DCLK: Abacus Deal Adds Up Perfectly, Creating Targeting
Powerhouse
Salomon Smith Barney
Monday, June 14, 1999
--SUMMARY:--DoubleClick, Inc.--Online Media
+ DoubleClick will acquire Abacus Direct in a stock-based pooling of
interests transaction valued at roughly $1 billion.
+ The combination will put Abacus' consumer purchase data resources
squarely behind DoubleClick's DART targeting technology, while also
openning up the Internet market for Abacus.
+ The combined company should be able to grow at 50% on the top line in
1999 and 2000 by our estimates, even though Abacus' historical growth rate
has been closer to 40%. The combination should produce incremental revenue
opportunities on both sides.
+ We continue to rate DCLK a 1-H with a $165 per share price target.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $(0.16)A $(0.14)A $(0.14)A $(0.13)A $(0.57)A
Previous 12/99 EPS $(0.13)A $(0.12)E $(0.10)E $(0.06)E $(0.41)E
Current 12/99 EPS $(0.13)A $(0.12)E $(0.10)E $(0.06)E $(0.41)E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $(0.08)E
Current 12/00 EPS $N/A $N/A $N/A $N/A $(0.08)E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (6/11/99).....:$88.81
P/E Ratio 12/99.....:N/Ax Target Price..:$165.00 Prior:No Change
P/E Ratio 12/00.....:N/Ax Proj.5yr EPS Grth...:50.0%
Return on Eqty 98...:N/A% Book Value/Shr......:N/A
LT Debt-to-Capital(a)N/A% Dividend............:$N/A
Revenue (99)........:89507.0thous Yield...............:N/A%
Shares Outstanding..:34.2mil Convertible.........:No
Mkt. Capitalization.:3037.3mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
+ SUMMARY & OVERVIEW +
DoubleClick announced that it will acquire Abacus Direct in a pooling of
interests stock transaction. The transaction will combine the clear
leader
in Online advertising solutions and targeting technology with the
recognized
leader in transactional databases and consumer purchasing information. We
continue to rate DoubleClick a 1-H and maintain the stock as our Top Pick
in
Online Media for 1999. Our current 12-month price target is $165 per
share.
By combining with Abacus Direct, DoubleClick will gain control of a vast
database of specific consumer purchase history information and other
demographic data it will use to accurately target Online advertisements.
On
Abacus' side, the merger with DoubleClick provides an open avenue for
redeploying and expanding the Abacus Alliance database in the direction of
the Internet. The combination should not only increase the appeal and
effectiveness of DoubleClick's DART technology, but it should also enhance
the breadth, depth and value of the Abacus database. Furthermore, Abacus
Direct's 35-40% operating margins will sweeten DoubleClick's near-term
financial profile, moving the company into the exclusive ranks of the
profitable Internet companies.
DoubleClick will issue 1.05 shares for every ABDR share, resulting in a
price of about $92.50 per ABDR share based upon DoubleClick's closing
price.
The transaction's value is roughly $1 billion, compared to DoubleClick's
$3.6 billion market capitalization. We anticipate that the combination
shold produce revenue upside of 5-10%, or $20 million, on a pro forma
combined base of just over $300 million in 2000.
+ OVERVIEW OF ABACUS DIRECT (w/ help from Janet Del Giudice 212/816-3306)+
Abacus Direct is recognized as the market leader in supplying a
comprehensive direct marketing data source to the catalog and retailing
industry. The business is built around the Abacus Alliance, which is a
cooperative database of customer purchasing information from over 1,300
catalogs (LLBean, Williams-Sonoma, etc.) and traditional retailers
(Macy's,
Saks Fifth Avenue, etc). These merchants contribute their transactional
files to the Abacus Alliance, which then combines record to produce
valuable
customer purchasing profiles. The database of consumer profiles and
purchasing history is used by the members of the Alliance to target their
direct marketing campaigns. Abacus helps a cataloger or merchant to
identify, select and mail to customers most likely to respond through the
use of the Alliance database and advanced statistical modeling. In short,
Abacus' scoring capabilities enable a catalog company to choose responsive
customer names, further segment a customer file, and, as a result,
increase
the dollars generated-per-catalog or direct mail piece, without adding any
extra costs.
The key to Abacus' business model is that each cataloger or merchant is
required to supply its customer transactional data to the database, which
is
key to attracting new catalogers and marketers to the Alliance. Thus,
each
participant benefits every time a new cataloger or merchant joins the
Alliance network because the shared information resource is expanded to
the
benefit of all. Participants contribute their data free of charge, which
gives Abacus a highly leveragable business model. With no data
acquisition
costs, the company's major expense is associated with maintaining the
database and dreating the statistical models used to draw marketing
information from the database. Abacus generates revenue from the Alliance
partners each time they use the database to target or screen their direct
marketing campaigns.
+ THE TRANSACTION +
Under the terms of the proposed transaction, DoubleClick will issue to
each
Abacus Direct shareholder 1.05 shares of DCLK stock for every 1 share of
ABDR stock. There are currently 10.2 million shares of ABDR outstanding,
so
DoubleClick will issue approximately 10.7 million new DCLK shares in the
transaction, bringing DoulbeClick's total share count to roughly 52
million
shares. In effect, ABDR shareholders will hold about 20% of the combined
company, while DCLK shareholders will make up the remaining 80% ownership
interest. Abacus has no debt and $25 million in cash on its balance
sheet.
The transaction will be treated as a pooling of interests, and the
combined
company will issue restated and combined historical financial statements
sometime before closing. The transaction is subject to the normal closing
requirements (shareholder vote, regulatory review), and should be
completed
by the end of 3Q99.
+ FINANCIAL IMPLICATIONS +
The combination of DoubleClick and Abacus Direct should have mutually
beneficial financial implications, as DoubleClick's DART business should
be
accelerated by the addition of Abacus' transactional data resources and
Abacus' database business should be boosted by DoubleClick's Internet
presence. Prior to the transaction, we were projecting systems revenue
(aka
gross billings) of $150 million for DoubleClick in 1999 and $208 million
in
2000. Likewise, Salomon Smith Barney's Janet Del Giudice, who has covered
Abacus Direct closely, was projecting revenue of $66 million in 1999 for
that company, with $94 million in sales estimated for 2000.
In combining the two firms' income statements, we would not expect to see
any combined lift or upside in 1999, as the companies will only be merged
for the final quarter of the year. However, in 2000, we believe that the
DoubleClick - Abacus Direct combination should be able to produce
additional
revenue that had not been our standalone projections.
Specifically, our new projections for DoubleClick are $216 million in
systems revenue in 1999 ($150mm DCLK, plus $66mm ABDR) and $322 million in
systems revenue in 2000 ($208mm DCLK, plus $94mm ABDR, with another $20mm
coming from additional upward revisions). We believe that DoubleClick
will
be able to grow 50% on the top line in 2000, with ABDR's 40% historical
revenue growth rate being lifted a bit by the merger.
On the profit side, while we have not yet completely finalized the
necessary
revisions to our financial model, it is clear that Abacus Direct will
improve DoubleClick's near term financial picture. Abacus boasts
operating
margins in the upper-30% range, with operating income of about $26 million
expected in 1999, $35 million in 2000. Our current DoubleClick model
projects operating income losses of ($23) million in 1999 and ($5)
million in 2000. As we combine and finalize our forecasts, we expect to
wind up in the range of $3 million in pro forma operating profit in
1999 and $25-30 million in operating profit in 2000.
Importantly, Abacus Direct's business is highly seasonal, with the third
calendar quarter generally accounting for one-third of the year's sales
and
45% of the year's earnings. Conversely, the first calendar quarter is a
light one for Abacus. The seasonal pattern reflects the normal spending
activity of catalogers and marketers, with heavier spending in the third
and
fourth quarters corresponding to the holiday sales season. Even though
Abacus is highly seasonal, it is still profitable in all quarters, with
margins ranging between a quarterly high of 50% and a low in the upper 20%
range. |
