Web.com, which offers internet services and online marketing to SMBs, will acquire Network Solutions, a provider of website services, online marketing and global domain name registration, also focused on SMBs. Under the terms of the agreement, Web.com will pay Network Solutions USD 405 million in cash and issue 18 million shares of Web.com common stock, in addition to refinancing Network Solutions existing net debt and paying certain fees. Network Solutions is currently majority owned by equity firm General Atlantic.
From 30 June, the new entity will have about 3 million paying subscribers, more than 9 million domains under management and more than 1900 employees worldwide. The deal will create the largest online marketing company focused on the USD 19 billion web services market for SMBs. The new entity will have a clear path to USD 500 million in non-GAAP revenues. The pro-forma, combined non-GAAP revenue is seen in the mid USD 450 million range for 2011, with the pro forma adjusted EBITDA estimated at at least USD 120 million for the year, before cost synergies and transaction expenses. Web.com believes revenue and cost synergies will position the combined company to deliver non-GAAP revenue growth in the low teens, with non-GAAP earnings per share and unlevered free cash flow growth in the mid-teens to 20 percent range over the next three to four years.
Under current debt pricing terms, the transaction is expected to be at least 20 percent accretive to the current USD 1.22 per share First Call consensus estimate for 2012, with “significantly greater” accretion in 2013. The combined company is expected to generate USD 105-110 million in pro forma unlevered free cash flow. The combination of revenue growth and USD 19 million in cost savings during the first full year is expected to contribute to USD 125-130 million in unlevered free cash flow and more than USD 140 million in adjusted EBITDA in 2012. In addition, the company expects to realise USD 30 million in annualised cost savings by the end of 2013.
Web.com CEO David Brown said the transaction will expand scale, add further momentum to Web.com’s already improving top line growth, and further expand market share. Brown said the integration strategy will be similar to when the company acquired Register.com, and that the company will be in a strong position to cross-sell and up-sell services to Network Solutions’ two million retail customers and hundreds of thousands of wholesale customers. The transaction, subject to Web.com shareholder approval as well as customary regulatory approvals and closing conditions, is expected to be completed in the fall. At the close, General Atlantic and other current Network Solutions shareholders are expected to own around 37 percent of Web.com. General Atlantic managing director Anton Levy will join the Web.com board of directors. The cash portion of the acquisition will be funded with new debt commitments. As part of the financing arrangement, the remaining USD 84 million in Web.com debt resulting from the Register.com acquisition in 2010 will be paid off. After closing the acquisition, the combined company is expected to have net debt of USD 740 million, around 5x net debt to 2012 adjusted EBITDA.
