Limelight Sells EyeWonder Business, Still Working On Bigger Transformation

This morning, Limelight Networks announced it would sell their EyeWonder business to DG Fast Channel for $66M in cash. Limelight originally paid $110M for the business last year, so the sale to DG Fast Channel comes at a loss. Limelight also announced that they would buy back $25M of their stock, or about 8% of their outstanding shares.

As I reported earlier in the month, Limelight has been in discussions with Level 3 about merging both company's CDN businesses and the first step Limelight needed to do was was get out of the interactive advertising market and focus only on their CDN and SaaS based platforms. I'm hearing that Level 3 and Limelight are still in talks, but no deal is done and there is no guarantee it will happen. Today the Office of Fair Trading (OFT) announced they had "cleared" the Level 3 and Global Crossing merger and the full text of the decision will be available shortly on their website. So that now makes a Level 3 and Limelight deal much easier to accomplish.

Limelight clearly wants their share price to be higher so that they get a bigger buyout from Level 3, but there is no guarantee that will happen. If Limelight's share price goes up and they can an $8-$10 share buyout from Level 3, then I think the deal will get done. But, Level 3 may just sit back and wait a few months and see what happens. If Limelight does not grow revenue the rest of the year, then Limelight won't get the buy out they want and would have to sell any way, with Level 3 benefiting from the lower price.

But if you are Level 3, you don't want to wait too long to acquire the company as you still want to acquire them when their CDN business is strong. So it's really going to come down to timing on this one. With all these factors in play, I would not be surprised if it takes till the end of the year before this plays out. Limelight does not have a lot of options in the market and Microsoft, Verizon and AT&T have already all passed on acquiring them. So either way, Limelight is going to have to do something in the market soon, but I think it will probably be a few months before it happens.

Comments

[bob]

thanks for the info and insight Dan.So Microsoft is a no no?

[schmuckinsurance]

Level 3 or anyone else for that matter isn't paying a 300% premium from the beginning of negotiations, nor even a 100% when the LL biz has an expiration date on it. I agree that an EYEW deal makes a LL-L3 deal more likely but I think the structure will be similar to this deal. Limelight sold this business at 1.8x revenues which is a nice price. A more capital intensive, money losing & litigious business with large competitors seems like a real argument for a lower multiple on CDN than that especially given the low opportunity for cost savings.

However, for the sake of argument, assuming the same multiple on say $125M in revenue they could sell the CDN business for $225M the same way they did with DG. $225M in proceeds plus $160M cash on hand leaves them 80c/share upside from here with no value from SaaS which maybe is $45M in revenue that GS can retain in its Private Equity portfolio as a take private transaction with a JV agreement on Level 3's CDN business or just run it as a SPAC.

I'd be curious Dan, what's your opinion on the revenue multiple available for the CDN business, either this one or the market more broadly given the sustained capital intensity, low(if any?) profitability outside AKAM and increasing competition.

[Dan Rayburn]

Honestly, I don't know what the revenue multiple would be in today's market. If I had to guess, I'd say a max of 3x revenue, but with the way the market has been, and with no CDN being profitable (Akamai does not count as we don't know if their CDN business makes money), 3x would be on the high side.

[from6454]

Dan,

By buying LLNW, what can LVLT get?

Revenue: LVLT already offered lower price than LLNW and LVLT has better margin than LLNW, The revenue LLNW has just those customers who needs a second option. If LVLT buys LLNW, most likely LLNW's customers have to find another 2n CDN vendors, AKAM? I think LVLT probably will became a primary vendors for CDN and AKAM will move to 2nd place (backup vendor).

Network assets: LLNW has none.

Patents: if VZ, T, MSFt or even GOOG not interested, LVLT probably has no use for it.

And my question will be what is there for LVLT to buy?

[from6454]

Dan,

One more question. As you know LVLT's CNS (all IP) has over 80% margin. CDN pricing usually is much higher than IP pricing. LLNW sell CDN and buy IP service, if CDN pricing is marketed the same as IP, where is LLNW's gross margin? "Zero".

It is true that LLNW don't have debt (because they don't have network) and don't have to spend money to maintain and run network, but if your gross margin is "zero", you just don't have a business. It does not matter that your Adm & selling expenses are zero. The business model just won't make sense anymore.

Now I am no expert in CDN or telecom and I am just a average Joe. I love to know how it going to work for LLNW.

Thanks.

[Carlk]

Goldman Sachs should send a memo to "Mr. Market" telling them that their Limelight position is a big fat ZERO.

They should also stop attempting to trick the market by trumpeting share buy backs into the abyss.

Of course, both Limelight and Akamai continue to emphasize new revenue streams beyond cdn in their "value added" categories. What that all means beyond their core cdn services which were their primary businesses previously, remains a mystery yet to be unveiled. Maybe if they say it enough times while clicking their heels together, their stock price will go up.

Cdn is going the way of The Do Do Bird including network owners like (3) according to Fool Fodder for consumption with Google spearheading it all, if one believes Google exists without a network infrastructure which it didn't or refuses to pay for.

http://www.fool.com/investing/general/2011/09/01/does-google-want-akamai-dead.aspx

[John]

Between this and the other recent CDN entries it sounds like there isn't a viable streaming CDN business.

I recently switched from Akamai to Limelight because it was well under half the price for the video streaming I was doing. I would have assumed from general professionalism that Limelight was the clear second to only Akamai. Every other CDN I looked at seemed to barely able to provide me with enough info to actually wire our custom player up to them. Basically I came away from most conversations feeling like they bought a bunch of FMS licenses and dropped them on some servers and that was that.

Yet every blog article here about CDNs makes it sound like they are all barely hanging on and even Akamai is just supporting the streaming side with the object delivery side. I would imagine many readers of StreamingMedia.com are like me and have more streams than we are comfortable handling on our own FMS or Wowza server but aren't anywhere near a Netflix or Hulu. What are we supposed to do if we can't depend on there being a mid-sized CDN market?

[cd]

This was an expected move actually. However, I didn't imagine it will be this soon and fast. I wish the company all the best.