy its financials for the second quarter, as marketers who suppressed spending during the initial stages of the pandemic opened their wallets. The company ended the first quarter of the year with more than $150 million on its balance sheet.
BuzzFeed was among a crop of high-profile digital publishing startups that expanded quickly over the past decade. Its keen grasp of internet culture, notably with lists, quizzes, news coverage and partnerships with brands to produce sponsored content, propelled a 50% growth rate that made it a magnet for investors.
The industry matured, competition in the advertising market stiffened as Alphabet Inc.’s Google and Facebook Inc. asserted their dominance, and costs, especially in BuzzFeed’s news operation, concerned investors, people close to the company have said.
In the past few years, as BuzzFeed’s growth slowed, the company began to focus on financial discipline and diversifying into such areas as licensing and e-commerce. BuzzFeed’s revenue last year, amid the pandemic, was $321 million, up 1% over the prior year, filings show. Cost cutting and increased e-commerce revenue helped the company swing to a profit of about $11 million from a loss of $37 million the year earlier.
Viewing greater scale as the answer to competitive threats in digital media, BuzzFeed last year set out to make strategic moves—mergers, an IPO or both. Some shareholders were eager to cash out, people familiar with their thinking said, even if dreams of a massive return had dimmed.
Near the end of last year, BuzzFeed began reaching out to SPACs, hoping to strike a deal to take the company public, according to a person familiar with its pitch to investors.
By February, 890 5th Avenue Partners —a SPAC named for the headquarters of Marvel’s Avengers superheroes—had reached out to BuzzFeed, and the firms were in discussions, filings show. The deal would help finance the acquisition of youth-media company Complex Networks, adding another company to a portfolio that already included digital publisher HuffPost.
By the middle of May, BuzzFeed and 890 had hammered out the contours of a deal. The combined company, boosted by its acquisitions, expects to generate $654 million in revenue by 2022, with $117 million in adjusted profits, and would increase sales by about 26% annually and reach $1 billion by 2024, according to an investor presentation.
Mr. Peretti, a pivotal figure in orchestrating the deal, wanted to secure control, according to people who were involved, and was successful. He will have about 65% of the voting power after the merger, filings show.
NBCUniversal invested $400 million in BuzzFeed in 2015 and 2016, valuing it at $1.7 billion in the latter round, including cash, The Wall Street Journal reported. The value of its BuzzFeed holding stood to shrink in the SPAC deal, which valued the company at $1.5 billion, after its various acquisitions.
To win over NBCUniversal, Mr. Peretti agreed to set aside 1.2 million shares of BuzzFeed stock, some of which would be granted to NBCUniversal if the shares stay below $12.50, according to people familiar with the matter and regulatory filings. Shares of the SPAC have been trading at about $9.90 since the BuzzFeed deal was announced in June.
BuzzFeed also agreed to let NBCUniversal convert its ownership in BuzzFeed to stock in the public company at a premium, the people said, effectively granting NBCUniversal shares worth an extra $29.8 million. Still, NBCUniversal could stand to lose roughly $75 million to $100 million on the transaction, depending on the company’s stock price, filings show.
Because shares of the SPAC taking BuzzFeed public have been trading below their listing price, many investors who put money into the SPAC could pull out their money to eliminate a possible loss on the trade, analysts say.
If they did so, BuzzFeed would have less cash to invest in its business.
Either way, the SPAC’s creators stand to make tens of millions of dollars on paper through incentives, a standard feature of these mergers. The SPAC team’s shares and other investments are worth about $78 million on paper at today’s prices and cost roughly $8 million, according to New York University Law School professor Michael Ohlrogge, who studies SPACs.
Mr. Rothstein said in a statement that the investments would go to SPAC advisers, board members and operators, adding that they were all motivated to make the company a success. Wall Street Journal