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eUniverse to Buy L90

Entertainment-oriented Web publisher eUniverse plans to buy ad rep network and direct marketer L90, effectively ending L90's run as an independent entity and largely transforming it into a sales and promotional channel for its parent.

Through an unusual purchase arrangement, L90 will actually help fund its own buyout. The firm will pay its shareholders between $1.80 and $2.00 in cash, for a total of $44.82 million to $49.8 million. eUniverse, meanwhile, will then buy each shareholder out for about $0.20 per share, or about $5.1 million in total.

The two Los Angeles-based companies' combined $2.00 to $2.20 per share payout represents a 20 percent to 28 percent premium over L90's average stock price for the past ten trading days. L90 and eUniverse said the exact amount of L90's payment to its shareholders would depend on precisely how much L90 has in cash immediately prior to the merger, and on the amount of "certain balance sheet items" -- language that generally refers to outstanding liabilities.

Since L90 will retain about $3.1 million in its coffers after its payout, eUniverse will essentially be buying the firm only about $2 million. That's good, because eUniverse, which has been profitable since June, isn't expected to have $2 million in cash until the close of its most recent quarter.

The merger is subject to L90 shareholder approval, and is expected to close by April.

Once the transaction is complete, eUniverse expects to see a host of benefits emerge from the union -- most of which entail L90 serving as a free promotional unit for eUniverse sites and services.

For example, L90 will advertise eUniverse sites -- several of which, like Cupid Junction and Fitness Heaven, charge for their services and have proven big money-makers for eUniverse -- across the more than 100 sites in its ad network.

L90Direct, L90's offline direct marketing and list management division, also will sell eUniverse's e-mail network and lists.

Additionally, L90 also will promote inventory on eUniverse's Web sites and its e-mail properties to its own network advertisers.

"With the L90 brand name behind us, we expect eUniverse to be able to make major inroads into the traditional advertising sponsorship and branding market," said eUniverse chairman and chief executive Brad Greenspan. "We've had a really strong direct marketing practice, but branding and sponsorship [sales] ... takes time to crack. You've got to have a strong agency that can go knock on doors and ... it takes time to build that up. For eUniverse, who's never had a large sales force, this allows us to piggyback on [L90's] ad sales force."

In conjunction with L90's continuing ad representation business, such promotional activity is expected to add more than $2 million in net income to eUniverse's bottom line in the year following the merger.

"Our acquisition of L90 will help solidify our existing operating base and provide us with additional momentum to grow our business and enhance shareholder value," Greenspan said. "This incremental profit will be achieved through the synergies that are realized by combining the operations of the two companies."

L90's ad network, which will continue as a separate brand name under eUniverse, will also see changes. Most importantly, it will begin adopting new forms of performance-based pricing, a move that spokespeople said would enable L90 to work with a larger client base, and increase the network's effective pricing yield. Previously, L90 has been an outspoken advocate of the CPM and sponsorship models, making the change quite a philosophical shift for the company.

"This merger will create a company with a large presence in the online marketplace, a strong sales and marketing team, and a very attractive platform for both publishing and advertising clients," said L90 CEO John Bohan.

In justifying the move, which essentially asks L90's investors to cash out and drop their hopes of a reversal in the company's fortunes, Bohan painted a dismal picture of the firm's prospects.

"The Internet media marketplace is not growing like many people had expected," he said. "A variety of forces have contributed to this slowdown, including the economic recession, the downturn in the advertising industry, and dot-com bankruptcies. And unfortunately, there are unfortunately no signs that these conditions will improve anytime in the near future."

"The fact that the marketplace is not growing as expected means that it will be very difficult for L90 to achieve the scale necessary to make our business model work from a financial perspective," he added. " And in an economic recession, companies tend to scale down their advertising budgets, and the advertising dollars that remain are generally targeted at the larger media properties. So the second- and third-tier Web sites that L90 and the others tend to represent have been disproportionately impacted ... and many are in need of additional financing to continue to pursue their business plans..."

Bohan also added that L90 had been hamstrung by its low margins, which were only about half of larger Web sites that typically handle their own sales.

"Our gross margins are only about 40 percent, whereas many of the larger Web sites, such as eUniverse, that sell their own ads have gross margins of over 80 percent," he said. "So for these reasons companies that have had an Internet ad network model have had a tough time in this marketplace, and despite the fact that L90 has outperformed many of our direct competitors ... we are obviously not immune to these same challenges."