As part of Brightcove’s full year 2018 results, management announced a definitive agreement to acquire Ooyala’s OVP (online video platform) assets. Those assets comprise the products Backlot (video content management and publishing platform), Analytics, Live, and all associated intellectual property and patents. Brightcove will retain “substantial portions” of Ooyala’s engineering, support, and sales staff, to include Ooyala’s Guadalajara, Mexico operations. Lastly, and likely most important, “Bightcove intends to take on all customer, reseller, and partner relationships utilized by Ooyala’s OVP business globally.”
Ooyala did not sell, and is retaining, its Ooyala Flex Media Platform and related assets.
This is yet another transaction for Ooyala. The most recent since its management buyout from Telstra in October 2018. There is one update to the earlier discussion of the management buyout (MBO) from Telstra. At the time of its announcement there was no disclosure of the deal terms between Telstra and Ooyala management. Telstra’s subsequent financial disclosures would suggest the deal included little in terms of cash. Telstra recognized a loss of AUD $89 million on the sale of Ooyala. Since Telstra had already written off all goodwill associated with the original acquisition, any loss on the sale would mean a price was received below the carrying value of the remaining, identified net assets. For context, according to Telstra’s historical financial filings, the cumulative fair value of the assets of Ooyala (plus Nativ and Videoplaza) at the time of acquisition (in 2015) was AUD $74 million.
The acquisition by Brightcove of Ooyala’s OVP assets is expected to close in the first half of 2019. A purchase and sale document is agreed and closing remains subject only to customary closing conditions. The purchase and sale document states the timing of a closing “as promptly as practical, but no later than 60 days.”
Purchase consideration is listed as USD $5.75 million in cash, reimbursement of audit fees capped at $500,000, and 1,056,763 shares of Brightcove stock. Brightcove’s stock closed at $8.58 yesterday (2/13), equating to a market value of $9.06 million. In aggregate the consideration is then approximately $15 million (Brightcove’s management cited a figure of $15 million for enterprise value).
It is worth noting that today the value of the deal is around $15 million, it will vary based on movements of Brigthcove’s stock until Ooyala liquidates the stock – which is reasonable to expect. Liquidating the stock can’t occur before the deal closes and the shares are registered. Further, since the amount of shares is roughly 10x the daily volume of trading in Brightcove’s shares, it will then take several trading sessions to actually effect the sale of the stock.
Because the deal hasn’t closed, Brightcove isn’t in a position to offer specifics on the revenue results of the acquired assets. On the Company’s Q4 2018 call, Brightcove’s CFO Robert Noreck indicated the valuation level was below 1.0x in terms of enterprise value to trailing twelve months of revenue. (We are tempted to guess at the valuation, but will hold back). Reversing the math puts a floor on the acquired revenue of $15 million of annual revenue.
The statement on valuation level is informative, especially when considering Brightcove’s past acquisitions.
Brightcove’s June 2012 acquisition of Zencoder was for $27.4 million (representing more than half of Brightcove’s then available cash on hand); Zencoder would generate slightly less than $1.5 million of annual sales for the full year 2012 (= 15x+ revenue multiple). Brightcove’s January 2014 acquisition of Unicorn Media was for $39.7 million, a business that contributed approximately $6.5 million of revenue to Brightcove for the remainder of 2014 (= ~6x revenue multiple).
This deal is different.
The only other mention of the financials by Brightcove management is the expectation the acquisition will be accretive on an adjusted EBITDA basis in the 2019 calendar year.
Stock consideration is not without cost to Brightcove. The more than 1 million shares contemplated in the transaction is roughly 3% of Brightcove’s outstanding stock and will dilute existing equity holders accordingly. Further, since the stock will almost assuredly be sold immediately in the open market, there will be downward pressure put on Brightcove’s stock price (more selling pushes down prices). Management’s comment on accretion indicates a belief the financial contribution of Ooyala’s OVP assets will more than offset the dilution.
The cash component of $6.25 million represents more than 20% of Brightcove’s cash on hand as of December 31, 2018. A discussion of cash expenditures starts to move into a discussion of the rationale of the deal.
From Brightcove’s perspectives the $6.25 million cash outlay is an investment in growth. Excluding for the moment other merits, let’s limit the analysis to the cash cost of generating incremental growth in the media technology sector. In each of the past four calendar years Brightcove has spent between 34% – 37% of its annual revenue on sales and marketing expenses. Those investments have yielded the below revenue growth picture in Brightcove’s media vertical (where the Ooyala acquisition is most impactful).
We have deliberately omitted the specific figures to focus the attention on the year-over-year change. Despite increasing levels of investment in organic growth, growth has declined.
Brightcove’s fourth quarter call started with the following quote from the Company’s CEO, Jeff Ray:
“During the fourth quarter, Brightcove made additional progress with its strategic initiatives to position the company to deliver break out growth. We remain confident that Brightcove can deliver sustainable revenue growth and profitability in excess of current levels over time as the changing we are making take hold across the business.”
Based on Brightcove’s guidance, the acquisition of Ooyala’s OVP – when viewed through an investment lens – is at least a dollar-for-dollar return of growth (given the stated multiple). Put more simply, it is an approach likely to generate growth in excess of current levels.
Brightcove’s messaging on the transaction has been focused on the other, business merits of the deal.
We had an opportunity to speak with Charles Chu, Brightcove’s Chief Product Officer about the announcement. Charles’s enthusiasm about the deal begins with the addition of a roster of high-profile media clients (Tribune Media, Star Hub, Arsenal, among others) and the opportunity to combine the best aspects of Brightcove and Ooyala technologies into a unified platform.
Echoing Charles’s sentiment was the below statement made by Jeff Ray on the Q4 call. Jeff is responding to an analyst question about the potential for the Ooyala acquisition to accelerate Brightcove’s growth.
“Yes it does give us an opportunity to accelerate. First of all, it makes clear who the undisputed leader in OVP. When you are the market leader, customers and prospects naturally include you in RFP and come to you. We think that gives us a great advantage. We also have an opportunity to open up new markets. They have some great well-known customers in geographies where we aren’t very strong. We are excited about the opportunity to accelerate our global expansion.”
The above quote hints at a much larger topic of market dynamics resulting from all the recent M&A events in the OTT segment. As part of its acquisition of Massive Interactive, Deltatre’s management made similar statements on these market dynamics.
OTT market dynamics is a topic we plan to cover in greater depth during our upcoming eighth annual Devoncroft Executive Summit in Las Vegas.
We will close this post with a reminder that too often M&A events are viewed as a winner-take-all transaction. More often both sides stand to gain.
The rationale of the deal for Ooyala is equally strong. Its OVP business was the heritage business line of the business and was responsible for the majority of its revenue (based on management’s public statements). However, nearly all of the messaging of Ooyala has been focused on the Ooyala Flex Platform. Even a glancing read of the press release announcing the MBO from Ooyala reinforces this point. Flex is mentioned seven times in four paragraphs of text. It is not surprising then that management is choosing to redeploy (and refocus) the resources of the business on the Flex Platform.
Related Content:
Press Release: Brightcove Announces Definitive Agreement to Acquired Ooyala OVP Assets
2019 Devoncroft Summit | Las Vegas
© Devoncroft Partners 2009 – 2019. All Rights Reserved.