MySpace Deal Creates Stir

When News Corp. bought Intermix, the parent of MySpace, for half-a-billion dollars last week, bloggers went nuts. After all, News Corp., owned by the conservative Rupert Murdoch, doesn’t exactly share the same political bent as the youth-oriented MySpace. One VC blogger delved into the acquisition’s return for investors. The following is edited for length.

MySpace Equals Mo’ Money

Bill Burnham, Managing Director

Celsius Capital

billburnham.blogs.com/burnhamsbeat/

Unlike Friendster and its clones, MySpace took a unique approach to the social networking space and concentrated heavily on building a community first (centered around music and bands), and a social network second. The strategy worked and MySpace became the clear No. 1 player in social networking. Well, MySpace and its VCs were richly rewarded for their success when News Corp. plunked down a substantial wad of cash for Intermix.

This sale is significant because it represents the first real payday in the social networking, a space that to date has seen lots of VC hype but few returns. Just how big a payday was it? Thanks to the fact that Intermix was a public company it’s possible to take very educated guesses at how the VCs – VantagePoint and Redpoint – made out.

In terms of Redpoint, according to the latest 10-K on file, they made two investments, one in Intermix last year and one in MySpace in February. The Intermix investment was $4 million and it got Redpoint 1 million common shares and another 150,000 warrants at $4/share. At $12/share that would net them $13.2 million on a $4 million investment or a 3.3X return.

They invested a separate $11.5 million (or 25% stake) in MySpace, but Intermix bought back all the shares of MySpace as part of the News Corp. acquisition. Their stake in MySpace (which arguably represents almost all the value in Intermix) will not be worth 25% of $580 million, but rather 25% of $125 million or $31.25 million. That said, this represents a 2.7X return on their investment in MySpace. Taking its two investments together, Redpoint will take home $44 million on $15.5 million invested or a 2.9X return.

For VantagePoint, the sale of Intermix was no doubt a welcome event as, according to the latest proxy statement, they own 11.56 million common shares (on a converted basis) worth $139 million at $12/share. VantagePoint acquired these shares in two transactions. The first was a purchase of $8 million in Series C stock in late 2003.

The second investment in July 2003 was less straightforward. In that investment, VantagePoint purchased an option to buy all of the shares owned by Sony’s now defunct VC group, 550 Digital Media Ventures. In terms of an overall return for VantagePoint, according to a Form 4 filed with the SEC, VantagePoint’s option allowed them to acquire Sony’s shares at $1.10/share, so this means that the Sony shares cost them roughly $5.3 million. Add to that the $8 million in Series C shares and the $2 million in debt that was later converted to shares, and you have a total investment of $15 million. And at $12/share, it’s a total return of $139 million or 9.1X invested capital. Assuming the deal closes in three months, the IRR would be around 223 percent.

Update

I talked with a reporter who had a conversation with Geoff Yang, the Redpoint GP who did the MySpace deal. Apparently, Geoff said that Redpoint would ultimately net about 50% more than the $44.25 million that I estimated, thanks to special provisions they negotiated for their MySpace preferred stock. Just guessing, but it sounds to me like they were able to get what VCs call a “double participating preferred,” which means you get 2X your money back before everyone else and then still get your cut of what’s left.

So it looks like Redpoint got an even better deal than I first estimated, which makes their performance on MySpace all the more impressive.

Congrats, Geoff!