Wall St Speaks Out on Yahoo Acquisition of BrightRoll

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Acquires Video Ad Tech Platform BrightRoll for $640mm in Cash - Dan Salmon, BMW Capital Markets

After market close, Yahoo! announced that it would acquire video ad tech vendor BrightRoll for $640mm in cash. With net revenue of $100mm+, this implies a 6.4x multiple, and the deal will be accretive to EBITDA. BrightRoll's client base includes 87 of the AdAge top 100 U.S. national advertisers, all of the top 15 advertising agencies, and all of the 10 leading demand-side platforms. The transaction is expected to close in 1Q15, and Yahoo expects to begin scaling BrightRoll internationally after that.

Our View:

• With independent video ad tech businesses becoming increasingly scarce (LiveRail to FB, AdapTV to AOL), we see this as a solid deal. With that said, we expect investors to have questions about the wisdom of using BABA ($114.54, Outperform, by Ed Williams) proceeds on ad tech, a sector that is still working its way out of investors' doghouse. We understand that concern, but believe this type of deal was necessary to keep up with third-party ad tech solutions already offered by GOOG ($561.29, Market Perform)/DoubleClick, AOL (AOL, $45.23, Not rated), and FB ($74.61, Market Perform), whose third-party ad tech strategy has accelerated considerably over the past six months (FAN, Atlas, LiveRail).

• At 6.4x net revenues, we believe YHOO is paying a pretty full price, but one that is better than the originally discussed $700-725 million price tag. Moreover, while revenue details for FB + LiveRail and AOL + AdapTV were never made public, we believe the multiple is considerably lower, offset by slower growth at BrightRoll (in part due to a higher base of business).

• In BrightRoll, Yahoo gets scale. One of the original video ad networks, the company has been rolling out its programmatic platform since 2010 and is largely transitioned. We believe mobile is north of 25% of total inventory transacted and more than 10-15% of revenue, and CPG and Auto are particularly strong categories.

• BrightRoll has been focused on desktop/mobile/connected TV and not been aggressively pursuing the emerging programmatic TV opportunity, where both TubeMogul (TUBE, $16.97, Outperform) and especially AOL, have been more vocal. But complementing and integrating with TV was noted in the press release, so we're curious to learn more about the product roadmap from here.

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Daniel Salmon, Equity Research Analyst at BMO Capital Markets. Research trends at the intersectionDan Salmonof entertainment, advertising, data and technology. Dan can be reached at dan.salmon@bmo.com. Click to read more on Dan and the BMO Company disclosure.

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