Vice’s $400 million deal for Refinery29 illustrates the pointlessness of private valuations

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Shane Smith

Krisztian Bocsi | Bloomberg | Getty Images

Fresh off its $400 million deal for Refinery29, Vice is valuing itself at about $3.6 billion. In related news, I’m valuing my house at $278 million.

Sure, my neighbors’ houses are all worth less than $1 million, and my house looks just like all of my neighbors’ houses. But mine is worth $278 million, because that’s the value I’ve decided it’s worth. It will grow in value once others realize how much I like it, just wait and see.

The beauty of being a private company is you get to make up your own value when you’ve run out of investors to pump in more cash. Vice is paying about $400 million of mostly stock for Refinery, a digital media company focused on women’s fashion, beauty and entertainment. The only two companies that needed to agree on value with this deal are Vice and Refinery29. Perhaps Vice thinks Refinery29 is actually worth $100 million and Refinery29 thinks Vice is worth $900 million. That’s OK. They just agreed to publicly inflate each other by 4x. The stock isn’t traded on a public exchange. At this point, while the relative values are meaningful, the overall value is virtually meaningless.

The reason Vice’s valuation stands out as particularly unrealistic is there is actually a way to gauge someone else’s view of Vice’s worth. Disney owns about 27% of Vice, and as a public company, Disney must mark its equity investment in Vice to its perception of market value. In other words, Disney has to predict the value of its 27% stake in Vice. And what value has Disney predicted? $0.

That’s right. Disney has completely written off its value of Vice, suggesting it is banking on getting no return whatsoever from its equity investment. Disney wrote off $353 million in Vice earlier this year, the second time it has written off value in Vice. The more recent charge eliminated the entire value of Disney’s investment in Vice from its books.

This isn’t to say Vice is actually worth nothing. It just signals Disney feels like it isn’t going to get any money back from its investment. My house can be worth $278 million until it’s time for me to sell my house or file for bankruptcy. Then, I’ll need to embrace reality. Maybe I’ll get lucky and someone will agree with my price. Have you seen the backyard? The kids love it, and the children are our future.

Vice and Refinery29 do have functioning businesses. Vice was on pace to bring in between $600 million and $650 million in revenue last year, according to The Wall Street Journal. Refinery29 executives have said the company generated about $100 million in annual sales last year.

But the question in a stock deal is what someone else values the stock to be worth. The only way to know this is to either go public, giving the market a chance to value your stock, or to sell the company to someone else. Disney is betting that Vice can’t go public (i.e. there won’t be appetite for its shares) and won’t find a buyer at a material valuation.

There are few buyers of digital media businesses, which have struggled to compete for ad dollars with Google and Facebook or overtake much larger, more traditional media companies such as Comcast, Disney and WarnerMedia. Companies such as Buzzfeed and Vice have backed away from IPOs as they’ve tried to restart a growth story for potential public investors.

We’ve seen this same story play out recently with WeWork. SoftBank valued WeWork at $47 billion in its final funding round. But when it came time to actually getting a market value on the company, public investors looked around and said, “Wait a minute, your house isn’t worth $278 million. You have neighbors. There’s a comparable company out there called IWG that does basically what you do, and it’s worth $3.6 billion despite bringing in $2.7 billion in annual revenue. You want me to value you at $47 billion on $2.6 billion of annual sales?”

WeWork, like Vice, may now be looking at a world where it has few exit plans. Maybe it can get more money from SoftBank and continue to bob along at a value that no one else believes. Maybe it can go public at a much lower valuation, thus having its come-to-Jesus moment. Or maybe it can sell itself to SoftBank, which apparently thinks it’s worth much more than everyone else.

By not going public, WeWork doesn’t have to face its reckoning quite yet. It still has a chance to turn things around. And Vice can still prove Disney wrong.

And my house can still sell for $278 million.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

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