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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