Bullshit reaches limit - AFF and Iporn scuttlebutt

[RawAlex]

Fausty, normally the idea is that the companies "merge" and stock is issued to the winners. It seems this time instead that AFF was sold on notes (which appear by the report to not have been respected / late / in default). If Andrew and Lars are lucky, they didn't finance the notes themselves and rather actually got paid out. I somehow manage to doubt it, but you never know.

So what happens is that instead of the boys having a stake in a relatively debt free (but money losing) company, they hold notes payable only if a public offering for a debt laden and unprofitable company works out. It's pure hail mary, more so because little or none of the public offering money would get turned into operating capital, which means that at least in the short term, their cash position would not improve. Further, because the notes have not been paid in a timely manner, it is unlikely that any debt service has been going on, so retiring that debt (aka, paying off L&A) wouldn't do anything to fix the go forward business.

What I find most interesting is that those in the investment world that chose to comment on the potential IPO all came to the same conclusion really, really quickly. I think the online adult community is still in shock from finding out that the huge cash cow that was AFF in fact is a debt laden, money losing pig in a poke. It is also the best case anyone can every put forward for why you don't pay $100 or more for a member, or at least that you can't unless you are jamming them the deecash way.

[Fausty]

Originally Posted by RawAlex

Fausty, normally the idea is that the companies "merge" and stock is issued to the winners. It seems this time instead that AFF was sold on notes (which appear by the report to not have been respected / late / in default). If Andrew and Lars are lucky, they didn't finance the notes themselves and rather actually got paid out. I somehow manage to doubt it, but you never know.

Technically, there's not a pre-defined "winner" in a merger and, though it's somewhat different from everyday assumptions, the distinction between a "merger" and an "acquisition" is not as bright-line as it seems. I don't know if this deal was structured as a 368(b) all-stock merger, or an asset acquisition, or what (too lazy to dig deeper, sorry) - there's as many potential deal structures as there are creative minds to design them. Still, the issuing company is almost by definition the "acquirer" and the company (shareholders, actually) receiving that payment (whether it is cash, stock, or debt) is the "acquired entity." Mergers are sort of the middle ground and can go either way - as they say.

Indeed, the "acquiring company" in technical M&A topics is primarily chosen on the basis of tax and jurisdictional variables - it is not uncommon for the "acquiring" company's shareholders to end up with a minority position in the resulting combination. Twenty years ago, there was a sense that deals like that were inherently "shady" - say "reverse merger" to an old-school finance player and the wince. However, the structure itself is now commonplace and this AFF deal is, in a sense, a form of that.

You do bring up a good point - I'd need to look closer at the EDGAR docs to see if they debt carried from the acquisition is held by the sellers or a third party. If it's the latter, then the sellers did in fact "cash out" on close (apart from any equity they may have received - either stock or warrants/options).

I pretty much agree with you that these "go public and pay off debt" deals just seem uninspiring. As you say, there's really no cash left, post-IPO, to invest in the business or help it to grow (though paying down debt can free up extra operational cashflow in the process - depending on whether the notes accrued to a balloon or required regular paydowns). Similar concerns apply to deals where most of the IPO stock is being sold by outside investors - not the company itself - so the proceeds don't end up in the corporate treasury.

Basically, if the market is hot all sort of deals like that go right through. In today's dead market, I can't imagine floating an offering like this - I was involved in a de-leveraging, post-LBO IPO in 2000 that got scuttled at the last minute when the market got jumpy. So much is at the winds of fate, in deals like this.

In any case, raising money via the debt markets to fund acquisitions isn't, ceteris paribus, improper - in fact, given the US tax treatment of corporate debt interest payments, companies "lever up" as part of sound tax management all the time. Much of the volume of the commercial paper markets in recent years has been composed of debt placements to fund purchase activity - the hedge funds placed many billions of such debt in the markets for just such deals, with nobody calling foul. Many buyout funds specialized in doing deals like that, and nothing else.

Basically, I'm trying to say that, if this deal had been done in 2006, it would have looked an awful lot like everything else - with the "adult" side the only difference. You look at some of the private equity IPOs that went out in 05/06 and it's just shocking - these deals were entirely to pour cash into the hedge fund profit column and many of the companies that did them are now defunct as a result. In the nonexistent current IPO market, ANY weakness or symptom of deal weakness is going to bring out the knives - and once that happens it is sort of a self-fulfilling failure.

Q.E.D.

Fausty (MBA, University of Chicago - minor in finance )

ps: some acquisition agreements will specify a "best efforts" requirement to float an IPO after a certain period of time - this AFF deal could, in theory, just be the company going through the motions of that so it doesn't end up in some sort of trouble under a separate agreement - just pointing out something I've seen before, where "hopeless" deals got proposed for that reason alone, and not because anyone really thought the'd price and trade.

[gonzo]

Thanks to Will76 for reminding me of the AFF / Ibill connection - again...who much does Ibill owe you?

2002: Intercept buys ibill for 120 million: " But when Atlanta-based InterCept acquired iBill for $120 million in 2002, it immediately encountered problems. New rules from Visa made it more complicated and costly to process adult website transactions, and "accounts dropped like flies," says Dugas. Meanwhile MasterCard levied $5.85 million in fines against iBill for an unusually high volume of "charge backs" -- consumer-disputed charges -- though InterCept managed to recoup most of the fine from iBill's previous owners.
Porn Billing Leak Exposes Buyers

3/24/2004 Penthouse buys Ibill from intercept for 23.5 million plus assumption of 20 million ibill is obligated to.

Artcile 3/31/2004 says " iBill has no corporate or bank debt outstanding. iBill and Penthouse International's real estate assets are unaffected by the current reorganization of General Media and subsidiaries. "
" On a pro forma basis, had iBill been consolidated with Penthouse for the full fiscal year ended December 31, 2003, Penthouse consolidated revenue would have increased by approximately 197%. "
iBill Attends First Industry Event Since Acquisition by Penthouse. | Company Activities & Management > Company Structures & Ownership from AllBusiness.com

Penthouse buys ibill which has no outstanding debt and to give Penthouse (which is losing tons of money) value.

" iBill processes online website orders. First Data is a billion dollar company that gave notice earlier last year that we would not extend iBill’s merchant agreement. It seems that iBill sought court intervention to require us to continue processing after the expiration of iBill's agreement, in lake September 2004. The court denied iBill's request for a preliminary injunction against First Data. First Data has not processed payments for iBill since that date." New York Daily Times

October 2004: " Care Concepts financed the recent acquisition of General Media by issuing new preferred stock and convertible notes in the amount of roughly $16.4 million, the release stated. " " Care Concepts’ announcement came following a stormy month for the company, which was forced to delay its acquisition of payment processor iBill and had its stock delisted from the American Stock Exchange for a variety of public-interest concerns. " " Under the new purchase agreement, PET Capital Partners Inc., the company that owned General Media’s debt, will retain voting common stock and a majority of the total common stock equity of the company. PET’s Marc H. Bell and Daniel C. Staton will assume the day-to-day operations of the magazine. "

Care Concepts Completes Penthouse Publisher Purchase - XBIZ.com


" With its acquisition of iBill, Penthouse believes that numerous economic synergies will exist between iBill and its media companies, including the ability to offer iBill clients access to the PENTHOUSE brands and, at the same time, generate new sources of recurring revenue for Penthouse."
Penthouse Acquires Internet Billing Company LLC ``iBill'' | Business Wire | Find Articles at BNET

“We are very excited to welcome Various and its employees as a part of the Penthouse family,” said Penthouse Media Group CEO Marc H. Bell. “Various is an attractive addition to our already strong print platform, and one that puts Penthouse in a very robust position in the ever-growing online social networking arena. We like where the business combination puts us and that this transaction will enhance PMGI’s current and future licensing, print and interactive ventures.”
Penthouse Media Group Purchases Adult Friend Finder for $500 Million - XBIZ.com

" Penthouse is continuing its acquisition program as it continues to consolidate the industry into one global brand."
AdultFriendFinder.com finally sold out - $500M Web 2.0 Money: The Money & Business Behind the Web 2.0 Innovations


Segway /Ibill connection. - GFY Webmaster Board (in particular post #40 and a few others) explains where a lot of ex-ibill employees ended up.

[Hell Puppy]

I like the bit about the car as an asset.

Turns out it's not Andrew or Lars company car, it's a company asset originally tagged to be given away.

That amuses me on many levels. How many big giveaways like that have ever actually ended up with the prize in the hands of an affiliate or customer?

I can only think of one, and that was Greenguy getting the CE viper back in the day.

The usual MO is make the contest a year long, quit promoting after a couple of months and let people forget about it.

[JFK]

Originally Posted by Hell Puppy

I like the bit about the car as an asset.

Turns out it's not Andrew or Lars company car, it's a company asset originally tagged to be given away.

That amuses me on many levels. How many big giveaways like that have ever actually ended up with the prize in the hands of an affiliate or customer?

I can only think of one, and that was Greenguy getting the CE viper back in the day.

The usual MO is make the contest a year long, quit promoting after a couple of months and let people forget about it.

from what I recall, at the time the winner chose the cash prize, versus the car.

[Hell Puppy]

Originally Posted by JFK

from what I recall, at the time the winner chose the cash prize, versus the car.

That sounds right, I may be wrong but I think Greenguy couldn't even drive a stick at the time or something like that.

Plus unless you've got extra garage space, a Viper is not exactly a daily driver or something you just park beside the house with a car cover. It's not a happy car in traffic. In fact, it's not a happy car til it hits at least 80 mph.

But at any rate, I know that prize was actually rewarded. I think a lot of people grumbled because Greenguy won it, and he was tight with CE at the time. But when you run a raffle type contest where every signup is a ticket, statistically you would expect huge affiliates to have the best chance at winning.

Now I seem to remember CE following that up with a million dollar give away. Hell, I probably still have a banner for that here somewhere. Dont recall that ever being awarded. And that was circa 98-99.

[JFK]

Originally Posted by Hell Puppy

That sounds right, I may be wrong but I think Greenguy couldn't even drive a stick at the time or something like that.

Plus unless you've got extra garage space, a Viper is not exactly a daily driver or something you just park beside the house with a car cover. It's not a happy car in traffic. In fact, it's not a happy car til it hits at least 80 mph.

But at any rate, I know that prize was actually rewarded. I think a lot of people grumbled because Greenguy won it, and he was tight with CE at the time. But when you run a raffle type contest where every signup is a ticket, statistically you would expect huge affiliates to have the best chance at winning.

Now I seem to remember CE following that up with a million dollar give away. Hell, I probably still have a banner for that here somewhere. Dont recall that ever being awarded. And that was circa 98-99.

sorry man, 2 different cars