A reckoning for BuzzFeed

Happy Wednesday. This is the first issue of 2024, and we’re now back on the usual Monday, Wednesday, Friday cadence. Here’s what we’ve got today…

• No headline deals in favor of a deeper dive on the latest developments at BuzzFeed

• The deal sheet, plus a market update from top restructuring professionals

In recent weeks, digital media business BuzzFeed (Nasdaq: BZFD) appeared close to a temporary respite from its years-long financial struggle, but that hope now looks to have been short-lived.

At issue is the company’s sale of its Complex Networks assets, the music and fashion-focused media business that includes the annual ComplexCon event.

The process launched earlier this year with the expectation that the deal would fetch around $150 million. Now, BuzzFeed is said to be in late-stage talks with suitor Ntwrk, a live video e-commerce startup backed by Live Nation and Main Street Advisors, over a deal that would instead value Complex at just $100 million, per The Information.

That’s a potential problem for BuzzFeed, which is working to shore up liquidity ahead of the December 2024 maturity of its outstanding convertible notes, for which it needs to cough up north of $200 million to cover principal and accrued interest.

The Background

The current sticky situation can be traced back to a SPAC-gone-wrong, which left BuzzFeed high and dry while it was in the process of going public.

Its December 2021 merger with 890 Fifth Avenue Partners was meant to provide the business with a $288 million cash infusion, a portion of which was earmarked for the concurrent $300 million purchase of the same Complex assets ($200 million of which was cash, the remainder stock).

The transaction’s contemplated sources and uses plugged the remaining cash need with the aforementioned, and now problematic, convertible notes.

890 Fifth Avenue Partners shareholders, however, soured on the proposed deal, and more than 94 percent opted to redeem their shares. That left BuzzFeed with just $16 million of new cash, though it still had to pay out the Complex Networks purchase consideration (and still issued the convertibles). The result was a capital structure that turned out to be much more levered than anyone expected.

For its troubles, BuzzFeed racked up $35 million in transaction fees. Netted against cash proceeds raised, the company was out more than $19 million — regardless, Fifth Avenue still walked away with a 4.7 percent equity stake for its sponsor promote.

The BuzzFeed SPAC turned out to be just one of a string of unsavory outcomes for Fifth Avenue executive chairman Adam Rothstein, also co-founder and general partner of early-stage investor Disruptive Technology Partners. Rothstein held similar senior SPAC roles in five other transactions:

• QualTek Services, a 5G infrastructure provider that entered into Chapter 11 proceedings earlier this year following an $800 million SPAC merger in 2021

• PureCycle Technologies, now trading down 89 percent from its peak and labeled a fraudulent “ESG SPAC charade” by short-seller Hindenburg Research

• TopCo Holding Corp., a cannabis distributor that had appointed Jay-Z its Chief Visionary Officer and now trades OTC for 18 cents per share

• Tigo Energy, a solar manufacturer that’s fallen more than 90 percent from its post-merger peak

• Music publisher Reservoir Media, the best outcome of the lot, now trading at a more than 40 percent discount to its 2021 de-SPAC valuation

A Tough Business to Be In

Two years on from the debacle, BuzzFeed has had its hands full enduring a torrid digital media environment. Loss of easy traffic from third-party platforms like Facebook, an anemic post-pandemic ad sales market, and resultant upside-down economics have all contributed to prolonged cash burn and a series of organizational restructurings.

That’s included the shuttering of its flagship BuzzFeed News offering, which had won a Pulitzer Prize for a series of investigative articles utilizing satellite images, 3D architectural models, and in-person interviews to examine China’s detainment of Muslims in its Xinjiang region.

Today, analysts say the company’s brightest spot is this year’s promising audience engagement uplift from interactive games Clout Queen and Under the Influencer, both of which BuzzFeed describes as “AI-powered sims that determine whether you can make it in the high-stakes, low-reward world of internet influencing.”

Also contributing to the optimism is Nepogotchi, another recently released AI chat-based game in which players “get their very own nepo baby to raise and bond with.”

Any remaining journalistic laurels have been further tarnished with management’s recent earnings call excitement over Q3 editorial content traffic that is now 60 percent higher for AI-generated content relative to the outlet’s non-AI offerings.

Otherwise, the company’s current strategy largely relies on its ability to deliver a superior ad product via what may be best described as its mass-market social media expertise.

Key to that effort is BuzzFeed’s creator network, a roster of more than one hundred digital content creators that allows the business to penetrate difficult-to-reach audience segments, unlocking high-engagement, brand-safe access for its advertisers.

The network also solves some of the scale issues present in influencer-led advertising, where brands face an uphill battle to secure the reach needed for a meaningful campaign without the logistical challenges of managing a deep bench of creators. And, for those creators, BuzzFeed’s off-the-shelf monetization option is a clear win.

In fairness to management, the pivot does seem to be gaining traction.

After burning more than $70 million since 2018, excluding the impact of financings and acquisitions, co-founder and CEO Jonah Peretti is now guiding toward Q4 EBITDA of between $20 to $30 million (including contribution from Complex). Expectation is that current momentum will continue through 2024, largely thanks to the recently rightsized cost base.

Where Does BuzzFeed Go From Here?

Even with improved performance, BuzzFeed still needs to find a solution for its convertible debt problem. With Q3 cash on hand of $42 million, plus potential for marginal contribution from the business’ cash flows, there’s still a roughly $60 million gap to be plugged within the next twelve months.

Equity financing options are largely off the table thanks to the company’s current market value of just $38 million. A debt refinancing appears similarly challenging, though some sort of structured financing package may be actionable.

Otherwise, the clear next step is a sale of the business or further divestitures. A prime candidate is BuzzFeed’s food-focused brand Tasty, which could fetch $100 million on its own. That said, both an outright sale or further asset sales have historically been opposed by Peretti, though his hand may soon be forced.

Meanwhile, senior executive departures have picked up. Last week, the company announced the resignation of president Marcela Martin, just weeks after the November exit of CFO Felicia DellaFortuna. Not quite the sign of confidence shareholders may have hoped for; though on the bright side, the turnover should at least provide some unexpected cost savings.

In any event, the likely outcome is a go-forward business that is substantially smaller than the BuzzFeed of years past. The company’s $1.7 billion Series G valuation, set in 2016, will probably be the permanent high water mark — a distant memory for backers including NBCUniversal, Hearst, Andreessen Horowitz, NEA, and General Atlantic.

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• NewSpring raised over $180 million for its fourth growth equity healthcare fund.

• Countdown Capital, a venture investor focused on aerospace and defense startups, is winding down operations.

1. The year ahead, according to restructuring experts.

• Bankruptcy and restructuring publication Petition released the latest installment of its multi-part industry trends survey, available sans paywall. — BK Pros Weigh In. Part IV., Petition

2. Preparation for e-scooter company Bird’s bankruptcy proceedings…

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