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Fishing For The Web: Is Zapata Really An Internet Stock?

Ever since Zapata (NYSE:ZAP) announced July 6 that it was acquiring Web sites and forming an Internet division a few in mainstream media and more than a few investors have bought the line bait, hook and sinker.

Some of the leading financial press have referred to fish and meat processor Zapata as an "Internet" company. If so, how come its second-quarter revenues announced July 30 were from fish and meat processing?

And, while we're at it, most of its net income was from an IPO of Omega Protein, its fish processing division.

Proponents of ZAP as an instant Internet powerhouse may site the firm's hastily put together Web acquisitions--more than 25 done or in process--as evidence that it's now an "Internet" company.

These are reported by Zapata to generate more than $20 million in revenue and 23 are profitable, although the exact figure is not disclosed by Zapata nor is a net income (or loss) number for the Internet acquisitions, nor is it shown on the 2Q results pro forma.

One thing is certain: Zapata has wasted little time cranking out press releases about its new Internet identity.

It has attracted a set of believers along the way who have pushed ZAP shares up more than 109% from July 2 to July 30's $20.625 per share. July 6, when Zapata announced its Internet intentions ZAP shares doubled to $21.50 per share. Average daily volume July 30 was 1.9 million vs. 20,000 July 2.

To be fair we admire Zapata's "discovery" of the value of being an Internet business and its move in that direction. One small step for Zapata is not one large step for Web kind, however. Managing an Internet company is a far cry from managing fish and meat processing, or acquiring sports teams (the family behind Zapata owns the Bucs).

The act of reportedly faxing over an all-stock offer of $1.68 billion for Excite (NASDAQ:XCIT) two weeks ago and another rumored fax a couple days ago of $400 million for WhoWhere provides evidence in our minds that Zapata is big on paper. Any Internet mogul in the making knows that an email is the proper way to make a multi-hundred million offer.

Let's highlight some statements by Zapata's CEO Avram Glazer from a series of press releases:

  • July 6: "Noting that most Internet companies lack the capital to make acquisitions, which will fuel industry consolidation, Glazer added that as "the Internet grows one has to question the ultimate fate of portals that merely point users to other sites."

    Our thoughts on this: Zapata's $86 million capital raised from Omega's IPO, which it says will be used to fuel its Internet investments, is hardly a dent in the merger and acquisition space of today's Internet. And the stock of leading Internet sites is far more attractive than ZAP to make acquisitions with.

    Our own experience (which is extensive) shows that most for the high-traffic sites fetch north of $30 million to $100 million easily. And two rumored targets, Excite and WhoWhere, reportedly rebuffed ZAP paper.

  • July 6 press release: "The new ZAP.com," said Glazer is a "cutting edge portal to the Internet which will offer almost everything today's avid computer user is looking for." ZAP.com will have a "myriad of features" including search, chat, stocks, mutual fund and business and travel information.

    Our thoughts: If ZAP.com is a portal then it's certainly not on the top 20 or 50 list from Relevant Knowledge. If it's a portal then so is www.papertowel.com.

    In short, let's get passed the hype and see what ZAP's Internet assets could be valued at if spun off as the company says it intends. Based on $20 million revenue which we cannot verify let's assume that ZAP's Web assets traded at 5x revenue. That implies $100 million valuation.

    Said another way, there's $4 per share of "Internet" value in ZAP in our view, the rest is fish and meat.

    Next week Zapata says it plans on announcing a major Internet acquisition and with it a Web team to manage the new Internet side of the company. Don't get us wrong. We encourage Zapata to fulfill the expectations. If it doesn't then plenty of ZAP shareholders may feel zapped.



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