Online coupon service providers a hot commodity

Contact: Brian Satterfield

With Groupon’s IPO looming on the horizon, the online coupon business model is attracting more attention than ever before. That’s also coming through in deal flow, with the number of transactions in the emerging sector having increased more than six-fold so far this year compared to last year. The main driver for these deals is the push by deal-a-day sites to buy their way into new markets, mostly overseas. (We’ve already noted how Groupon got an incredible value on its primary international purchase, Berlin-based CityDeal.)

Like the online coupon market itself, M&A in the sector is accelerating at a dizzying rate after a very recent start. As a proxy for the overall daily deal market, consider the almost unprecedented growth of Groupon: the Chicago-based company launched in November 2007, generated less than $1m in sales in 2008 but then posted sales of $30m in 2009 and more than $700m last year. In terms of acquisitions, we only tallied the first online coupon transaction in the sector in April 2010. That was one of just five acquisitions in the market that we recorded in the first half of 2010. In comparison, we’ve already had 29 online coupon acquisitions this year – a 500% increase.

Geographic expansion is the primary factor driving the robust growth in this sector, as more than half of the 43 total online coupon deals that we’ve seen appear to be driven by a push into new markets, both domestically and overseas. Groupon, which has been the buyer in nearly one-quarter of all online coupon transactions, exemplifies this trend, pocketing a total of 11 competitors overseas. Meanwhile, the company hasn’t made a single consolidation move in its home market. That’s not surprising, given that Groupon’s international operations, which account for the majority of its revenue, are growing faster and run at a higher margin than its US business.

Online coupon transactions

Period Deal volume
Q1-Q2, 2009 0
Q1-Q2, 2010 5
YTD 2011 29

Source: The 451 M&A KnowledgeBase

A valuable deal for Groupon

Contact: Brenon Daly

As it preps for its public debut, we note that Groupon, the coupon giant known for offering consumers deals up to 90% off, did a bit of smart bargain shopping of its own last summer as it made an important purchase to expand business in Europe. In May 2010, Groupon picked up Berlin-based CityDeal, a Groupon clone that’s posting growth that far outstrips the already astronomical rate at the acquiring company. CityDeal wasn’t even a year old when Groupon scooped it up, although it managed to generate approximately $450m in annualized revenue in 2010. For comparison, in its first year of existence, Groupon posted $30m in sales.

Groupon has since followed up the CityDeal acquisition with about a dozen other small deal-a-day sites across the globe. However, CityDeal remains the foundation for Groupon’s international operations, a business that is growing faster and has a higher gross margin than Groupon’s original operations in North America. Groupon now gets more revenue from outside its home country than from inside, which is an almost unheard of rate of internationalization for a three-year-old startup.

Given the contribution that CityDeal is making to Groupon’s financials, it’s worth remembering that Groupon only paid $125m in stock for the acquisition. Another way to look at it is that Groupon gave away about 10% of the equity of the company (roughly 41 million shares) for a company that now accounts for more than half its business. Of course, CityDeal’s owners took their payment in equity, so they will undoubtedly see their shares soar on the public market – far above the roughly $1bn valuation Groupon had when it acquired their company. (Valuations of around $20bn for Groupon on the public market are being kicked around right now.) As we think about that deal, it strikes us as a fitting structure for Groupon to use, in that the true value isn’t realized at the time of purchase, but at the point of redemption.