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Last week I posted on my Facebook PhotoBizCoach group a notice from RTT that Masterfile sold . Today I ran across this detailed release from PDN Newswire. There’s a few things to note about this.

It appears that the Masterfile sale is not completed yet. This usually means that a letter of intent for acquisition has been filed but the transaction is not complete until October 31, 2011. In the 2 months leading up to the sale the company, Arius3D that wants to acquire Masterfile must raise the capital. The purchase price is set at close to $21 Million. As both companies are located in Canada these are Canadian Dollars.

Most interesting is that we are finally seeing a few numbers about Masterfile’s gross sales published. As the largest independent stock syndication Masterfile has kept their gross sales results closely guarded in the past. Now we know that their sales dropped from $27.5 mill to $22.3 mill from 2009 to 2010. The purchase price therefore is incredibly low. It is actually a lousy deal because they are buying Masterfile on a 1x gross sales evaluation. For those who don’t know. Businesses are worth their gross sales (actual value) and then there is a goodwill factor amongst many others like popularity, demand, market conditions etc. All of these are factored in to arrive at a final purchase price. The rule of thumb is a sales price of 2.5x to 3x (to gross sales). That the purchase price is at 1x means that this years numbers of Masterfile must be worse than 2010. In the best times of stock companies sold between 5x to 20x.

The buyer, a very, very mediocre (sorry guys, but look at the pics and let’s not talk about the website or search functions)  3D image company is buying Masterfile for what reason? Arius says it is because of distribution. You only need distribution because you have something to sell. What they got right now is really not warranting a massive distribution system, that stuff won’t sell. That makes me suspicious that there is something we don’t know. What could that be? And here is my purely speculative perspective.

3D imaging is a huge trend. I believe that this particular genre will gain massive popularity over the next few years. Just as all advertising and media in general is exploring 3D – the who gets in now will have a pretty good shot at it when this genre heats up. A Canadian company like Arius 3D is wanting to buy Masterfile but they don’t have the cash. That means that a publicly traded company (valued close to nothing) is hunting for Venture Capital and somebody is having pretty big plans. But, here is the really bad news. Their financials that have to be published because they are public are dismal. Revenues of under $2 Mill with expenses far exceeding the sales and an operating loss of $-3.7 Million. So this entire thing is designed to SAVE Arius3D. If the Executive Team can demonstrate to shareholders that 3D is a.) a trend, b.) they have solid expansion plans, c.) want to create a huge library of 3D and c.) need to distribute this massively than yes, this makes sense.

Is it smart for Masterfile to sell? They have only two choices. They either keep doing what they are doing and continue to being squeezed by industry giant Getty who will mow everything and everyone in their path to the ground. Or Masterfile is going for change. CEO Pigeon remark about their debt also means that Masterfile got a financial woe or two (but then again who doesn’t these days)?

Before I go into my next speculative mode I am going to wait to see if the transaction is actually going through. I’ve seen it before where the announcement was made before the deal was inked and it fell through only to make all participants look like fools. This transaction looks as shaky as anything I’ve seen. And while I personally know the excitement of selling a company I wished they would have kept quiet. Unless of course the strategy of Arius3D was that the announcement would make their stock prices soar and will generate enough free cash to buy. But that is highly unlikely.

On Masterfile’s behalf I completely understand the pressure that is sitting them. I like Masterfile and always have. Aside from a little inflexibility their course to go after high-end advertising worked for a very long time. And they treated their photographers pretty good. But I also know that the business climate has continuously changed negatively since 2006 for established companies. There comes a point where you have to say we must change. While not ideal and not with a prestigious high-end buyer, I can see what Masterfile hopes to achieve with this.

Holding my breath on this one.

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