FriendFinder isn't likely to find any pals on Wall Street; Needs IPO to pay debt

FriendFinder Networks, the company formerly known as Penthouse Media Group, is filing to go public to pay off almost a half a billion in debt in an equity market that stinks. Simply put, FriendFinder is launching an IPO Hail Mary to stay alive.
Written by Larry Dignan, Contributor

FriendFinder Networks, the company formerly known as Penthouse Media Group, is filing to go public to pay off almost a half a billion in debt in an equity market that stinks. Simply put, FriendFinder is launching an IPO Hail Mary to stay alive. At least  FriendFinder's initial public offering filing turned up a bunch of interesting nuggets.

FriendFinder is best known for its Adult FriendFinder site, which is a social network for folks looking for services that probably shouldn't be mentioned on a family friendly site on Christmas Eve. But I'm a sucker for an entertaining regulatory filing as are a few other bloggers (Techmeme).

The IPO, which is underwritten by a firm called Renaissance CapitalRenaissance Securities (Cyprus) Limited(we're not talking Goldman Sachs and Morgan Stanley folks), details a bevy of interesting stats such as churn rates on Adult FriendFinder as well as nuggets on how Penthouse magazine is trying to cover sports and games. FriendFinder also operates sites such as AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com.

As background, Penthouse bought Various, which is the parent of FriendFinder, a year ago for $400 million. The $460 million in potential IPO proceeds will go to paying off FriendFinder's almost $450 million in debt. For the nine months ending Sept. 30, FriendFinder had revenue of $243 million, operating income of $17.6 million and a net loss of $32.3 million. Prior year comparables are largely irrelevant since you're comparing a social network to Penthouse magazine.

Here's all you really need to know: This IPO is a Hail Mary pass for survival. The company says it all in its prospectus:

Our ability to continue as a going concern is dependent on our ability to raise additional capital, including from this offering. As of September 30, 2008, our balance sheet had approximately $43.3 million in cash and restricted cash and $420.1 million in short-term debt, net of unamortized discount, $411.0 million of which had been reclassified from long-term debt, due to our failure to comply with certain covenants and restrictions in the agreements governing our 2005 Notes and 2006 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained...If we are unable to cure such defaults and/or obtain waivers, we could trigger the acceleration of payment provisions in such agreements which would require us to immediately repay up to approximately $466.0 million to our noteholders. We do not currently have sufficient cash to repay this indebtedness if our debt is accelerated and if the noteholders instituted foreclosure proceedings against our assets, the proceeds of the assets could be insufficient to repay such indebtedness in full. Under these circumstances, we may be unable to continue operating as a going concern.

Comforting eh?

At least there are some really interesting stats from FriendFinder (since we don't get much color from private social networks like Facebook). Here's a look:

  • FriendFinder averaged 1 million paying subscribers a month for the first nine months of Sept. 30. That's good for 77.2 percent of Internet revenue. Net revenue per subscriber was $19.06 a month.
  • Paid users, people who pay by usage, averaged 1.7 million minutes a month--good for 19.6 percent of revenue.
  • The monthly churn rate is 18 percent for the nine months ending Sept. 30, down from 19.6 percent at the end of 2007. Here's the breakdown by product category (click to enlarge):

  • Ad revenue of $152,356 a month for the nine months ending Sept. 30 is skimpy. The company is hoping to change that, but acknowledges: "We have never generated significant revenue from internet advertising and may not be able to in the future."
  • A nice history lesson on Various, which operates other social networks beyond Adult FriendFinder (click to enlarge).

  • American Express won't process credit card transactions for adult material.
  • Various neglected to collect taxes in the EU. The company says:

After our acquisition of Various, we became aware that Various and its subsidiaries had not collected VAT from subscribers in the European Union nor had Various remitted VAT to the tax jurisdictions requiring it. We have since registered with the tax authorities of the applicable jurisdictions and have begun collecting VAT from our subscribers in the European Union and remitting it as required. We have initiated discussions with most tax authorities in the European Union jurisdictions to attempt to resolve liabilities related to Various’ past failure to collect and remit VAT, and have now resolved such prior liabilities in several jurisdictions on favorable terms, but there can be no assurance that we will resolve or reach a favorable resolution in every jurisdiction. If we are unable to reach a favorable resolution with a jurisdiction, the terms of such resolution could adversely affect our financial condition or results of operations.

Overall, I'd file this IPO filing in the "you must be kidding" department.

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