The balance of power in advertising media is shifting further. Call it the Google economy.
"In 1991, the Los Angeles Times gave employees coffee mugs celebrating the milestone of hitting 1 million in daily circulation and becoming the nation's largest metro daily," recalls former editor John Markham. "Today, the circulation is 5 percent lower and dropping. And as circulation has plunged, so have mass-market classified and help-wanted advertising revenue."
"Before there were search engines with targeted advertising, there were full-page newspaper spreads advertising the latest white sale at Sears. When consumers wish to buy a house or motorcycle, rent an apartment or find a job today, they are much more likely to visit Homestore, eBay, Craigslist or Monster Worldwide than slip 50 cents into a newspaper rack. Online search pinches the pricing of everything newspapers once viewed as their lifeblood," he explains.
That could explain why Elevation Partners, a private equity firm is investing $100 million in Homestore. If you're thinking, "This is like deja vu all over again," you and Yogi Berra aren't alone.
Homestore was one of the darlings of the dot-com era and had previously attracted millions in venture capital, but as with many companies, its founders lost their moral compass, especially when tempted by lucrative, but risky "round-trip" deals with advertising partner AOL. The company was caught lying about its revenues, was sued by investors, and former management is facing fraud charges, with Homestore footing their multi-million dollar legal bills.
Years later, after a massive clean-up by Mike Long and other executives who replaced the miscreants, Homestore is still struggling with proving its value in a medium where consumers prefer shopping for homes but don't want to pay the service providers with the inventory - Realtors.
Buy low. Sell high. That's the credo of real estate, and Elevation Partners , a group composed of six high-powered, high-profile media-savvy partners, believes it recognizes a bargain in beleaguered Homestore. Nearly three-fourths of homebuyers prefer to shop for homes online and Homestore, through its partnership with the National Association of Realtors, has 90 percent of all listings online, say Fred Anderson and Roger McNamee of Elevation Partners.
Their names alone are enough to raise Homestore's stock price. The six partners are Fred Anderson, former EVP and CFO of Apple Computer, Bret Pearlman, former senior managing director of The Blackstone Group, Marc Bodnick, a founding principal of Silver Lake Partners, John Riccitiello, the former president and COO of Electronic Arts, Roger McNamee, a co-founder of Silver Lake Partners and Integral Capital Partners and Bono, lead singer and co-founder of the rock band U2.
The investment, anticipated to close by year-end, will give Elevation Partners 14 percent ownership in Homestore.
"We are partnering with management and employees of Homestore," says Anderson, "We think it is at an inflection point and our capital will give the company an opportunity to do some great things. We think they are on the threshold of accelerated growth."
Adds McNamee, "The key thing is we are signing up in support of a plan already in place. From our perspective you have a situation where 74 percent of consumers are going online to get information that drives that purchase decision and most are taking place on Homestore, and our view is there are opportunities to enhance products and accelerate conversion of dollars from print to online."
Forget that pesky, restrictive NAR agreement. According to the partners, the NAR is on board with Homestore's goals to accelerate growth and won't stand in the way of progress.
"Our view is the NAR is enormous strategic asset," says Anderson, "and it's our view that Realtors have come to appreciate what Homestore brings to the party and the advantages to having a well-financed, well-positioned company. There has been extraordinary proliferation of companies serving consumers and Realtors, and many are in conflict with Realtors, and we have the opportunity to work with the NAR and homebuyers in a positive way which has been demonstrated."
Like any stigmatized property, Homestore was a Long shot, pardon the pun. Under Mike Long, the company overcame lawsuits, restrictive agreements, expensive traffic partnerships and much more. "Obviously, we satisfied ourselves that the greater issues were resolving lingering effects of prior management," says McNamee, "and we think Mike Long did one of the greatest turnarounds ever witnessed. We think Homestore has everything it needs to be successful and we will help them achieve their potential. The NAR is aligned with Homestore's interest and they have over 6.5 million unique users and consumers overwhelmingly believe that the merchandising of homes is better online, so we think there is a real opportunity where consumer traffic is. The NAR has demonstrated over the past year an understanding and recognizes the value of Homestore as a business partner, and they have most complete listings with 2.5 million well over 90 percent of listings."
The preferred stock is convertible into shares of Homestore's common stock at $4.20 per share, or approximately 18 percent over the closing price per share of the Company's common stock on Nov. 4, 2005. If converted, the investment would represent approximately 14 percent of the Company's shares outstanding. The preferred stock will pay an annual dividend of 3.5 percent of the liquidation preference, payable in additional preferred stock, for the first five years following issuance, after which it will be paid only in cash. After the third anniversary following the issuance, Homestore may cause all of the preferred stock to be converted to common stock if the average closing price per share of the common stock during any 30 consecutive trading days is at least $7.77. The preferred stock is non-callable until after the fifth anniversary of the issuance and will be mandatorily redeemed by the Company on the seventh anniversary. Homestore intends to use the net proceeds for general corporate purposes, including strategic growth initiatives or acquisitions.
The investment is expected to close before the end of the year, subject to clearance under the Hart-Scott-Rodino Act. The convertible preferred stock will be sold in a private placement and will not be registered under the Securities Act of 1933.
Elevation Partners is a newly formed private equity firm that makes large-scale investments in market-leading media, entertainment, and consumer-related businesses. It focuses on investing in intellectual property and content oriented businesses, as well as traditional media and entertainment companies, where it can partner with management to enhance growth and profitability through a combination of strategic capital and operational insight. Elevation Partners had its final close on a $1.9 billion fund this past August.