Outbrain issues on Nasdaq.

Outbrain’s $1 billion Teads deal: The latest in Israel’s high-stakes acquisition spree

Israeli companies are increasingly making daring moves on the global stage, with Outbrain’s acquisition of Teads being a prime example of this ambitious trend.

While the discourse in Israeli high-tech often centers on exits, Israeli companies are increasingly making significant acquisitions. Despite 2023 being one of the most challenging years for the country, local companies have matured, becoming exit strategies for others. A few months after CyberArk paid $1.5 billion for U.S. competitor Venafi, Outbrain announced an even bolder move on Thursday: the purchase of French company Teads for $1 billion. This acquisition follows a series of large purchases made in the past year by companies such as Palo Alto Networks, Check Point, and the decacorn Rapyd.
Outbrain's move is necessary but very bold. Teads is not only a slightly larger company but is also better known in the field of video advertising and financially stronger, with high profitability. Outbrain is making a significant leap here by paying $725 million in cash and allocating 40% of its shares to reflect a $1 billion valuation for Teads. This comes while Outbrain itself is traded at a valuation of about $240 million, roughly equivalent to its cash holdings.
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יום הנפקת אאוטבריין נאסד"ק
יום הנפקת אאוטבריין נאסד"ק
Outbrain issues on Nasdaq.
(Photo: Noam Galai)
To finance the purchase, Outbrain has already secured commitments from Goldman Sachs, Jefferies, and Mizuho to underwrite the deal, though it will likely raise additional funds through the debt market. The deal is expected to close in early 2025, and if Outbrain clears all the hurdles, the merged company could become one of the largest players in the online advertising market on the "open internet" — the segment of the advertising market that hasn't yet been dominated by major platforms like Meta and TikTok.
The merged company will have 2,000 employees, 20,000 advertisers on the platform, and is expected to reach 2 billion consumers per month. With this acquisition, Outbrain, along with its Israeli competitor Taboola, is moving further away from its original focus on content recommendation, best known from "you may also be interested in" links. This shift follows several strategic moves by Taboola, but both companies will continue to compete in the global online advertising market.
Taboola, which made a major acquisition of an American company Connexity for $800 million three years ago, has moved towards recommendations on e-commerce sites. At the end of 2022, it signed an agreement with Yahoo, becoming responsible for all advertising on Yahoo's platform, and making Yahoo the largest shareholder in Taboola. Taboola also recently signed a strategic agreement with Apple.
Outbrain, for its part, is now stepping into the more traditional advertising market with the acquisition of Teads, a company considered a pioneer in video-based advertising. Outbrain had courted Teads in the past, but the discussions did not lead to a deal. Teads was sold in 2017 to Patrick Drahi's Altice Communications Corporation for $307 million. Recently, however, Altice was looking to divest non-core assets, creating an opportunity for Outbrain to make this acquisition, albeit at a high leverage price. Drahi exits the deal with a handsome profit: $725 million in cash, 40% ownership of the merged company, two director seats on the new board (in addition to Outbrain’s eight), and contingent payments based on performance targets. Outbrain had to pay a substantial premium for Teads' profitability, which is nearly five times higher than Outbrain's.
The merger is expected to address the two main challenges that have kept Outbrain trading at cash value: a lack of growth and insufficient profitability. The two companies are expected to generate combined revenues of $660-680 million in 2024 and an adjusted operating profit of $180-190 million. Starting in 2025, the merged company expects synergies that will contribute an additional $50-60 million to adjusted operating profit.
Simultaneously, Outbrain raised its forecast for the second quarter of 2024. It now expects revenues of $55-57 million, up from a previous forecast of $53-57 million, and adjusted operating profit of $6 million instead of the previously anticipated $1-4 million. While Teads is private and less information is available about its performance, Outbrain reported a 6% decrease in gross revenue to $935 million in 2023, with net income of $224 million. However, it managed to achieve a net profit of $10 million compared to a loss of $24 million in 2022. From these numbers, it is evident that most of the net income and profitability will likely come from Teads, raising questions about what will ultimately remain of Outbrain's Israeli identity, which may appear as the acquiring company in name only.
This acquisition comes after Yaron Galai, founder and co-CEO of Outbrain, retired from his position six months ago, leaving David Kostman as the sole CEO. Galai stepped down after Outbrain struggled to show significant growth since its IPO in 2021, which initially valued the company at $1.2 billion but has since lost nearly 80% of its value. Kostman will now manage the merged company while also serving as chairman of Israeli company NICE, where he faces the task of finding a new CEO following Barak Eilam's unexpected departure. Teads' two co-CEOs will serve as co-presidents, indicating that Outbrain intends to lead the merged company despite being the smaller entity.