LESSONS IN M&A: HOW TO SELL A DIGITAL ENABLER TO GOOGLE FOR A 122 TIMES EBITDA MULTIPLE * MAKING MONEY IN ENTREPRENEURCOUNTRY

Ariadne Capital was the sole financial advisor to BeatThatQuote on its acquisition by Google in March 2011. We wrote the following Valuation Paper which anchored the valuation for a company with ~£250 K EBITDA at £100 m which enabled the deal to get done at £37.7 m. The founder and shareholder’s expectation was to sell at £10 million.
Summary Overview.

John Paleomylites was known to Ariadne Capital since 2007, but when Google came knocking, he gave Ariadne Capital a call to help him maximize the value of the exit.

This is the Valuation Paper that Ariadne Capital submitted to Google which kicked off the successful negotiations.
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Ariadne Capital believes that an appropriate valuation for an acquisition of BTQ by Google would be in the range £100 – £110m. This paper sets out how this valuation has been derived.

Financial Projections for BTQ as a Stand Alone Business
The latest current financial year forecast together with five years of projections are tabulated below.

table

Actual monthly revenues are tracking extremely closely to the current year forecast and management are confident that the forecast will be achieved. Projections are based on very conservative assumptions.

Key metrics underlying these numbers are:

• The majority of growth is from white label (“WL”). There is very little growth from other marketing channels
• WL growth is being driven both in terms of
o Developing existing partners, and
o Adding new partners
• In the short term (12 month) the numbers were compiled from both a bottom up and top down analysis
• Longer term projections were prepared on a top down basis
• As a benchmark, already Q1 this year from WL is up by over 44% from Q4 last year and will grow even faster later in the year
• Year on year revenue growth from the current financial year are 33%, 28%, 27%, 27% and 21%.
• The numbers above are very conservatively based on no recovery happening in the credit markets even though management anticipate that in practice there will be a material recovery in 2011/12. Please note that even a small recovery in the credit markets will have a large positive impact on our numbers. Loan revenue per transaction is down by over 85% from peak (from £29 per lead to £4 now) and mortgage revenues per transaction are down 75% from peak (from £25 to £6). FY to date, credit products account for 44% of revenues, therefore a doubling of revenues per transaction on credit products (still less than 50% off peak prices) will alone uplift revenues by 22%.
• BTQ’s projections do not include any growth from internationalisation despite BTQ having advanced on-going discussions with both MSN and GE Capital about this.

Valuation Metrics

We have carried out a valuation analysis of BTQ as a standalone business looking across the normal valuation metrics of:

• Discounted Cash Flow – based on the forecast and projections above yields a £38 – £59m range with a £49m mid-point.
• Precedent Transaction Multiples – based on revenue multiples paid for comparison businesses, generates a range of £53 – £68m with a £60m mid-point. We have applied the precedent multiple to this year’s forecast revenue, which we believe to be the most appropriate measure because:
o Last financial year numbers were completely unrepresentative of typical BTQ revenues as this was in the teeth of an economic recession
o The shape of the BTQ business has changed significantly since last year – as well as launching a number of new products, BTQ has substantially increased its indirect distribution through white label partners. Last years numbers do not reflect this change while this financial year does
o certainty of delivery of this years revenues evidenced by close tracking of trading to date

Publicly Traded Comparables – for the reasons stated above, this is based on current financial years revenues. To which needs to be added the 30-40% change of control premium that an acquiror would typically pay in a public company take-over. £35 – £49m range with a mid point including a 35% control premium of £57m.

In summary this yields an average valuation range for a STAND ALONE business of £46 – £64m with a mid point of c£55m.

The analysis is contained in Appendix 1. However, this valuation does not include synergies, and also does not reflect the scarcity value – within the UK market, BTQ is the only privately held independent price comparator with a comprehensive product portfolio.

We have also not attempted to compare a build vs buy scenario because we are not privy to much of the information on your part that we would require to perform this analysis accurately.

However we would make the following points.

If Google decide to build rather than buy, the cost to Google will not just be the time and lost earnings that it will take Google to catch-up. Aside from the fact that BTQ brings Google considerably greater certainty in execution, in a build scenario Google will find that by the time it has developed its offering, a significant portion of the market will already be in the hands of other players, including BTQ. Google will therefore have already lost a large slice of the market that it would otherwise have owned if it had acquired BTQ and will have to settle for a lower market share than it otherwise would.

Also the standalone valuation significantly underplays the value of BTQ to Google because of the large synergy that BTQ will be able to unlock, as indeed would be the case for other likely acquirors whether they be other search players, financial product providers looking for additional distribution or other price comparison sites to whom BTQ could bring significant incremental revenues together with large technology cost savings.

We have not attempted to model the synergies available, but they are enormous. To give some idea of scale, the UK price comparison market alone is worth £500m, and the UK is generally estimated to be worth c5% of the global market opportunity which would therefore be valued at £10bn. BTQ management believe that if Google acquire BTQ, it would be realistic to project that a 20% market share could be achieved within 6 years which would be worth $2bn in revenues.

Conclusion

In summary, Ariadne Capital believes that an appropriate valuation for an acquisition of BTQ by Google would be in the range £100 – £110m, derived from a standalone value of £46 – £64m, together with a synergy value of c£50m, which represents a tiny fraction of the synergies that BTQ would allow Google to unlock.
4 June, 2010