Snap may want to disappear from the public markets
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, July 22 (Reuters Breakingviews) -Michael Dell did it with his eponymous computer maker. Twitter did it, too. Snap SNAP.N boss Evan Spiegel may want to make the social media company he helped create disappear from the public markets, especially as he embraces an overhaul to his business.
The social media firm, which gets nearly all its revenue from advertising, is staking its future in augmented reality with see-through glasses. Spiegel, who talked about them at an investor conference in May, believes the next generation of computing will be centered around wearable devices appealing to consumers. That will take time plus the well-funded competition has similar notions. Meta Platforms META.O, which has a market capitalization of 50 Snaps, launched Ray-Ban smart glasses with success. Last month, Mark Zuckerberg’s company restructured Reality Labs into two organizations, the metaverse and wearables, according to the Verge.
Taking Snap out of the purview of public shareholders would give Spiegel breathing room — and the numbers work out. Shares of Snap are down nearly six-fold since hitting its high in 2021. It is also cheap: rival Pinterest PINS.N is more highly valued on an enterprise-to-sales multiple of 7 times than Spiegel’s network at 4 times.
If Spiegel, co-founder Robert Murphy and Chinese giant Tencent 0700.HK rolled their equity into a private company, collectively representing 36% of shares outstanding, it would help ease the financial burden. Assuming a 25% premium to the current share price, buyers would have to come up with $20 billion to compensate shareholders. With just $800 million in EBITDA projected in 2025, according to LSEG, Snap may not be able to shoulder loads of debt. But taking on $5 billion would be reasonable, and a buyer – or likely a group of buyers - would have to produce $15 billion in cash to fund the rest.
Working behind the curtain has certain benefits while Spiegel transforms Snap’s business. It could broaden subscriptions to games and the like with augmented reality, growing revenue by a reasonable 7%. Another advantage is private equity often finds ways to trim inefficiencies. If it were able to get EBITDA margins up to 20%, well below those of Pinterest and Meta, and sell itself for 25 times EBITDA, the same as its takeout multiple, buyers would see an annualized return of over 20%.
Plus Spiegel, who along with Murphy controls the vote, is on the board of KKR KKR.N. He sees first-hand the benefits of not having quarterly analyst calls. Collectively, they could enjoy the screen that going private would provide.
Follow @jennifersaba on X
CONTEXT NEWS
Snap will report second-quarter financial results on Aug. 1. The company is expected to increase quarterly revenue 17% year-over-year to $1.3 billion, according to estimates from LSEG.
Snap launched its latest iteration of artificial intelligence technology that will allow its users to see more realistic special effects, Reuters reported on June 18.
The parent of the disappearing message app said its upgraded version of its developer program will reduce the time it takes to create augmented reality effects.
Snap's share price vanishes in value https://reut.rs/3VX2CSH
Editing by Lauren Silva Laughlin, Pranav Kiran, and Sharon Lam
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