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It's a Big Web After All: DisneySeek, A Whole New Adventure

The question front and center on Disney's foray into the Web portal business with its $400-plus million deal to acquire 43% of Infoseek is exactly what did Disney pay anyway? Our analysis shows an effective $15.27 per share.

The problem with looking at the deal in this fashion--which many on Wall Street are sure to do--is that it comprises a backwards view of the future and leaves Starwave off the table, Disney's clout and content penniless, and investors confused as to how to value SEEK. Hence the jump and dump in share price on June 18 when SEEK went up to $42 and then settled down at $35.125.

Some of the deal had already been discounted ahead in SEEK which started to gain ground the past few weeks when rumors surfaced that a large media suitor would emerge. Now that the deal has happened, Wall Street looks to see what it means moving forward.

The agreement aligns the world's number 9 (Infoseek) and 10 (Disney.com) Web sites in terms of users into what could be the world's number 3 site--assuming unduplicated reach--at 21.7 million users.

The numbers:

DisneySeek

Starwave value estimate

$ 350.00

Disney cash contributed

$ 70.00

Warrant agreement

$ 139.00

Total deal value

$ 559.00

Infoseek ad buy on Disney

$ 165.00

Effective deal value

$ 394.00

SEEK shares Disney owns

25.80

Effective deal value/share

$ 15.27*

* note: warrants dilute further

But another look at value...

SEEK close June 18

$ 35.13

Estimated SEEK-Starwave value

$ 1,350

Infoseek via Disney ad value

$ 165

Plus Disney marketing & content clout

$ 200

Implied pro forma DisneySeek

$ 1,715

all figures in millions except share price (c) 1998 Mecklermedia, The Internet Media Company

If we value Starwave at $350 million, add the $70 million cash Disney (NYSE:DIS) kicks in, plus $139 million for warrants, the deal value looks like $559 million to Infoseek total.

More number crunching: Infoseek agreed to buy $165 million of advertising on Disney's networks, bringing the effective deal value to $394 million, or $15.27 per share using the 25.8 million shares Disney receives. That figure is one-third of SEEK's 52-week high hit just over a month ago.

The effective price though must also consider that Starwave on its own could have been spun out to the public at about $375 million via initial public offering and may have traded north of CNET (NASDAQ:CNWK) rather rapidly. CNET's market capitalization is more than $800 million.

So Starwave, which produces much of Disney-ABC-ESPN's Web sites and content, cannot be ignored in what Disney has put on the table. That's a mistake some analysts make in suggesting Disney got a discount. Discount to the past but not future.

If you figure Infoseek pre-deal at $1 billion and Starwave at $350 million, even the ad revenue is worth something, some sort of value on what Disney's global reach can do. The rest, as shown in the table, gives us reason to believe SEEK-Disney.com could be a $1.7 billion firm. That's north of $50 per share. Although the warrant Disney has to gain majority of Infoseek ownership would dilute shares outstanding which is not known yet to what degree.

Why $1.7 billion? Consider Disney vaults run deep: ABC, ESPN, animation, movies, theme parks and several of the world's most popular brands ever in Mickey Mouse and friends.

Infoseek opens its users up to the endless flow of Disney's high-quality content, something that can be leveraged into community, chat, news, video, email, portals, search, commerce, marketing, advertising, mixed media and more. On the Web it's not a small world after all.

Real losers potentially are Yahoo! (NASDAQ:YHOO) and Excite (NASDAQ:XCIT). Both are left with a smaller partner pool in the big media space, although both have paths that perhaps don't require big media partners on the equity side. Having Disney on your side is probably a plus, though, in the long term.

Another large media player already has a date, further limiting the field of deals. NBC hooked up with CNET/Snap last week, and now the world's most valuable content, brand, and media firm stops 'Mickey Mousing around' with Infoseek.

With NBC and Disney staking claims in the top 10 Web players, who's left? CBS (TV network, stations, radio); Time Warner (almost as strong as Disney in every area); Viacom (movies and cable, MTV its flagship brand); News Corp. (Fox TV, studios, newspapers); Bertelsmann (music, film, publishing, and linked with Lycos in Europe, perhaps further expanding in the U.S. if Lycos sees the opportunity).

But by far, the best media brand in the world is now linked with Infoseek, a partnership that could transform SEEK into an extremely large Internet media company, perhaps surpassing Yahoo! at some juncture.

On the other hand, the best laid plans of mice and men sometimes go astray. Infoseek was the runt of the litter on Wall Street. Can Mickey Mouse and the new breed of 'mouseketeers' (Web media firms) click?

Question: Do you think Disney and Infoseek are a good fit? Why? Why not? Answers Monday.