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X-rated IPO

6 January 2009 By Jeff Segal

Here s a shocker: Wall Street doesn’t appear all that excited by porn. How else to interpret the fact that not one major US or European bank has agreed to handle the planned $460m initial public offering of nudie magazine Penthouse’s parent company? After a year of extreme famine in the historically lucrative business of underwriting IPOs, this sounds odd. That is, until one examines the details of the offering.

Penthouse, for decades the poorer but saucier little sister to Hugh Hefner’s Playboy, went bust a few years ago. Its new owners expanded the brand into the social networking arena, culminating in the $500m acquisition last year of the operator of websites like Adultfriendfinder.com and Christian-themed Big Church. Friendfinder Networks, as the new group is called, booked $244m in revenues during the first nine months of 2008.

Now it s flirting with the frigid public equity markets, targeting an offering less than twice its sales line and nearly six times the market value of Playboy. It s not clear how much of the company it s selling, but that may not be too crazy in the fast-growing social networking context. The centerfold of the squad, Facebook, isn’t public, but private trades of its shares among some of its staff and investors have given it a valuation of some 10 times its expected revenues.

Moreover, Friendfinder’s sites receive a robust 2.5% of the daily traffic on the internet, according to research outfit Hitwise. And unlike more buttoned-down rivals Facebook, MySpace and their ilk, Friendfinder actually has a real revenue model from subscriptions its average member pays $19 a month in fees. At a time when advertising spending is plummeting, that has the potential to make its earnings more stable.

So one might think Wall Street would be jumping all over the first sizable US IPO for months. But the sole underwriter on Friendfinder s ticket is the Cyprus-based securities arm of Russian investment bank Renaissance Capital. The company hopes to add others to the list. But that may be a tough sell.

While investment banks like nothing more than money, after a year of public drubbing for precipitating the credit crisis, they are understandably wary about attracting any further negative attention. And reports have surfaced suggesting that some of the casual sex listings on Adultfriendfinder.com as well as on websites like Craigslist – are actually prostitution-based.

A new US government could easily collar sites that even indirectly promote online prostitution. The company refers to this risk in its prospectus: Government officials may also place additional restrictions on adult content affecting the way people interact on the internet.

Similar regulatory fears kept Wall Street firms away from the IPOs of online gambling companies like Partygaming a few years ago. They shied away from the deals because they feared reprisals from US regulators. That premonition proved spot-on when Congress effectively banned internet betting a year later. As tempting as Penthouse s IPO may be, this looks like one fee orgy that Wall Street is sensibly taking a pass on.

 

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