Could This Spinoff Parent Compete With Facebook and Google +?
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In late August of 2012, Woodland Hills, California-based e-commerce company United Online (NASDAQ: UNTD) announced its intention to spin off its FTD floral-shipping business into a standalone public company. The FTD division currently accounts for 65 percent of United Online's gross revenues and could have an initial enterprise value of $500 million or more. As such, this offer appears to provide an excellent opportunity for ambitious United Online investors who wish to maintain a stake in the emergent company. Barring any unforeseen regulatory or legal delays, the tax-free transaction should be completed by August of 2013.
About United Online
United Online is a diversified e-commerce company that provides several different consumer-focused services within the space. The company's FTD division offers bath products, gift baskets, specialty food products, novelty clothing and stuffed animals in addition to its core flower-delivery business. Once it has been spun off, FTD appears poised to increase the reach of its already-robust network of florists and increase its delivery range in places like the United Kingdom, continental Europe and Southeast Asia.
United Online's "content and media" division manages a number of different niche brands that focus primarily on selling mementos like class rings, yearbooks, letter jackets and other products. This division also operates an interactive yearbook database through an emergent social media property known as "SchoolFeed." United Online's "communications" division operates several Internet connectivity businesses and maintains a significant stake in the shrinking dial-up and DSL markets. The company's "communications" properties include NetZero and Juno. As a whole, United Online employs about 1,500 people and earned $36.6 million on $869.8 million in revenues in 2012.
How the deal is structured
Under the terms of the spin-off, United Online shareholders will receive one share of FTD for every United Online share in their portfolios. The exact pricing of this offer has not yet been announced. However, it appears that the two companies will have an identical float in the aftermath of the spin-off. While FTD's listing application is still pending, it is reasonable to assume that the company will trade under the "FTD" ticker symbol.
The pending spin-off has already produced sizable returns for United Online's shareholders. On the last trading day before the late-July spin-off announcement, the company's stock closed at $4.20 per share. On the day after the announcement, the stock gained exactly $1 per share and closed at $5.20 per share. Since then, it has followed a steady upward trajectory and is currently valued at more than $6.50 per share. This equates to a six-month return of approximately 55 percent.
Potential complications and drawbacks
At this point, there appears to be little standing in the way of this spin-off. It has already been approved by United Online's board of directors and should sail through the shareholder-vote process with little trouble. In addition, the small size of the deal and the competitiveness of the industry in which United Online and FTD operate will limit the regulatory scrutiny that this spin-off receives. Barring any last-minute legal action, the deal appears likely to come off without a hitch.
Long-term prospects and outlook
It is clear that FTD has been the principal driver of United Online's healthy revenue growth. Although its emerging social-media properties may produce solid gains during the next several years, FTD remains the healthiest of its three core businesses. Its dial-up and DSL services add relatively little value to the company and may soon wind up on the auction block.
Although the rationale behind the decision to spin off FTD is not immediately clear, it probably fits in with United Online's stated goal of integrating its e-commerce and social-media businesses. This is a tall order: Should the company make a run at a significant chunk of the social media market, it would run headlong into behemoth competitors like Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG).
Then again, United Online might be on the right track. Although Google's search-driven advertising model earns the company billions of dollars per year, it has had limited success in monetizing its social media efforts. In fact, it has largely resorted to squeezing revenue out of its e-mail and Google Plus platforms with increasingly obtrusive text and in-line ads. Meanwhile, Facebook's P/E ratio is an otherworldly 165. While the company exhibits tremendous promise, its revenue model is inadequate to justify its current market capitalization. In the absence of concrete evidence of progress on the revenue front, it is due for a major correction.
If United Online succeeds in monetizing its niche-friendly social media platforms, it could provide a model for these larger companies. More importantly, it could turn out to be an incredible value for its shareholders. For ambitious investors who see a future in the company's fragmented approach to social media, United Online could be a steal at these levels.
mthiessen has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Google and United Online. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!