Fitch Assigns Outbrain Inc. First-Time 'BB-' IDR; Outlook Stable

Published: 2025-02-05 04:22:08 ET OB

Fitch Ratings has assigned a first-time Long-Term Issuer Default Rating (IDR) of 'BB-' to Outbrain Inc. and OT Midco. Inc. (collectively Outbrain).

Fitch has also assigned a 'BB+' with a Recovery Rating of 'RR2' to OT Midco. Inc's $625 million senior secured notes. The Rating Outlook is Stable. Outbrain is set to acquire Teads S.A. (Teads) for approximately $900 million, using proceeds from the secured notes and common stock.

The IDR reflects Outbrain's increased operating scale, market position, and diversified advertising platform following its merger with Teads. Fitch anticipates the merger will improve the operating profile for both entities, which had faced pressure due to advertising market softness starting in 2H23. Fitch projects ex-Traffic Acquisition Cost (Ex-TAC) EBITDA margins will rise to the mid-30s, with Fitch-calculated leverage falling below 3x by FY26.

Risks to the credit profile include integration challenges, the industry's low entry barriers and uncertainty regarding recovery in the digital advertising market in FY25.

Key Rating Drivers

Increased Scale and Market Position: Fitch believes the merger strengthens Outbrain's competitive position in the fragmented digital advertising space by providing access to greater scale and global audiences. The merger unifies leaders in performance advertising, branding, and omnichannel video, creating one of the largest global end-to-end advertising platforms.

This enhances cross-sell and upsell opportunities between Outbrain and Teads, benefiting advertising and publishing partners. It also supports Outbrain's expansion into high-growth, high-margin services, and new markets, while combining data and technology assets for synergies.

Advertising Headwinds: The diversified media industry has faced significant macroeconomic and operating headwinds due to a lingering advertising recession that began in 2H23. Teads faced additional headwinds in 4Q24 due to political uncertainty in France and lower political advertising spend in the US on its digital platforms. Fitch believes the additional headwinds for Teads are one-off and we expect revenue growth in FY25 driven by improved macroeconomic conditions and expansion into fast-growing digital advertising segments, aligning with broader industry trends.

Improved Profitability and FCF Generation: Fitch projects Teads will boost Outbrain's FY25 revenue by nearly 60% and expand adjusted ex-TAC EBITDA margins to mid-30s for FY25-FY27, up from 12% in FY23. This will drive positive FCF generation throughout the forecast horizon with FCF margins in the low to mid-single digits. Outbrain estimates $65 million-$75 million of run rate synergies to be realized in FY26, primarily from TAC-related savings and a streamlined operating model. These synergies are largely achievable, and our rating case assumes aggregate savings of $60 million-$70 million by FY26.

Manageable Acquisition Risks: Fitch considers the integration and execution risks to be manageable due to the extensive pre-merger and integration planning conducted by management. The company is poised to achieve higher synergies and quicker execution, following transaction close.

Declining Leverage Post Transaction: Fitch expects reduced credit risk following Outbrain's acquisition of Teads, with Fitch-calculated EBITDA leverage in the mid-3x range at deal closing. The post-merger capital structure will comprise $625 million senior secured notes and a $100 million super senior revolver, which will be undrawn at close. Fitch-calculated leverage is projected to fall below 3x by FY26, driven by significant incremental EBITDA from Teads and organic growth from Outbrain. Management has committed to maintaining modest long-term debt levels and has guided to leverage reduction post-close.

Conservative Capital Allocation: Outbrain does not have a publicly stated leverage target but is committed to deleveraging through organic growth and FCF generation. In light of the Teads acquisition, Outbrain plans to suspend all share buybacks, including its existing $30 million share buyback program. Additionally, the company does not foresee any dividend distributions or M&A transactions in the short to medium term. Fitch's forecast model excludes any capital raising or M&A activities.

Strategic Partnerships Driving Growth: Fitch believes the combined publisher and advertiser relationships from the merger will drive revenue growth by connecting leading brands with premium publishers. Outbrain has exclusive long-term relationships with publishers such as Dotdash Meredith, Vocento and CNN. About 80% of its publisher contracts are multiyear, with an average tenure of seven years among its top 20 partnerships. Similarly, Teads has over 50 joint business partnerships with leading global brands, including LVMH, and Visa.

Highly Competitive Environment: Outbrain faces significant competition from major players such as Google, Facebook, TikTok, Twitter, and Snap. The competitive pressure from the majors could intensify if they decide to target the Open Internet space as part of their growth strategy or leverage their position to make unfavorable changes to browsers, operating systems, and other platforms. Additionally, Outbrain encounters competitive risks in its relationships with publishers. Despite currently holding some page placement exclusivity with its publisher partners, the rise of header bidding opportunities could result in publishers opting out of exclusive agreements.

Regulations and Anti-Tracking Developments: Fitch notes that Outbrain and Teads have developed privacy-sustainable, cookie-less technologies, such as contextual and audience targeting, which should reduce their susceptibility to regulatory changes. Digital advertising platforms rely on cookies and other tracking methods for targeted ads, and new legislation could impact these services. Additionally, companies like Apple and Google have introduced features to enhance privacy, limiting tracking and affecting advertisers' reach.

Parent-subsidiary Linkage: Fitch equalizes the IDRs of Outbrain Inc. and OT Midco Inc due to a stronger parent and high legal incentives, evidenced by parent guarantees.

Derivation Summary

The 'BB-' IDR reflects the company's enhanced operating scale and diversified advertising platform post-merger with Teads. The ratings are constrained by a highly competitive and fragmented market which includes larger advertising companies with significant market share and AdTech capabilities.

Fitch equalizes the IDRs for Outbrain and OT Midco Inc. due to strong legal, strategic, and operational ties.

Outbrain has a smaller scale compared to AppLovin (BBB-/Stable), which is a market leader in the fast-growing mobile gaming performance marketing industry. AppLovin has lower leverage with structurally higher EBITDA and FCF margins. Outbrain has similar scale and leverage but lower margins compared with Red Ventures (BB-/Negative) which is a leading technology-enabled customer acquisition platform that partners with companies to optimize the customer acquisition lifecycle.

AppLovin and Red Ventures are not direct peers to Outbrain, however, both companies operate in the digital advertising market.

Key Assumptions

Merger with Teads closes in February 2025;

Pro forma for Teads, FY25 revenue for the combined company increases by 2% as advertising demand stabilizes and Outbrain accelerates the roll-out of its combined digital offerings to customers. Thereafter, revenue grows in the mid-single digits primarily due to fast growing segments including CTV and online video;

EBITDA margins expand to the mid-teens, while Ex-TAC margins expand to the mid-30s due to higher margin Teads acquisition and operating synergies. Fitch assumes total realized synergies of approximately $125 million by FY27;

Capex intensity maintained in the mid-2s over the ratings horizon.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

EBITDA Leverage remains above 4.0x on a sustained basis;

Deterioration in operating profile including a significant slowdown in revenue and/or EBITDA growth with margins at or below 10%.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

EBITDA Leverage sustained below 3.0x;

Operating scale improvement such that revenue grows in the mid- to high-teens and EBITDA margin is maintained at or exceeds 15%.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Outbrain's liquidity sources include proceeds from the senior secured notes, approximately $83 million cash on the balance at transaction close, and an undrawn $100 million revolving credit facility.

Outbrain's capital structure comprises an undrawn $100 million super senior revolving credit facility maturing in 2029 and $625 million first-lien senior secured notes, maturing in 2030.

Issuer Profile

Outbrain is a leading technology platform that connects media owners and advertisers with engaged audiences to drive business outcomes across the Open Internet.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.