DG FastChannel is aiming to tighten its grip on the digital-ad-delivery market by acquiring its major competitor, the Vyvx advertising-services business, from Level 3 Communications for $129 million in cash.
Dallas-based DG FastChannel entered a definitive agreement with Level 3 to buy Vyvx, which delivers commercials both via file-based satellite distribution and traditional “dub-and-ship” tape-based methods.
DG FastChannel would take over Vyvx’s ad-distribution, postproduction and related operations, including offices in New York, Chicago, Delaware, Memphis, Tenn., and Los Angeles and a stand-alone network-operations center in Tulsa, Okla. Level 3 will retain ownership of the larger Vyvx fiber-distribution business, which backhauls live feeds for sports coverage and major news events.
The deal is expected to close during the first quarter of 2008, pending regulatory approval.
DG FastChannel has been working steadily over the past few years to consolidate the file-based content-delivery market, despite some financial ups and downs that included a NASDAQ delisting notice in early 2006.
The former DG Systems acquired competitor Media DVX for $10 million in April 2005, then merged with privately held FastChannel Network last year in a tax-free, stock-for-stock transaction worth $36 million.
In 2007, it acquired the advertising-distribution business of video-postproduction and duplication firm Point.360 for $34 million in stock and syndicated-content-delivery firm Pathfire for $16 million in stock.
To help fund the Vyvx deal and refinance existing debt, DG FastChannel obtained a financing commitment from BMO Capital Markets for a six-year, $145 million senior credit facility and a two-year, $65 million senior unsecured bridge loan. DG FastChannel -- which had net debt of $36 million at the close of the third quarter -- said the close of the Vyvx deal will leave it with pro forma net debt of roughly $170 million.
Level 3 said the Vyvx advertising operation, which it considered noncore to its larger fiber-based transport business, should generate some $36 million in revenues this year.
DG FastChannel said it can achieve approximately $7 million-$9 million in operational synergies within one year of closing the deal from integrating management, operations and facilities and eliminating duplicative offices, transmission capacity and staff. The Vyvx ad business currently has 120 employees, while DG FastChannel has about 575.
Investors appeared to like the Vyvx deal, as DG FastChannel’s shares were up 19% at the close of trading Wednesday. The company’s shares were probably also boosted by a separate announcement in which it slightly raised its guidance for 2007 year-end results.
Acquiring the Vyvx ad business should help DG FastChannel to expand its delivery of HD commercials, chairman and CEO Scott Ginsburg said, and better position the company to deliver ads to the Internet, mobile devices and public displays, which Ginsburg called the “second and third screens” for TV commercials.
DG FastChannel began deploying HD-capable “HD SpotBox” cache servers to its station and network customers one year ago, but so far, it has only installed working HD systems in about 60 of 1,000 customer sites, mostly at national networks, not call-letter stations.
Ginsburg expects DG FastChannel’s HD-delivery business -- which the company is now calling the “HD Extreme” network -- to take off in 2008 as more stations launch local HD newscasts and want to air local HD commercials to match. He added that existing Vyvx ad customers will also be upgraded to the new system.
“We will be transitioning the Vyvx platform to the HD Extreme platform over the next several quarters,” Ginsburg said.