Dollars From Donuts- Is There Enough Upside In Offer for Rightside?

Privately held Donuts Inc is acquiring Rightside Group (NAME) for $10.60 per share or approximately $213m in cash. With the deal signed, the company will now control top level domains such as ‘.sale’ and ‘.dance’ in addition to its portfolio of names like ‘.movie’ and ‘.group’. Personally, I am puzzled that a company named Donuts has nothing to do with confectionery deliciousness. It’s just wrong. While they may not sell Boston Cremes or Rich Frosted delights, the company does operate a large domain name registry and apparently had been circling Rightside and its portfolio of domain name extensions for some time now. Rightside actually rejected a similar $70m offer from Donuts last year, feeling that it significantly undervalued the company’s assets. Donuts Co-Founder and Executive Chairman Paul Stahura founded eNom, sold it to Demand Media and spent several years a senior manager at Demand prior to  starting Donuts.

For those who don’t remember, Rightside was spun out of Demand Media (since rebranded as the Leaf Group LFGR) back in 2014 and initially the company also contained eNom (a domain name reseller) and some domain names which it hoped it could monetize. eNom was sold earlier this year for ~$83m to Tucows (TCX), a company whose 5 year chart really makes me wish that I had been a shareholder.

Top level domain names were supposed to have become all the rage, but as far as I can tell, they haven’t really taken off yet. Feels a bit gimmicky to me, but I am sure some will stick eventually. It will be too late for Rightside shareholders though. Although the deal price represented a modest premium, shareholders since the spinoff are still in the red. That is also true for the parent company as well. Can’t win them all.

The deal is expected to close during the third quarter of this year and it’s worth noting that Rightside is currently trading slightly above the announced price. Many Rightside shareholders feel that the deal does not adequately value the company. Perhaps the market thinks another bidder will emerge? We will leave that for the merger arb guys to ponder.

Disclosure: Author holds no position in any stock mentioned.