News that the Daily Mail is considering buying Yahoo has generated a lot of interest, but what interest would a nearly 180-year-old media company have in buying an Internet giant that is past its prime?
First, it’s important to understand that this deal does not represent a full acquisition of Yahoo by DMGT, the owner of the Daily Mail. DMGT is a successful media company that incorporates much more than just the print and online editions of the Daily Mail, but its financial position does not make a full acquisition feasible, even if Yahoo were acquired at a bargain price.
As analysts Peel Hunt said in a note on Wednesday, DMGT has £700 million in debt and a pension deficit that gives it “little room to carry out such a deal” without selling other assets or taking on further debt, both of which are “unlikely”.
Instead, two deals are thought to be in discussion with private equity partners that would likely pay a majority of the cash.
DMGT will take over Yahoo’s media assets, including Yahoo News and Yahoo Sport, while the private equity firm will acquire other businesses, including advertising technology, email and search.
Another, less likely, deal would see a private equity consortium buy all of Yahoo and combine its media assets and online email business into a separate company in which DMGT would hold a large stake.
Why would Mail want Yahoo?
The Daily Mail is the world’s largest English-language news site, but even its nearly 14 million daily unique users are tiny compared with the vast user bases of Google and Facebook, and while online revenues grew 27% overall in the fourth quarter of 2015, it is approaching saturation point in the UK. By contrast, revenues in the US alone grew 62%, and Yahoo’s media assets could add another 128 million monthly visitors to its current 66 million.
“Yahoo is generally a very good fit, and things like celebrity gossip are easy to integrate,” says Enders Analysis’ Thomas Caldecott, “but the biggest attraction is the sheer size of the audience.”
Digital scale is becoming increasingly important as the Mail’s online business can no longer offset disappointing print revenues.
“The Daily Mail Online has acted as a scapegoat for the decline in the value of print,” said Peel Hunt analyst Alex DeGroot. “Unfortunately, the decline in the value of print has outweighed that. Over the past year, the stock market has stopped talking about the Daily Mail Online. [its value] above.”
Another reason the deal makes sense is that while sites like Yahoo Sport and Yahoo News might not be of much interest to private equity firms looking for short-term profits, they fit with the Mail’s focus on digital news.
“Online news is a tough business to get into,” Caldecott says, “and not something that private equity groups would be particularly interested in. But for the Mail, which deals in online news, it makes sense to acquire these assets as part of its growth strategy.”
The deal could also serve a more strategic purpose: The book Yahoo is pitching to potential buyers has been called “unusually confusing, and perhaps intentionally so” by tech site Recode. The Mail could be using the deal to distract from the fact that its digital, ad-driven business isn’t performing as well as expected.
What about Tumblr?
One of the intriguing questions in any deal will be the future of social network Tumblr, which in some ways is a perfect fit for the Mail’s content, with its shared interest in celebrity and pop culture.
But Tumblr’s community is highly sensitive to attempts to make money through more advertising, as the Mail will inevitably do. Two-thirds of Tumblr’s readers are under 35, but its more web-savvy, liberal and progressive readers may resent being owned by the same company as the Daily Mail, a right-wing, socially conservative print publication.
The bigger hurdle may just be the price, given that Tumblr was acquired by Yahoo for $1.1bn (£770m) and even after its value was written down by $230m still represents a significant portion of Yahoo’s total value.
What are the chances of that happening?
The prospect of a deal has people excited, but with other potential buyers in the mix, there may be more excitement than hype. As a Peel Hunt analyst note points out, “The media — but not the stock market — is going wild over the prospect of DMGT owning Yahoo.”
One reason is that other companies thought to be interested in Yahoo are all well-funded, including Verizon, which is driven by long-term goals similar to those that led it to buy AOL for $4.4 billion in 2015. Yahoo is also thought to have held talks with Tinder owner Interactive Corp. and television network CBS, and other companies thought to be interested include Time Inc.
However, Google’s parent company Alphabet and Microsoft have both reportedly decided not to make any offers, and Yahoo’s deteriorating performance is likely to scare off many bidders.
If the Mail can find a private equity partner that sees enough of an opportunity in Yahoo’s remaining assets, it will be well positioned to grab a piece of what only a digital news business looking to build a huge global readership would find attractive.
And if it doesn’t, it’s likely just the beginning of the company’s search for something to accelerate its U.S. operations.
“If this deal doesn’t happen, they’re going to need a solution,” DeGroot said. “Because whoever owns the Yahoo business will be the No. 1 news media in the U.S. The Daily Mail is interesting, but it’s too small. They have to do something. This is not the end, it’s the beginning. They’re going to need some kind of partner. It has to happen.”