CentralNic’s gutsy acquisition will transform the company

Domain monetization will be a big part of CentralNic’s revenue and profit story going forward.

Last Friday, CentralNic (London AIM: CNIC) announced it is acquiring Team Internet AG for $48 million, $45 million of which will be paid in cash.

CentralNic has been rolling up smaller domain name companies with a focus on domain registrars and the occasional registry. Last year it made its boldest acquisition, picking up KeyDrive for $55 million, much of which was in equity and an earnout.

The Team Internet acquisition should be viewed as even bigger. It is hugely transformative and CentralNic’s riskiest deal to date. Like most risky transactions, it also has potential upside.

First, consider the numbers. Team Internet had $66.7 million revenue and $10.6 million adjusted EBITDA in the 12 months ending June 2019. During the first nine months of this year, CentralNic as a whole had revenue of $77.1 million and adjusted EBITDA 13.1 million.

Team Internet will be a massive part of CentralNic’s revenue and profit story going forward.

Beyond the numbers, Team Internet is a very different business than the subscription businesses CentralNic has acquired in the past.

Team Internet is a domain monetization company, i.e., domain parking. Its two main brands are ParkingCrew and Tonic.

Ask any domain investor and they will tell you that domain monetization has had its ups and downs, and mostly downs. In fact, Tucows (NASDAQ: TCX) recently sold off its domain portfolio partly due to changes in domain parking.

CentralNic tacitly acknowledges these changes in its releases about the acquisition. First:

“Team Internet experienced an increase in revenues in the year ended 31 December 2017 due to the collapse of a competitor.”

That competitor was Rook Media, which also owned DomainSponsor. Word is that it collapsed virtually overnight after Google pulled its ad feed.

Second:

“Due to an industry-wide policy revision for the long-term health of the online advertising ecosystem in summer 2018” revenues declined at Team Internet around that time.

I believe that policy revision was related to email monetization, but there have been so many policy revisions that I’ve lost count.

Both of these point to changes Google made. For all of the movement to alternative monetization channels, the domain parking business still relies on Google.

Domain parking companies have played a bit of a cat and mouse game with Google since the beginning of domain parking. Parking companies push the limits, Google clamps down. Push the limits, Google clamps down. Push the limits…

Go too far, get dinged with clawbacks. Or the collapse of your business.

This, combined with changes in consumer behavior and the online advertising market, has had a significant impact on the value of domain traffic.

Team Internet’s Tonic service goes around Google with zero-click monetization. Instead of a parked page with ad links, Tonic sends domain visitors directly to an advertiser’s website.

In theory, the business delivers great value to advertisers and sends visitors to relevant sites. Unfortunately, the business is a boon for bad actors. It’s difficult for zero-click companies to keep the bad guys out. Zero click traffic often bounces between multiple redirects. Even if the monetization company approves the destination URL, the scammer can easily redirect it further.

Combine the risks of Google, zero-click, and domain traffic arbitrage and you have a lot of risk. This probably explains the relatively low multiple CentralNic is paying for the business: just 4.5 adjusted EBITDA.

If Team Internet delivers for CentralNic (i.e., no surprises in the next few years) then this could be a huge win for CentralNic. If it doesn’t, CentralNic will have a mountain of debt to pay off.

It’s a gutsy acquisition.