Opinion & Analysis
OPINION: Special offer, two days only, 202 million Trade Me shares. Buy now price, $3.80 each.
Even at $767 million, the deal was more popular than a Tana Umaga memorial handbag and the shares were snapped up by eager buyers.
Part of the attraction was no doubt the discount to the market price, then about $4.05, but it’s also apparent Trade Me has plenty of investor support - selling 51 per cent of the company over a long weekend is no mean feat.
In fact, it is probably the biggest deal of its kind in more than a decade.
Given the size of the deal it’s significant that Fairfax, owner of www.stuff.co.nz and seller of the 51 per cent, chose not to flog its controlling stake to a single buyer.
Ordinarily, a vendor might seek a premium for such a strategic holding by selling it to a trade or private equity buyer. Why would Fairfax not do so in this case?
Maybe it considered the idea, but the fact that the shares went to a multitude of institutions suggests it was not the optimum approach this time.
Among the issues with a trade sale a single buyer - perhaps a competitor - might require a period of due diligence and a conditional deal, extending the transaction time and correspondingly the risk of something going awry.
And if a trade deal falls over there is the risk of a competitor potentially gaining useful intelligence from the due diligence process.
Instead, Fairfax went for a quick sell-down to institutions, with the minimum price guaranteed through an underwrite with investment bank UBS. Clearly, although UBS would have made a tasty fee for the underwrite, it would take on the obligation only if it was confident it wouldn’t be left holding surplus stock.
That the whole thing was executed between last Saturday and Monday shows there is plenty of money looking for a home and that Trade Me is seen as a good place to put it.
It shows something else too, but first, what does it mean for existing Trade Me shareholders?
Analyst Arie Dekker of Craigs Investment Partners started covering Trade Me in January and in his first research note rated the stock a hold reflecting ‘‘comfort in the investment thesis and near-term earnings outlook for the company, and a [valuation] multiple that we think is sustainable if Trade Me continues to execute well in the core auctions and classifieds businesses’’.
In hindsight his 12-month price target was conservative at $2.94 - within two months the shares topped $3.50 and kept climbing.
Last week Dekker was still conservative, suggesting a 12-month price target of $3.78, below the price of the Fairfax sale and well below the market price.
Still, he was not saying Trade Me was overvalued. ‘‘It’s been trading at a premium,’’ he said, ‘‘but it’s still not really out of line with where its Australian peers have been trading.’’
In August, Trade Me announced its first result as a listed company was net profit of $75m, well ahead of the prospectus forecast of $65m. The dividend of 7.8c was also up on the 6.8c foreshadowed in the prospectus.
At the October 30 annual meeting it said the outlook was stable, but the broader economic upturn forecast at IPO time has not emerged.
As it turns out, the shares peaked at $4.45 on October 29 and fell sharply to $4.24 on the day of the AGM, so it looks like the remarks may have had an effect.
It’s also possible that efforts to assess demand for the Fairfax stake immediately prior to the deal, a process some bankers call seasoning, affected share trading.
Since the Fairfax sale, Trade Me shares have fallen slightly on high volume, easing to $3.99 within a couple of days. That’s 10 per cent down on the October peak.
With the release of the Fairfax shares onto the market, it seems likely the shares could take some time to touch previous heights again. Nevertheless, Trade Me has been a good performer since its IPO at $2.70 a share last year and the level of investor support should give confidence to other companies thinking of going public.
And that is possibly the wider significance of the Fairfax deal.
This time next year we could be assessing the performance of several new listed companies on the NZX. Let’s hope for a happy new year.
Tim Hunter is deputy editor of the Fairfax Business Bureau. He owns shares in Trade Me.
- Sunday Star Times