M&A in the daily deal space may have jumped in the past two years but valuation multiples are dropping, according to a report from CB Insights.
Since 2009, 72 acquisitions have occurred in the sector with more than half, or 44, taking place in Q2 and Q3 of this year, according to CB Insights.
M&A may be up but valuation multiples are “declining very quickly,” CB Insights says. I asked Jonathan Sherry, CB’s co-founder, for more info on the multiples, but he declined to disclose further information. That data is only for subscribers, he says.
The CB report did reveal that daily deal price per subscriber sold multiples has dropped 36% in Q3 from their peak in first quarter. Price per voucher sold multiples has also declined 40% in Q3 versus a high in Q1, CB said.
What’s driving the declines? It’s relatively easy to get into the daily deal sector and there is currently an oversupply of companies (there are reportedly 600 Groupon clones in the market), Sherry says. So many are entering the sector but fundraising is difficult. Many companies have nowhere to go for capital so they sell, he says. “That’s driving valuations down,” Sherry says.
But the biggest contributor to multiple declines likely is Groupon, the Big Cahuna in the daily deal sector. Groupon, before it filed for its IPO, rode a wave of largely positive sentiment and was tagged as the fastest growing company ever, CB Insights says.
Then, in June, Groupon filed its first S-1 and the momentum ended. Analysts quickly realized daily deal companies like Groupon need “massive” capital to achieve scale, Sherry says. Daily deal companies need money to grow their sales force and to increase their merchant networks, he says. Groupon, for example, reported $273 million in selling, general and administrative expenses in second quarter, up from $178.9 million in Q1, according to my coworkers at Thomson Reuters. Much of those funds were spent on hiring. Groupon added more than 1,000 employees in Q2.
Since filing to go public, Groupon has been subjected to several scathing reports. The Chicago based company has huge revenue growth but is unprofitable and growth is already slowing, according to some articles. Also, the company used a questionable accounting method, some high power execs have left and Groupon’s sales staff have even sued the company.
Groupon, with its S-1, “created more questions than answers about how daily deal companies can make money and the viability of the business model longer-term,” CB Insight says.
All the bad press has made investors weary of the daily deal space, Sherry adds.
CB Insights also came up with their own valuations for Groupon and LivingSocial, using subscriber and vouchers sold. Sherry says these numbers are “significantly less” than the mammoth $20 billion IPO valuation being floated for Groupon or the $15 billion pitched for LivingSocial. However, CB Insights wouldn’t give up those numbers.