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If you're an investor in Ziff-Davis Inc., the former tech-media conglomerate, you may be wondering what will rise from the ashes of the company's highly complex restructuring. The answer is ZDNet, a Web news site that some analysts believe can make money as the No. 1 source of tech news on the Internet, despite fierce competition from rivals such as CNET Networks (CNET).
Ziff-Davis has been stripped to the core, and the assets of ZDNet are virtually all that remains. But some analysts like what's left -- and one who follows ZDNet closely says an arbitrage play in the stock is possible. "A lot of investors really don't know what's going on, but this is worth a closer look," said analyst Michael J. Davey, of Investec Ernst & Co. However, a word to the wise is in order: It's a complicated situation made more risky in a bearish tech market.
Two kinds of Ziff-Davis stock are trading right now: ZD, the original stock, which represents the assets of ZDNet and a small trade-show and conference business, and ZDZ, a tracking stock created last year for ZDNet. ZD stock currently trades at $9.30 a share, while ZDZ trades at $10.70. Davey says he doesn't own either stock, but he sees a buying opportunity in ZD, a stock that analysts have largely forgotten. In late June or early July, the trade-show and conference business (which hosts the sprawling Comdex technology expo in Las Vegas every autumn) will be spun off, the two kinds of stock will disappear, and new shares of common stock will be created to represent the assets of ZDNet. Those who don't mind a bit of market risk have a way to buy shares of ZDNet at a discount before the new stock is created.
CHEAPER ENTRY.
To understand this arbitrage play, you need a bit of Ziff-Davis history. The restructuring saga began a year ago, when the company's investment bankers recommended a full-scale asset sale to pay down high debt. Microsoft co-founder Paul Allen acquired ZDTV for $205 million, and Wasserstein Perella bought ZD Education for $172 million. Then, Chicago venture capitalists Willis Stein & Partners paid $780 million for Ziff-Davis Publishing, which owns a stable of personal-computing magazines. That firm also bought the Ziff-Davis name, although it can't begin using it until after the restructuring is complete.
Here's where things get interesting. Davey figures that buying ZD stock now offers a cheaper way into ZDNet. Here's why: ZD shareholders will be paid cash and securities worth about $5 a share for the spin-off of the trade-show and conference business, renamed Key3Media. What will remain are ZD shares trading at $4.13, which represent a 78% stake in ZDNet. That's a much more attractive price than paying $10.60 a share for ZDNet. "At current prices, it makes more sense to capture the high quality Internet assets of ZDZ by purchasing shares of ZD," Davey says.
After the Key3Media spin off, ZD will merge with ZDNet, primarily to eliminate the two different kinds of stock. At that point, the newly formed company plans to issue about 30 million new shares, and the largest shareholder of both classes of stock, Japan's Softbank, will have what it sought when the restructuring began. That is ZDNet, standing alone as a pure-play content provider. "We are closer to becoming a pure Internet company," said billionaire Masayoshi Son, speaking on May 26 to Bloomberg in Japan. Son is owner of Softbank, which also has stakes in Yahoo!, E*Trade, and many other Net properties.
DELICATE BALANCE.
A pure Internet play may sound like an alarming strategy given current market conditions, but experts believe the Web's dominant players will survive and prosper after the latest shakeout subsides. Since December, ZDNet's traffic has outpaced CNET's, according to Web traffic monitor Media Metrix, even though ZDNet has spent far less on marketing and advertising. And although CNET's first-quarter revenues more than doubled, to $44 million from $20.1 million a year ago, ZDNet's topped $39 million, a 94% increase over last year.
"ZDNet is going toe-to-toe with CNET," says Paul Noglows, Internet analyst for Chase H&Q in San Francisco. The demand for the kind of news these sites provide is growing fast, analysts say. ZDNet's heaviest traffic day ever was May 5, when the "I Love You" virus struck the world's computer systems. "People wanted to know what was happening," says Robert Borchert, ZDNet's investor-relations chief.
To be sure, ZD shares carry plenty of risk. The arbitrage lies in a delicate balance of current share prices, which have been falling. "This is clearly not a simple transaction for the average investor to understand," admits ZDNet's Borchert. ZD stock has lost half its value since February, even though the former Ziff-Davis has paid down more than $1 billion in debt since the restructuring started. And ZDNet, after peaking at $30 per share in March, has plummeted 67%.
But thanks to ZDNet's growing viewership lead over CNET, Internet analysts are recommending the stock. Piper Jaffray's Anthony Gikas initiated coverage on the ZDZ stock May 25 with a buy rating. First Union started coverage on Apr. 12 with a strong buy recommendation. Chase H&Q rates the stock a buy as does Investec's Davey.
"Right now, there are a lot of frustrated ZD investors and analysts," says Davey, who's quick to underscore that the arbitrage play is a gamble. "This is definitely one of the more complex deals I've seen," he adds. "But I think investors are going to like the new company that emerges." Feeling agile?
Shook is a staff reporter for Business Week Online EDITED BY BETH BELTON
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