Bottom line: Huffington Post is the best online content brand out there, says Armstrong. Since AOL wants to be the best online content brand, it makes sense to join forces.
How long will Arianna stay at AOL? She says she wants to be there “forever,” and she views this as her last job. (Armstrong says she has an open ended multi-year contract.)
Original: Welcome! AOL announced yesterday that it is buying the Huffington Post for $315 million, with $300 million of that coming in cash.
This morning the company’s CEO Tim Armstrong will discuss the transaction along with Arianna Huffington, and CFO Artie Minson.
8:03: The call is just kicking off with the head of IR giving the boilerplate.
8:03: TA: Special thanks, really recognise work of Huffington Post, especially Arianna and Kenny Lerer, and Eric Hippeau, who I’ve had a long relationship. We believe this is a score for AOL. We have been very careful with our resource. We believe this will add sig. acceleration to our company, our strategy.
8:05: Huffington Post is one of the best content sites, if you look at my Blackberry, of Arianna’s, or Arties, you would see this. We are building a high quality content site that’s magical. WE’re also working on 80-80-80, women, local, influencers. Not hard to see synergies there with HuffPo.
8:06: On our side, Project Devil interest is strong, brand advertisers interested in this deal from a scale perspective. Unique things underneath the combination. Combo of global national and local. We’re going it uniquely. Serving at a global and local level. The other area is women’s content. That’s something the web is lacking in our opinion. That will be a strong piece.
8:07: Spend the next 30 days or so with integration. “There’s real synergies here to be had,” working on hard on putting it together. Spend next 72 hours communicating with all our employees. This may be the smallest disruption for the size of any deal I’ve worked on.
8:09: We’ll be transparent about the changes. We think transition will be done in 30-40 days. Wrapping up … We have looked at many companies, but Arianna stands out singularly as what I hope the future of the Internet will look like. Someone that is passionate, works hard at what they do. Everyone here very excited about this deal. Universally we think this is an exciting deal. Very excited, we think this is a great use of our money.
8:10: Now Arianna — Really an incredibly exciting time. Over last two weeks as we’ve spent more time together, amazing how much our visions align. At Huffington Post of hitting profits in 2010, we were looking very ambitiously in 2011, we were thinking of additional investment with view to IPO, when this came along, it was a perfect fit. We wanted to expand. Get global, focus on women, doing more around cause marketing. We’ve already done a lot to attract big brand advertising.
8:12: On all these fronts, it’s just providing a dramatic acceleration joining AOL. Getting off a fast train and onto a supersonic jet. I have grown to know the work of Patch, I see Patch as one of the top media brands, to work with Patch and to scale it, to be able to accelerate it again, especially in 2012 election, is one of the things I’m most excited about. Once in a lifetime oppty, can’t wait to start.
8:14: Now, CFO Artie Minson is talking. He’s just reading the remarks from below.
8:19: Now we’re onto Q&A with Wall Street:
Tim, can you talk about content strategy? Does HuffPo become central hub? Affects Seed? New direction for content out of HuffPo area? How long will Arianna be there? TA: Our strategy premium content for consumers. Things like Seed and StudioNow are platforms, allow you to do anything. That strategy is still our strategy. Allows different types of content at different types of scale. It can allow you to cover all elections in the United States. Second piece, is our ability to serve advertisers. Many want those platforms to build content. We had a top 5 advertiser in offices, we could use Seed to build content for that advertiser during the meeting, and publish it on an iPad, and give them the iPad on their way out the door.
8:22: It’s 80-80-80 at a high level, and platforms for doing more content. Also, with HuffPo, we like their technology and their CMS. With our system, and theirs we have 24-7 engineering. Stuff in the press about the AOL Way is just one part of our strategy … now, only thing on Arianna. Price has to be fair, entrepenuers have to stay.
8:24: Arianna: I want to stay forever, I want this to be my last act, optty is endless. Anything I want to do, I can do here. At HuffPo we made great content cost effectively. We do it with established editors and young reporters being mentored. That’s congruent with citizen journalism, with what Patch is doing, still a lack of understanding in the legacy media about what’s going on. We will accelerate our platform, bring in interesting voices.
8:26: TA: Arianna has a multi year contract, but it’s open ended. AH: We’ve worked hard to earn trust. Early on my own daughters used to check our stories against CNN. Now we have a huge community. We have 30 comment moderators. We had 4 million commentators. We’re increasing engagement. AOL no longer had commenting. We want to make sure everything is fully socialized.
8:28: Why not do a partnership? Why did you need to own the HuffPo? How will political nature of HuffPo affect AOL? TA: Partnership v. M&A, it’s art of war, where we can win, how do we have the upside? Partnership deals where we’re going to be great partners, limited upside. Balance sheet. From upside, HuffPost offers ability accelerate core strategy, the ad strategy, different brand ability. That’s why we chose M&A over partnership. Really similar visions. I wasn’t so concerned about bidding, I wanted to get the fairest price, I think it was a fair price. I think asset at the right place.
8:30: AH: Huffington Post was not for sale, small board, me, Fred Harmon, Lerer, Hippeau, no one in a rush to cash out. It was the optty that Tim provided that determined the timing. In terms of politics, HuffPo started political, but in last 5.5 years, we changed ourselves. We have 26 sections. Last one on Divorce. Became a hub for all things divorce, 7th most trafficked site. College has grown, can be a great partner to Patch. High impact. This is a consistent available platform for smart people, as well as people just starting out.
8:33: Arianna, you made reference to Patch … what in there do you find interesting? What is synergy? AH: What I find interesting, more people are overwhelmed at a national level, looking for solutions at local level. Good way to connect people. One thing that works on our site is looking at what is working. We want to bring that to Patch, the person that did great work for the day, highlight that for the day at Patch.
8:35: TA: One thing in our conversations, the ability to do national and local on a same platform. Able to mix it all in, we want to scale Patch, we think we’ll see a lot of new products in that area.
8:36: Artie, can you clarify some numbers on HuffPo financials? Who is selling what? And CPMs? AM: In 2010, HuffPo profitable, this year $50 million of rev $10 mill OIBDA. We expect to manage business at 30% margin, that’s a go forward basis.
8:37: TA: We want to maintain all the sales people. Looking forward to working with HuffPo sales team. Significant sales org. We have to work with employees on that. Some stats that are important. Great oppty because Huff Po sells specific set of accounts, we sell specific set of accounts. We think we’ll get a lot more account coverage out of this. They have strength, we have strength. Optty for us to bring up sell through rate. We can bring up CPMs, and have a larger sales force selling highly scaled things. Major agencies trying to go to few partners, one in particular wants to go from 4k to 250. Brand can’t just use coupon. Need to be around your customers.
8:40: TA: Arianna has spent time with company for last 60 days, one reason deal didn’t leak, we were hiding in plain site.
8:42: AM: This is not a capital intensive business we’re buying. On equity piece, we think this is an efficient use of our balance sheet. HuffPo growing rapidly. Cost savings piece to it also. Purchase price is $315, $300 is in cash.
8:44: For Tim and Artie, question about OIBDA growth in 2013? Why you think they’ll grow? How much from HuffPo? AM: Let me give you the high level — we expect to get there as HuffPost is rapidly growing property. We thing other growth from other things in time period. Patch, we expect revenue improvements over time. How you get to use expecting 2013 to be a growth year. TA: On access and search, we want to make sure we have the right assets there.
8:46: Any other areas for M&A? TA: We have a long term vision for where the space is going. Plan for putting in different pieces. Let me talk about plumbing. Get platforms straightened out. Large infrastructure and scale. What we put on that is flesh and blood of what’s interesting for consumers. layer in infrastructure pieces, and you will see us look at media properties and media brands. From organizational standpoint, look at the employees, look at cost revenue structure, but we want to serve as many customers as possible.
8:49: AM: We are price sensitive for all deals we do. Are there cost savings? Tax benefits? Lots of deals where we like company, but don’t like price and we’ve walked away.
8:50: AH: We want to see growth with women. That’s one space we’re looking. Do more and more in that space is really important.
8:51: TA: Wrapping up … Success in the Internet space comes from a specific vision, and specific follow through. Second, we believe in content, as devices get faster. People navigate by brand. We believe HuffPo is best content brand on internet that’s synergistic with what we want to do. Last thing — expect us to stay on strategy and on point, we will overcommunicate with employees and customers. We’re going to keep families tight, deliver value to ecosystems.
8:52: That’s all!
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Here’s the prepared remarks for this call from AOL’s site:
Remarks Made by Arthur Minson, AOL Inc. CFO, on February 7th, 2011 Regarding The Financial Impact of AOL’s Acquisition of The Huffington Post
Good morning, to summarize the economics of the deal, we have entered into an agreement to purchase The Huffington Post for $315 million, approximately $300 million of which will be paid in cash funded from cash on hand. We expect to close by the end of the first quarter or early in Q2 due to necessary regulatory clearances. Now, I want to give you some colour on our financial rationale for making the acquisition and the potential impact on AOL in 2011 and beyond:
First, on a stand-alone basis, I believe this is a very good financial deal for AOL. The Huffington Post has had rapid growth since its birth. In 2011, we expect it will do over $50 million in revenue and we believe it will be at a $100 million revenue run- rate in the next 12 months and operating in the 30% margin range. Even on a standalone basis, we think this is a very good deal for us financially.
Second, the added benefit of this deal is cost saving opportunities. As you know, one of our stated goals at AOL is to produce high quality content profitably. In certain areas we are losing money, and we have told you of our intent to reverse that through cost cuts, M&A or partnerships with third parties. You saw the latter with the recent Sporting News, Everyday Health and Move announcements. There are a number of areas where AOL and The Huffington Post’s content overlap and, based on our analysis, AOL lost roughly $20 million in those areas in 2010. We expected to cut costs and strike partnership deals in 2011 to reduce our losses in those areas and that fact coloured the comments we gave you in our earnings call. It also looks to be represented in your Adjusted 2011 OIBDA estimates. Accordingly, while we believe there are approximately $20 million of annual cost savings from this deal, there shouldn’t be any real change in your models to your 2011 Adjusted OIBDA estimates. Additionally, in order to achieve these go-forward cost savings, we anticipate there will be restructuring charges in 2011. We are still finalising our restructuring estimates, but we currently expect cash restructuring charges to be roughly $30 million. Approximately $20 million of these charges relates to cost overlap and approximately $10 million to purchase price, which for accounting purposes is treated as restructuring as we accelerated the vesting of certain Huffington Post employees as part of overall deal consideration.
Third, while we expect The Huffington Post to generate approximately $10 million in Adjusted OIBDA for the full year of 2011 (and a similar amount in operating income before other items I am discussing here today), keep in mind that we won’t own the business for the full year and the Adjusted OIBDA it generates in 2011 will be offset by retention compensation and transaction costs.
Fourth, in addition to the restructuring I just noted, we expect net income will be impacted by roughly $10 million of increased amortization of intangibles.
Fifth, I want to spend a minute on retention compensation – we are now looking at $40 million of retention compensation in 2011 related to all of our recent acquisitions which, while smart from a deal structuring standpoint, has a negative impact on Adjusted OIBDA as AOL defines it. We have seen some reports commenting on our increased expenses in 2011, but keep in mind that a significant piece of this increase is retention compensation which is just how we’re treating acquisitions from an accounting standpoint.We will break this component of our expense base out separately so you can model it accordingly for those of you who want to exclude it from your Adjusted OIBDA calculations.
Finally, one item we have been incredibly focused on is the time period over which we return AOL to Adjusted OIBDA growth. As you’ve heard us say, AOL is not a one year turnaround story, but we did not come here for it to take 5 years. We have been working very hard to make 2013 the year AOL returns to OIBDA growth and this deal will help us achieve that goal. You will see proof points along the way:
In the back half of 2011, we expect to see meaningful improvements in our domestic display growth trends.
In 2012, we expect that our investment in Patch will be partially offset by increasing Patch revenue.
And throughout you will see the contribution from The Huffington Post and other recent acquisitions, which we expect will accelerate the pace of our turnaround.