News Corp. Sells MySpace to Specific Media for $35 Million

11:11 AM PST 06/29/2011 by Georg Szalai

Rupert Murdoch's conglomerate had acquired the social network in 2005 for $580 million and had hoped for a $100 million price tag amid a continuing user decline.

NEW YORK - After a sales process that lasted several months and featured a last-minute swerve, Rupert Murdoch's News Corp. on Wednesday agreed to sell money-losing social networking site MySpace to online advertising network Specific Media for around $35 million, including a minority stake in Specific and a small amount of cash. News Corp. will also retain a small stake in the social network.

The deal's price tag is $545 million below what the media giant had spent on acquiring MySpace several years ago.
 
The conglomerate, which managed to finalize the deal to offload the company just before its fiscal year ends Thursday, was hoping for a $100 million price tag when it decided to look for bids earlier this year amid a continuing slump of MySpace. In comparison, earlier this year, Facebook, which is expected to go for an IPO next year, was valued at $65 billion-plus in private investment deals.
 
MySpace's value has dropped as Facebook became the dominant social network, and MySpace has continued to lose money and subscribers.

In the U.S., MySpace had 75.9 million unique visitors in Dec. 2008 at its peak, but only 34.9 million in May, according to comScore.

For the nine months ended March 31, News Corp. reported a loss of $477 million for the segment that includes MySpace, compared with $401 million in the year-ago period. While the company typically doesn't break out MySpace's financials separately, it has said that lower search and advertising revenue has been partially offset by reduced costs in many a recent quarter.

RBC Capital Markets analyst David Bank estimated that MySpace was losing News Corp. about $200 million per year. "So they are making at least 200 million more next year just by getting rid of it," he said. "The sale price was almost irrelevant."

Miller Tabak analyst David Joyce said that the price tag was "much less than expected," but echoed the notion that News Corp. had to move on. "Losses were increasing so it's good that they cut their losses and redirect their efforts," he said. "Eight months ago, the thinking was they could get $150 million-$200 million."

Joyce estimated though that "there was some return" on the MySpace investment when not purely looking at the price tags of the acquisition by News Corp. and now the sale, but also including the financial benefits from a Google search deal that made the company money a few years ago. Operating income before depreciation and amortization could be as high as $415 million over the time News Corp. owned MySpace after taking into account the $545 million loss from the difference between the acquisition and sales price, Joyce estimated. However, depending on additional overhead and depreciation expense, the return may have been even lower, he said.

As of earlier this month, MySpace appeared to be on its way to be acquired by an investor group including Activision Blizzard CEO Bobby Kotick. The group decided to pass last-minute amid concerns over potential legal liabilities, according to the Wall Street Journal.

Irvine, Calif.-based Specific Media is expected to focus MySpace even more narrowly on music, on which it has concentrated along with other fields of entertainment, such as comedy. Specific's executive team includes two former executives of the Fox Audience Network, News Corp.'s former online ad unit and the primary monetization arm of MySpace, which the company previously sold. MySpace will give the company its own ad inventory to sell beyond its usual focus on technology that helps broker online ads.

In conjunction with the deal, MySpace is planning what CEO Mike Jones in an internal memo called "a series of restructuring initiatives, including a significant reduction in our workforce." Jones will work with Specific during a transition period of two months before departing as CEO.

"“MySpace is a recognized leader that has pioneered the social media space," said Tim Vanderhook, CEO of Specific Media. "The company has transformed the ways in which audiences discover, consume and engage with content online. There are many synergies between our companies as we are both focused on enhancing digital media experiences by fueling connections with relevance and interest. We look forward to combining our platforms to drive the next generation of digital innovation."

When News Corp. acquired MySpace for $580 million in 2005, Murdoch was initially criticized for overspending to get a foot into a hot tech sector. Soon though, sentiment turned, with industry executives at times seeming to suffer from MySpace envy, and some Wall Street observers  predicting that MySpace had much value upside left in it.
 
During that time, executives at other conglomerates faced questions about whether they would also try to buy into the social networking phenomenon. And Viacom chairman and controlling shareholder Sumner Redstone told Charlie Rose that he at least in part decided to fire Viacom CEO Tom Freston because he didn't buy MySpace, which at the time of the interview he figured may have risen in value to $1.5 billion, for $500 million, allowing his rival Murdoch to pick up the site.
 
But the emergence of Facebook started eating into MySpace's user base and advertising revenue. eMarketer estimates that in 2008, MySpace was at the top of the social network food chain with more than $604 million in ad revenue. A year later though, the figure fell 22 percent to less than $470 million, while Facebook overtook its rival with $738 million, according to eMarketer.
 
News Corp. is also facing another potential change in its digital business after the conglomerate, Walt Disney, NBCUniversal and Providence Equity Partners recently decided to look at a potential sale of online video site Hulu.
 
Email: Georg.Szalai@thr.com

Twitter: @georgszalai

 

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