04/30/2012 11:55 am ET Updated Jun 30, 2012

Demand Media Shares Soar After Failed Buyout Bid

April 30 (Reuters) - Shares of Demand Media Inc rose 31 percent on Monday, following reports that an offer to take the company private fell through over the weekend, fuelling hopes that the online content provider may be up for grabs.

Private equity firm Thomas H. Lee Partners approached the company with a $1.2 billion buyout offer, but talks were abandoned due to a number of challenges, All Things Digital reported on April 28.

"Where there's smoke there's fire. These talks fell apart but some people may believe they may start back up," Evercore Partners analyst Douglas Arthur said.

"Once a company admits they've been in conversation to go private then investors start thinking there may be other firms that could step in, there may be other companies that might want to buy them."

Arthur downgraded the company to "equal weight" from "overweight" on valuation, saying Thomas Lee's alleged $11 offer would push the shares over the brokerage's $9 price target.

The company, which had a market value of $608 million as of Friday, was not immediately available for comment.

Demand Media's stock, which has lost over 65 percent of its value since touching a life high of $26.25 in March 2011, trades at 24.2 times forward earnings, compared with a sector average of 33.3.

The shares, which listed on the New York Stock Exchange in a successful IPO last January, have been hit as Google -- a key partner -- changed some of its search algorithms, reducing traffic to Demand Media's major content sites.

The company relies on freelance writers to provide articles and videos designed to appear at the top of Internet searches that in turn generate advertising revenue. It also operates a clutch of websites including eHow, LiveStrong and Cracked.

Demand Media, which is being closely watched as a test case for a way to inexpensively create content that surfaces high in search results, recently launched the first of its two major channels in partnership with YouTube.

Shares of the company, which competes with Yahoo's Associated Content, the New York Times Co's and AOL Inc's Seed, jumped to $9.48 in morning trading, making them one of the biggest gainers on the New York Stock Exchange.

They lost some of their early gains and were up 19 percent at $8.65 in midday trading.

(Reporting by Sayantani Ghosh in Bangalore; Editing by Saumyadeb Chakrabarty)