BuzzFeed faces investor exodus on the eve of its debut

BuzzFeed will continue its ambitious plans to build an online media giant despite the exodus of nearly all investors from its Spac fund (a special-purpose acquisition company) as it prepares to go public.

Investors at Spac who are taking BuzzFeed to the Exchange have withdrawn 94% of their money, indicating distrust of the media group’s prospects and highlighting how far Spacs have fallen from grace.

“I think the expression ‘in the short term the stock market is a voting machine, in the long term it is a scale’ is true,” BuzzFeed founder Jonah Peretti told the Financial Times. “Digital media still suffers a certain hangover from the hype boom five years ago. My opinion is that it should be valued more than what the market sees today.”

Spacs work like blank checks: they raise money from investors and enlist in the stock market, with the promise of finding an attractive private company to merge with. As shareholders initially do not know which company the vehicle will buy, they can withdraw their money if they do not want to invest in the chosen target.

After raising $288 million (£1.6 billion) from investors earlier this year, special-purpose acquisition vehicle 890 Fifth Avenue Partners announced its merger with BuzzFeed in June. The company will end up receiving just $16 million (BRL 89.6 million) of that original amount, plus $150 million (BRL 840 million) of a convertible bond.

“It doesn’t change our strategy,” Peretti said. “I’m not an expert on Spacs, I just see them as a means to an end for us.”

The company’s shares are expected to start trading on Nasdaq on Monday (6). BuzzFeed, which is known for its short list-like texts, has prepared a quiz for the occasion called: “Should You Buy BuzzFeed Stocks?” The “quiz” is “purely satirical,” Peretti said.

Peretti created BuzzFeed 15 years ago as a lab to see what kind of content would become popular on the internet. The site quickly grew, catching a younger audience with action videos like blowing rubber bands on a watermelon, and viral posts like “The Dress”. The company also invested in journalism, winning a Pulitzer Prize.

But the online media industry is struggling financially. Peretti wants to use open market money to rally smaller players into a megagroup. “When we have these private companies that received investments [em capital de risco] and everyone wonders how much they’re worth, it’s hard to make a transaction,” he said. “Going public will make it much easier.”

BuzzFeed recently agreed to buy Complex, a digital publisher focused on street fashion, pop culture and sports, for $200 million in cash and $100 million in stock, after acquiring HuffPost last year.

Peretti had tried last year to make a traditional IPO, but gave up on that plan as soon as the pandemic erupted. In June, BuzzFeed accepted an agreement with 890 Fifth Avenue Partners to go public with a valuation of $1.2 billion, or $1.5 billion ($8.4 billion) including Complex.

The firm raised $150 million through convertible bonds rather than the typical private investment in public equity financing (Pipe), a move dubbed “the kiss of death” by Michael Ohlrogge, professor of corporate finance at the Law School of New York University.

“Ideal is to find Pipe investors at $10 each. If you can’t, give a discount. If you still can’t, try selling convertible notes,” he said, adding interest rates of up to 8.5 percent that investors in the BuzzFeed can earn show that “it will be an even tougher deal than most Spacs”.

Peretti has also agreed to set aside 1.2 million shares of BuzzFeed, part of which will be given to shareholder NBCUniversal if the share price drops below $12.50.

Spacs, once the hottest investment product on Wall Street, have plummeted in popularity in recent months. Investors have been withdrawing cash at an ever-increasing pace, while the Pipes has also dried up, forcing companies to find more expensive sources of financing.

The average third-quarter redemption rate was 52%, up from 10% in the first three months of the year, according to data from Dealogic.

BuzzFeed’s Spac allows early investors, including NBCUniversal, to finally profit. The startup, founded in 2006, attracted more than $500 million from venture capitalists and media companies, who heralded BuzzFeed as the future of journalism. However, BuzzFeed and its peers struggled to follow this supposed trend, resulting in a period of reduced reviews, employee layoffs and consolidation.

BuzzFeed’s debut on the market comes at a time when the company is facing a years-long battle against its journalists, who have joined unions, over salaries. Some of them left work in protest on Thursday (2).

“There is a natural tension about how to reward people who do such important work for the world, when there are also financial realities about what we can pay as a company,” Peretti said. “A Pulitzer doesn’t bring revenue, and that’s okay, it’s part of the mission. But we also need to ensure fiscal rigor.”

BuzzFeed fared better than expected during the pandemic, ending 2020 with $4 million (BRL 22.4 million) in net income, compared to a net loss of $29 million (BRL 162.4 million) ) in 2019.

BuzzFeed projects it will double revenue from $520 million this year to $1.1 billion by 2024, helped by its fast-growing commerce business, in which it sells products ranging from spatulas to sex toys.

“Digital media was overrated and then underrated, and now it’s in a place where it will be valued more like a company,” says Peretti. “It’s not ‘Is this hot or not?’ but what kind of growth, revenue and profit is it generating? We’ve made $500 million in revenue this year.”

_{Translated by Luiz Roberto M. Gonçalves}