Disney Acquires Club Penguin; $350 Million Cash, Possible $350 Million Earnout
By Staci D. Kramer - Wed 01 Aug 2007 01:14 PM PST
On a call with Disney CEO Bob Iger now while he announces the company’s acquisition of Club Penguin, which he describes as a perfect fit. It’s a cash payment of $350 million and an opportunity to earn out an additional $350 million between now and 2009.
The virtual world for kids 6-14 launched in Canada in 2005 and claims 700,000-plus paying members; subscriptions run about $6 or $58 a year. The site also makes money from virtual goods and other online merchandise sold through the site.
Founders Lane Merrifield, Dave Krysko and Lance Priebe will join Disney and remain the senior execs responsible directly for Club Penguin. Former Disneyland employee Merriefield, now the CEO, will be an EVP of the Walt Disney Internet Group reporting to WDIG president Steve Wadsworth. The founders are the only shareholders; each stands to make $115 million. More after the jump…
The combination of Disney and Club Penguin made sense all along but Disney seemed to be more inclined toward growing its own communities—Toontown (2003), Disney Fairies (launched in 2007 with a game coming in 2008), the upcoming Pirates—in house. Iger said the company is still committed to that strategy and thinks it will be successful but sees in Club Penguin a successful standalone business. With the exception of changing the name to include Disney and supporting the company, Iger promised: “Club Penguin is going to continue to exist as is. ... The experience will not change at all. It will continue to evolve.” Iger added: “We really don’t intend to get in the way of that or do anything by virtue of the way we own it.”
For those of you just tuning in, we reported in May that Sony was in advanced talks to acquire the virtual world for what we were told was about $450 million, roughly a 7.5 multiple based on projected revenue of about $60 million —which struck some people then as high. But we were told then the self-funded company is already profitable and operating at about 50 percent margin—ie projected $30 million in profit this year. Sony broke off the talks, which we reported in June.
Disney, it turns out, is paying less up front but the potential is high—the deal could be worth $700 million by 2009 and possibly more.
Subscribers/users: CP has about 700,000 paying subscribers now but claims more than 12 million activated users, primarily in the U.S. and Canada. Iger and company think Disney can help the number of paying subs grow substantially, both by adding the “trust” of the Disney brand and through its wide-ranging promotion capabilities.
Loyal users: As anyone who follow our comments can attest, Club Penguin users are dedicated to the snow-covered virtual world where animated penguins are avatars. When I mentioned to Iger their expressed concerns about being owned by a corporation—Sony, in the case of most we heard from or read— he said that wasn’t anything they had experienced. He may have thought I was referring to Disney ownership. Trust me, though, these users are serious and will act as a kind of truth meter if they think Disney is doing anything to hurt the company.
From the earnings call, which started right after the announcement: Asked about the price based on a run rate of about $50 million, Iger said they expected it to e “modestly accretive in year one for the company: “We are basing long term projections on growing of the subscribers across the world....most of the cross promotion would be mostly to market the service itself, but you may see extensions in video games, theme parks and some on media networks.”
-- Iger: “We’re not going to get specific on the margins at Club Penguin except to say they are significant.” Part of the appeal for Disney is the simplicity of CP—“It’s simple, it’s easy to use. It doesn’t require significant amounts of technological investment.” It does take a lot of creative investment, which is important but not that expensive.
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