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Coupons drive M&A activity downunder

Party like it’s 1999

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It’s feeling a little bit like 1999 in the Sydney digital startup space. Last week online giant and TV broadcaster mash-up Yahoo!7 made the next in a series of digital acquisitions, this time taking out one of the top players in the white hot coupon space, Spreets, for a handy $40 million.

For Spreets, which launched a mere 12 months ago, with a dash of incubator funding behind it, the acquisition has already entered local startup folklore. The site was co-founded by digital entrepreneur Dean McEvoy – who returned from the US fresh from an extended capital-raising mission for his first online startup, Booking Angel, and inspired by the group-buying craze sweeping the States. The platform was developed and launched in around six weeks and by July had attracted $2 million in funding from European investors Klaus Hommels and Oliver Jung.

McEvoy’s partners are also online pioneers – Phil Morle is ex-CTO of music-sharing site Kazaa and Justus Hammer is an online marketing expert and was behind the launch of comparison shopping site GetPrice.

One of Spreets’s backers, Pollenizer – a startup accelerator specialist that had around a 10 per cent stake in the company – says that the deal signals “a big year for the Australian web business space".

Whether or not 2011 is the year of a dotcom styled M&A renaissance, cashed-up media players are taking a serious look at Aussie digital media offerings.

In December, US-based WhaleShark Media, an online coupon aggregator, raised $90 million to buy Australia’s RetailMeNot website, which is itself an aggregator of the best online retail deals of the day.

The four-year-old company claimed $30 million in revenue for 2010, and 14 million monthly visitors.

Meanwhile, in November, global group-buying player Livingsocial.com pumped $5 million into local startup Jumponit.

Yahoo!7 had been actively surveying the market for online businesses that fit into its strategy to attack vertical markets, the first of which was the acquisition of online travel company Totaltravel.com for $20 million in late 2009.

Yahoo!7 chief Rohan Lund has made no secret of his intent to snap up relevant digital companies that fit the growth strategy. But was $40 million over the odds for a site that claims 500,000 members and the sale of 274,000 vouchers in the last year?

Certainly having serial digital investors Klaus Hommels and Oliver Jung – who have both dabbled in Facebook and Skype – behind the Spreets machine may have helped bump up the price in negotiations.

And given that rival coupon purveyor Cudo (owned by rival online/broadcaster behemoth NineMSN) has been aggressively nipping at Spreets' stride since launching in August, Yahoo!7 was under some pressure to enter the fray. The Seven Network was the last free-to-air broadcaster on the block without a coupon play following Network Ten’s investment in OurDeal in November.

Given that most of the dozen or so online coupon players in the Australian market launched within the last 18 months had done so with minimal start-up costs and skeleton staff, the Yahoo!7 valuation of Spreets seems mostly fuelled by a "we left it too late" penalty fee, particularly as US coupon giant Groupon is about to barge into the Australian market under the brand Stardeals.com.au.

Cudo CEO Billy Tucker says that the window for entry to market for a coupon startup was probably September, hence Yahoo!7’s buy rather than build decision. Tucker also warns that the fluid Spreets model may not operate the same way within the Yahoo!7 mothership.

While Cudo is backed by the Nine Network and Microsoft, Tucker says the key to making that relationship work was keeping Cudo structurally separate from day one.

He warns that there are “onerous obligations in TV land” that may challenge some of the “agile” methods Spreets have used in the treatment of daily deals. And he has no doubt that the new owners are going to tamper with the model as they drive value to their asset by dispersing across their wide online and TV network.

The key will be retaining a high level of revenue share. Cudo attempts to keep its deals at 50 per cent with the client while rivals can drop down to 10 per cent, often reduced in a bid to win clients over from rival group buying outfits, but clearly unsustainable.

The battle for coupon market share will be fought aggressively over the next 12 months, when consolidation or collapse will play out. Tucker reckons a year from now there will only be room for one large media-backed group and one or two independent players – with the others either becoming hyper local or specialised in one market area or fading out. ®

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