The New Jupitermedia
I just received my proxy statement for Jupitermedia (NASD: JUPM) regarding the sale of their Jupiterimages division to Getty. The division is being sold for $96 million. Jupitermedia’s current market cap is $18 million, but there are some good reasons for this.
The New Balance Sheet
Looking at their most recent balance sheet as of 9/30/08, Jupitermedia has almost $98 million in goodwill, and it is likely that a majority of this will disappear upon the sale of their images division to Getty. Jupitermedia noted that $39 million of their intangibles were related to their image library in their 10-Q. Jupitermedia also had $78 million in long-term debt outstanding as of the end of September.
As an investor, I am hoping that Jupitermedia follows the crowd with regard to this cash and focuses on deleveraging. Paying down their long-term debt would seem to be a top priority for the company. Following the sale and debt reductions, the balance sheet will hopefully be a little cleaner, and the business a bit simpler.
Another reason to focus on debt reduction is management’s poor capital allocation decisions in the past. I hope they make the more conservative move to pay down debt. I covered the history of Jupitermedia in my introduction to the company, but the quick summary is that they sold several businesses in 2005 and 2006, then used the cash to buy the image businesses that they are now selling to Getty for quite a bit less than they paid.
In effect, what is likely to happen following the sale is that much of their balance sheet intangibles will be replaced with cash, but with no real increase in shareholder value.
Expected Income
On their income statement, the images division comprised the bulk of their revenues. The remaining media business reported $7.6 million in quarterly revenue, $6.9 million in expenses, resulting in about $700,000 in quarterly operating income. Again, I’m hoping a lot of their non-operating adjustments are eliminated after the sale, so the remaining business looks to make about $2.8 million per year with net margins of 9-10%. Given expected declines in advertising revenue, I would expect that this business will have its struggles in a down economy.
Valuation
Assuming net operating margins decline to 5%, the remaining business will produce about $1.5 million in annual operating income. This would price the business at about 12x earnings. The company will hopefully have a good amount of cash remaining on their balance sheet as well. Assuming they have $20 million of cash remaining, and the remaining business is also valued at about $20 million, I expect that Jupitermedia is about 50% undervalued. So their is some upside remaining, but investors should not expect a return to 2006 prices by any means. That value is long gone.
New Name
Jupitermedia will soon be known as WebMediaBrands, Inc., so be on the lookout for this change in the next few months.
