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Targeting Low-Priced Internet Takeovers

News Corp. bid big for Intermix; are there any other similar candidates out there?

In the wake of News Corp.'s (NWS) bid for Intermix (MIX) in July, we scoured the low-priced stock universe for other Internet takeover candidates that were attractively priced relative to this deal.

We recommended three companies to Stocks Under $10 subscribers --









-- that were undervalued relative to the double-digit percentage premium News Corp. proposed shelling out for Intermix. (A former CEO has since offered a

competing bid

for Intermix.)

Since that time, PlanetOut shares have fallen 40%, although we advised subscribers on Aug. 3 to exit the position about 2% above the current quote; CNET shares are up 12%, and Miva has added 5%. But our thesis that larger media companies are on the acquisition hunt was confirmed when News Corp. said in early August it would spend up to $2 billion on Internet acquisitions. And



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could be on the prowl because its recent 4 million-share secondary offering took its cash balance to more than $6 billion.

With that in mind, we want to reiterate our buy recommendations on CNET and Miva, and add



to this list of potential Internet takeover candidates. iVillage, through its family of Web sites, provides lifestyle and entertainment content primarily for women. The stock was recently trading at $6.85 and appeared on our radar screen after the company delivered upbeat second-quarter earnings results.

Potential acquirers could find a lot to like in iVillage: impressive growth in ad sales, and a loyal base of users who are attracted to the site for its female-oriented content. The company had 14.2 million unique users in June, vs. about 100 million users for CNET, and was ranked the No. 1 online women's community by traffic counter Media Metrix.

iVillage should deliver positive EBITDA of $17 million to $18 million in 2005, based on management's guidance. The company has wisely shied away from a subscription revenue model, which should lend itself to a higher sales and earnings multiple.

(The market has punished companies for under-delivering on subscription revenue. PlanetOut's shares recently took a 15% hit after it reported a subscription-revenue shortfall, and Interactive Corp. was forced to split into two companies in order to achieve a higher valuation after it, too, reported declining subscription revenue.)

On Aug. 2, iVillage reported break-even second-quarter earnings on revenue of $21.1 million. This was ahead of analyst expectations and sent the stock up by 12% in the following trading session. On a year-over-year basis, revenue increased 28% and was slightly ahead of the company's guidance of $20 million to $21 million.

And break-even earnings-per-share results, although flat with year-ago results, beat the Street's expectations by a penny. The company's flagship site, which represented about 75% of total sales in the quarter, turned in 65% year-over-year revenue growth, driven by strength in advertising revenue.

The company maintained its full-year revenue guidance of $87 million to $89 million, and said it still expects to generate between $17 million and $18 million in EBITDA and net income of between $9 million and $10 million. We believe these numbers are attainable, given the company's strong earnings to date, and the potential for strength in advertising sales heading into the holiday season.

To be sure, iVillage's 391 million page views in June hardly matches the 7.8 billion page views Intermix generates each month. But we believe what iVillage currently lacks in size, it makes up with a more targeted customer base.

Its content attracts young and middle-aged women, a market that it dominates online. With women spending almost as much money on the Web as men -- 57% of men in a UCLA study said they make purchases online vs. 45% of women -- it's easy to understand why a traditional media firm would want a piece of iVillage's market in looking to spread its online wings. Additionally, iVillage's 17% EBITDA margin is much greater than Intermix's 3.5% EBITDA margin, meaning each dollar in sales is worth more to a potential acquirer of iVillage than that of Intermix.

With that in mind, we believe it is fair to apply the 5 times sales and 38 times EBITDA that News Corp. bid for Intermix. On this basis, iVillage shares are worth as much as $9 each in a buyout. We believe this is a fair way to value iVillage because its most recent quarterly earnings results were impressive.

Risks to our thesis include a slowdown in the growth of online advertising, company-specific execution problems such as down time on its sites due to technology problems (which has been a problem in the past), and a slowdown in the shift of advertising budgets to online media.

That said, the 20% in upside potential represents a compelling opportunity for risk-tolerant investors to get involved in a name with double-digit revenue, positive EBITDA and earnings growth, all at a discount to what acquirers have recently been willing to pay for Internet stocks.

William Gabrielski is a research associate at and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

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