This month BlueFreeway Limited completes its IPO on the Australian Stock Exchange (ASX) to become a "digital and interactive marketing and communications company". At an IPO price of AUD $1.00 per share it will trade at about 7.9X EBITDA on 2006 Pro Forma EBITDA of AUD $5.7 million coming from 2006 Pro Forma Revenues of AUD $20.7 million.

Simultaneously with the IPO it will acquire the MMH business of Destra Corporation (ASX-DES) for consideration of AUD $19 million (consisting of $18 million in cash and $1 million in stock). Destra is spinning off its 8,000 MMH customers to focus on becoming a "digital media business" largely focused on music. Proceeds from the sale will be used to pay down debt incurred to buy music businesses from Home Leisure (HLD).

The MMH business did about AUD $7.3 million in revenue and AUS $3.0 million in EBITDA for FYE June 30, 2006. It is forecasted to do about AUD $8.6 million in revenue and AUD $3.5 million in EBITDA for FYE June 30, 2007. That equates to acquisitions multiples of 2.6x Price-to-Revenue and 6.3x Price-to-EBITDA looking back at FY 2006 or 2.2x Price-to-Revenue and 5.4x Price-to-EBITDA for the anticipated FY 2007 performance.

A few questions arise for us in looking at this transaction.

The year-over-year growth for the MMH business being sold exceeds 15%. Meanwhile the ARPU (average revenue per unit) is approximately $76 per month ($7.3 million divided by 8,000 customers divided by 12 months). We know very few MMH's with that kind of ARPU that are not in flux, either seeing ARPU decline or increase depending on the new direction of the service offering. Are new customers coming in at a higher or lower ARPU? And how does that impact future value?

This is yet another MMH deal done in the 5.0 to 6.0x EBITDA range even though Destra assumed more risk by selling contingent on BlueFreeway getting its IPO completed. Are these valuations we should expect to continue to see in 2007? Or are things about to change?

On September 11, 2006 MelbourneIT (ASX-MLB) closed on its acquisition of web hoster WebCentral Group (ASX-WCG). The merger was announced on May 22, 2006. From announcement to closing shares of MLB rose from about $AUD 1.75 to about $AUD 2.10 at the time of the September closing.

Today MLB trades even high at about $AUD 2.90. With shares outstanding of about 76 million, MLB hits a market capitalization of $AUD 220 million. The market liked the deal.

Although year end 2006 numbers are not yet available (and some adjustments need to be made for the September acquisition) we estimate the business now trades at about 10x EBITDA and about 1.5x Price-to-Revenue.

But a look at the filings shows MLB acquired WebCentral for about 5x EBITDA. At the time of the acquisition MLB was trading at about 12x its EBITDA.

MLB was primarily a domain registrar doing about $72.2 million in revenue and $6.9 million in EBITDA. WCG was primarily a web hoster doing about $59.3 million in revenue and $12.7 million in EBITDA.

WCG shareholders were offered two choices. They overwhelming (90% of electors) selected the Option under which the could receive the most MLB shares in lieu of cash. That option granted them 1/2 cash and 1/2 MLB stock for each share of WCG. Each share was valued at $1.53. So they had to take half thier consideration for a 5x multiple but now have the other half trading at 10x for an average of 7.5x cash flow.

The new MelbourneIT is the Australian hosting powerhouse although Hostworks (ASX-HWG) and Bluefreeway (the reincarnation of Destra hosting) might put up a fight in managed and mass market hosting respectively.

The 5x EBITDA value for the hoster and the 12x EBITDA value for the registrar was "approved" by the stock market's trading, the investment bankers opinion, and ultimately by the shareholders. And the market continues to like the story. As I said the stock is now up to $2.90 per share. Bankers looked at previous transactions including; Register.com going private (9.4x EBITDA), Pipex acquiring Host Europe (8.9x EBITDA) as well as the trading of public comparables and signed off (for a fee).

But I wonder how many more of these combination we will see get done at these respective pro-rata valuations? Some argue a hoster's cash flow is more steady than a registrars (and has more growth opportunity). As both types of companies begin offering each others products, either through acquisition or internal development, we argue for valuation of both kinds of businesses to head toward a mean.

On November 10, 2006 Hostopia went public at $6.00 per share (Toronto venture stock exchange. Ticker symbol H). We now have a new pure- play publicly traded Market Hoster (MMH) for the market to put a value on.

Hostopia issued 4.2 million shares or roughly 43% of the 11.2 million current shares (and in the money options) outstanding post IPO.

Five days later Hostopia issued its earnings release for the quarter ending September 30, 2006. In the release they reported quarterly revenue of $US5.585 million and EBITDA of $US1.286 million (an EBITDA margin of 23%).

Given the high growth of the business (about 30% year over year) we annualize the most recent quarter to get a truer picture of the businesses operating metrics and valuation ratios.

After annualizing the revenue and EBITDA of the business and multiplying those numbers into the Enterprise Value of the business we calculate that Hostopia is presently trading at 1.7x Price-to-Revenue and 7.5x Price-to-EBITDA.

As we write Hostopia trades at $6.20 per share Canadia ($5.47US). Since opening the stock price has traded close to its IPO pricing and trading volume has been thin. It is too early to know how trading will begin to settle.

Is this a good price for MMH's? Do other MMH's deserve a high or lower valuation? Recent private deals have been at lower multiples.

More importantly how effectively will the business spend $19 million in new cash?

In the next few posts we go overseas for M&A activity in the Mass Market Hosting sector. Our first stop is Norway.

In August 2006 Mamut ASA acquired the remaining shares of mass market hoster Active24 ASA is did not already own.

Mamut acquired Active24 for NOK 6.50 per share. (That's Norwegian Kroner for those of you who want to know. It trades at about 1 NOK for $0.15 USD)

Mamut is a Norweigen based software company offering a variety of business applications from accounting to CRM. It's about the same size as Active24.

For the quarter ending March 31, 2006 (1Q06) Active24 had revenue of 54.2 MNOK and EBITDA of 5.3 MNOK (That M in front of the NOK means millions.) So if we annualize the 1Q06 we get 216.8 MNOK in Revenue and an EBITDA of 21.2 MNOK.

Active24 had about 39.2 million shares and in-the-money options outstanding. Multiply those shares by 6.50 and we get a market cap of 254.7 MNOK. Mamut also acquired Active24's assets and liabilities which included current assets of 104.9 MNOK and liabilities of 161.2 MNOK. After adding the assets and subtracting the liabilities from Active24's market cap we get to an enterprise value of 198.4 MNOK.

If we divide that into the annualized revenue and EBITDA we see that Mamut acquired the remainder of Active24 at a Price-to-Revenue multiple of 0.90x and a Price-to-EBITDA multiple of 9.4x.

That's a little high for an EBITDA multiple and little low for a Price-to-Revenue multiple. A closer looks shows us that Active24's EBITDA margin was only about 10%, which is a little low for a MMH. In fact the same period the year prior Active24 had similar revenue but 7.3 MNOK in EBITDA. At that margin Mamut would have paid 6.6x EBITDA. That EBITDA multiple seems more appropriate for a "no-growth" situation. I am sure Mamut hopes to get margins back up post acquisition.

Mamut trades on the Oslo Stock Exchange and I do not own any of it.

Akamai Technologies (Nasdaq-AKAM) is priced at about $51.00 per share giving it an enterprise value of $7.72 billion.

If one annualizes the quarter ending June 30, 2006, Akamai has revenue of $402 million, EBITDA of $95 million and Net Income of $45 million. Therefore Akamai is trading at 19x revenue, 81x EBITDA and a P/E ratio of 171x.

So at current prices, if Akamai's operations performed the same in perpetuity, it would take Akamai 81 years to give an investor all their money back. That is a return on investment of a little over 1/10th of 1% per year. Obviously investors think Akamai will perform better. It is already expecting 50% growth next year.

Is this a sustainable long term valuation? Akamai would have to grow 50% per year for about 5 years straight AND preserve existing cash flow margins in order to begin to start to enter a zone that wold justify an $7.72 billion valuation. (Assume a $500 million cash flow in 5 years trading at 15x cash flow. Still an amazing multiple for an Internet-based network services company but not a software company.)

Don't misunderstand, I am not arguing Akamai is a bad business. Akamai is in fact a great business. Today it is the provider of choice for delivering digital media to the network edge. Everyone needs faster streaming media. Akamai says it does it 2.5x faster other providers.

Akamai can do this because it has 20,000 servers in 2,800 locations in 660 cities on 1,000 networks in 70 countries. It has global scale. Equally importantly it owns and licenses some special sauce that "predicts" user requests and therefore reduces data requests that flow over the Internet.

This scale and proprietary intellectual property allows Akamai to enjoy gross margins of about 78%. It is only forecasting a capital expenditure requirement of $50-60 million next year, a little more than this year, and not much for a network with $600 million in revenue.

Those margins are the margins of a software company. Akamai CEO Paul Sagan likes to compare Akamai to big software companies. He recently told analysts, "I think the number today (i.e. software companies) is 15 that have $1 billion in revenue. That's the club we are going for."

I simply believe these margins and growth are not sustainable. Another way to say that is I believe in the long-run Akamai is more like a Service than a Software on the SAAS continuum? This means I believe as competitors enter the market (and what IP network does not want a faster network delivering digital media and applications?) Akamai's margins erode and growth slows. I don't believe the intellectual property or scale are sufficient defenses. Sixty million in capex is a rounding error at some networks and all network are getting faster at content distribution every day.

I could be wrong but I own no Akamai shares. For full disclosure neither do I have a short position in the stock.