When Axel Springer bought control of Business Insider last year, it paid the largest ever sum for a digital publisher, turning the deal into a bellwether transaction that’s likely to influence future content acquisitions.
Fair warning, this could still end up being a one-of-a-kind deal as startups are now having to raise money at lower or flat valuations and the m&a environment has gotten choppy. Mashable, for example, has been looking for money or a buyer since the fall of last year, according to sources, and others may also have problems.
The caveat to this caveat, though, is there are a limited number of significant digital publishers out there, potentially placing higher value on companies like Business Insider. The fact that Axel, a legacy publisher, was involved illustrates how important the digital arena has become to companies that want to stave off the inevitable decimation of print.
Business Insider, privately held and run by Henry Blodget, hadn’t disclosed its finances, but since Axel is publicly traded, it provided some useful information in its annual report this week (first picked up by AdAge).
Unsurprisingly, BI is losing a fair amount of money, a fact that has been known for a while. Observers will likely point to this as evidence Axel overpaid, but that’s an amateur analysis. I’m not saying Axel couldn’t have overpaid; I’m saying it’s clear Axel wasn’t too concerned about BI’s losses when it valued the business.
The German publisher more importantly focused on BI’s rapid growth, potentially setting that metric as the standard for future deals.
Here’s how it breaks down:
Business Insider lost $11.9 million on $42.4 million in sales last year. Despite the loss, Axel says BI’s revenue rose 41 percent from the previous year, which, again, is the real value Axel placed on the business. (I’m using exchange rates from Oct. of last year, when the deal closed.)
To see what its revenue could look like for this year, Business Insider’s own story reported Axel’s deal as valuing the company at six times its projected sales. We can assume it’s not looking much more than a few years into the future, but for the sake of clarity let’s apply that factor to just this year.
Axel paid about $352.4 million for 87.8 percent of shares, valuing the company at $401 million. (Technically speaking, Axel bought control, not ownership, of Business Insider at 96.5 percent, with Amazon CEO Jeff Bezos personally owning the rest. It’s important to note this in order to accurately analyze the deal value.)
At that value, Business Insider is expected to generate $67 million this year, a hefty 58 percent gain. That means Axel expects BI to grow even faster this year than it did last year, which seems possible given how quickly the publisher has expanded into other countries (largely from licensing deals) as well as adding new properties like TechInsider, a site focused on tech and science for a general readership, and Insider, which aims to take advantage of other distribution platforms like Facebook and Twitter.
Going from 41 percent year-over-year growth to 58 percent would seem to justify the high price Axel paid. But it’s not just a function of absolute price. The value of a deal is really based on the purchase price (or overall value) relative to the company’s sales. In this case, Axel valued BI at 9.5 times revenue. Profit would be a better measure generally, but since the site isn’t profitable, and since Axel is valuing its growth, revenue is the most relevant metric.
Business Insider has said it could turn on profitability whenever it wants and has strategically focused on growing the business — the underlying promise of any startup.
Still, rapid growth is more challenging for digital publishers, which, unlike a software-driven site, still requires a relatively large staff to produce enough content to attract readers.
If other publishers want to see similar high prices, they’ll have to prove the same fast growth. Business Insider will otherwise end up standing as the last large content deal in a long while.
This article originally appeared on Recode.net.