"There’s competitive fire between these two," Zgutowicz added. "But I am surprised the bid was rejected. If you’re a shareholder, I think you would question the move. There isn't another potential bidder who can match that price, and in our view, unlikely even at the $12- $13 level. There is no one [in the space] that can bring the kind of immediate synergies that an Extreme supported deal can. DG has about $460 million in debt. So if you're going to make a bid at $12-$13, you'll have to write a check for $350 million on top of that."
At the moment, DG appears to be only entertaining offers from PE firms like Bain Capital and, according to a Bloomberg BusinessWeek report, investment bank RDG Capital, which already has a 4.9 percent stake in DG. (DG declined to address these reports, saying it does not respond to "market rumors or speculation"; Extreme Reach representatives did not return a message seeking comment.)
But Zgutowicz said he was "hard-pressed to believe a private or strategic buyer would be able to create synergies and scale efficiencies without Extreme's leading low-cost cloud-based technology, which has essentially destroyed scale efficiencies in DG's TV distribution business."
So what about DG's MediaMind? Doesn't that contribute enough of a value proposition on top of DG's TV distribution in its rivalry against Extreme Reach? Not really, said Zgutowicz, since internet accounts for only 15 percent of DG's total EBITDA compared to 85 percentDG gets from TV .
"Extreme is building the same online distribution capabilities in house," the analyst said. "MediaMind has a bigger name, but DG already overpaid for that after seeing revenue growth run into a wall in Q1 at MediaMind. The only value MediaMind brings to DG is if they could synergize with their existing TV sales channel (which is what DG professed when the acquired it), but they can't because TV and online is bought by different people today at agencies. So its just another business running alongside TV, which DG adds very little value to."
By David Kaplan