Did Yahoo!7 pay too much for group buying site Spreets?

Yahoo!7’s surprise $40 million acquisition of group buying site Spreets has set tongues wagging in internet and media sectors, with most observers asking the same question: Has Yahoo!7 overpaid for what is basically a start-up?

Clearly, the group buying phenomenon is growing rapidly around the world and Australia is no exception. There are more than a dozen general sites, offering deals on everything from restaurants and beauty treatments to cave diving adventures and gym memberships, plus niche sites targeting specific products (such as wine) and geographic areas (such as regional centres).

Late last year, the group buying sector came to prominence when Google was rumoured to have offered $6 billion to buy US-based group buying pioneer Groupon. Although that deal was rejected, Groupon went on to raise almost $1 billion in capital in early January.

Spreets is clearly one of the leaders in the Australian market. Yesterday it revealed that it has 500,000 people on its email database and has sold about 274,000 coupons in nine months of operations.

But many observers have suggested $40 million for a company that has been actively selling for less than a year is a very big price.

However, some back-of-the-envelope analysis by SmartCompany – with the help of a few industry insiders – suggests that Yahoo!7 has got a reasonable deal.

In fact, one industry insider even says the media company may have picked up a bargain.

Spreets gave some insight into its financials yesterday what it said that revenue was running at $4 million a month. Although this is presumably growing, if we annualise that, we are looking at revenue of $48 million a year.

However, that is gross revenue, which must be shared between the business offering the deal and the group buying websites. The split between the parties is different at each group buying website – it can range from the group buying site getting 10% of all revenue generated to 50% – but sources suggest Spreets aims for a 30% cut of revenue generated on most deals.

Assuming this conservative figure, Spreet’s share of that $48 million gross revenue is about $14.4 million.

From there, we need to take out costs, which include sales staff, administration, website and data costs and database acquisition.

However, margins are said to be quite healthy – as much as 70%, depending on the size of the sales team employed. Even if we use a more conservative figure of 50%, Spreets profit could be as high as $7 million a year.

But there is a caveat – industry insiders say the relatively large amount spent on database acquisition during the start-up phase means it is unlikely that any of the group buying sites are profitable right at the moment.

If Spreets can generate profits of around $7 million a year, and if it can continue to grow, then Yahoo!7’s deal makes good business sense. Indeed, one competitor told SmartCompany he thought the business would be worth $60-70 million based on its leadership position.

But can Spreets continue its stunning early success? While the industry is growing rapidly at present, and the group buying sites are still to win large businesses over, competition is intense and barriers to entry are very low.

Yahoo!7 will need to throw its support behind Spreets with advertising campaigns to drive customer acquisition, while Spreets’ sales teams will be looking to boost both the number of deals it is doing and its geographic coverage.

If Spreets can keep its growth going, then Yahoo!7 will have bought an excellent platform for growth in an emerging sector.