Trade Me takeover offer good deal, but not a 'done deal'

ANALYSIS There is only a 50 per cent chance of a $2.5 billion takeover offer for Trade Me coming to fruition, financial analyst Morningstar is forecasting.

Trade Me announced on Wednesday that it had received a preliminary, non-binding proposal from British private equity firm Apax Partners to but Trade for $6.40 a share – a 25 per cent premium to its share price on Tuesday.

Trade Me has opened up its books to due diligence by Apax, and Morningstar said in a note to clients that was "a major obstacle to overcome".

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But it said it did not think it was a foregone conclusion that the offer would eventuate, describing the negotiations as being at an "early stage".

"At this stage, we think there's a 50 per cent probability of the transaction proceeding."

Morningstar increased its "fair value" for Trade Me shares to $5.70 a share, indicating it believed it might be wise for investors to cash-in their holdings at more than a 10 per cent discount to the price Apax may offer.

But many investors appear more confident about Apax's intention. Trade Me shares trading at $6.10 on Thursday morning, following a frantic day's trading on Wednesday after Apax's interest in the business was disclosed.

Morningstar cautioned investors "should be mindful" that if a formal offer didn't eventuate, Trade Me's share price would likely slip back.

"Also, if no further offers eventuate and the Apax bid is not increased, shareholders only have 7 per cent upside to the current share price and may have their capital tied up for months should they decide to hold on for the offer price," it said.

What would the deal mean for shareholders?

While analysts appear to hold slightly different views on how likely it is the $2.5b offer for Trade Me will be finalised, they appear to be in agreement that it would be an offer shareholders couldn't refuse.

Hamilton Hindin Greene investment adviser Grant Davies has described $6.40 a share as "pretty decent" – noting it is above analysts' estimates of Trade Me's value and a higher price than the shares have ever traded at.

Morningstar also described the offer as "attractive on the surface".

And staff?

It is a cliche that private equity investors tend to buy businesses, strip out costs and sell them on.

But it certainly can't be assumed that is Apax's plan – in fact major cost-cutting would appear to make little sense in this instance.

Apax owns businesses that employ 150,000 people with combined revenues of over US$21 billion (NZ$31b) and describes itself as a "long-term" investor.

Critically, Trade Me is a very high-margin business. It employed only 594 staff at the end of June, and its staff costs totalled $40m last year which represents 16 per cent of its revenues of $250m, or 41 per cent of its net profit of $91m.

That means any savings Apax did try to squeeze out of Trade Me's operations would make little difference to its profit, while potentially putting its $2.5b investment at risk.

For customers?

This appears a big unknown.

Apax's ability to raise Trade Me's fees is hard to judge. Trade Me still has a stranglehold over the market for selling second-hand goods, though social media platforms from Facebook to Stuff-owned Neighbourly are nibbling away at the edges.

It has strong competitors in its key listing markets of jobs, property and cars. Trade Me has proved time and time again that it can raise its success fees without killing the business, but the risks of it doing so may be constantly rising.

What about "NZ Inc"?  

A private equity offer for Trade Me would be a blow for the NZX which would lose a top stock that has been popular with both retail and institutional investors.

But Trade Me has been in overseas hands before. Between 2006 and 2011, it was wholly-owned by Stuff's Australian parent Fairfax Media.

Past and present Trade Me staff members were out in force at an after-work gathering of technology industry leaders hosted by home-grown software company Raygun at Wellington's Dockside waterside restaurant on Wednesday.

Raygun makes software to detect software errors and help applications run better, counting the likes of Microsoft, Avis and Trade Me among its customers, and earning about 92 per cent of its revenues from exports.

Chief executive John-Daniel Trask recalled Trade Me was the city's highest-profile technology industry success when Raygun was founded in 2007.

But the sector now has a lot of rising stars.

Raygun chief operating officer Lana Vaughan announced at the event that it planned to recruit more than 70 staff in Wellington over the next two years to add to its existing team of 35, injecting $15m into the city's economy.

Her take was that the talent in Wellington was "world class" and it just needed more of it to keep the tech sector growing.

The reinvestment of capital from previous successes such as Trade Me and Xero was breeding a "third wave" of up-and-coming companies that would see the IT sector overhaul the public sector as the city's biggest employer, she forecast.

If that's right, Trade Me shareholders could take the $2.5b, if they are offered it, with a very clear conscience.

TRADE ME TIMELINE

1999 Trade Me is founded by Sam Morgan, aged 22. NZ InfoTech reports in March that it has about 20 registered users after two days, and quotes Morgan saying he is happy with that "considering the lack of publicity to date." He is running the site on a Dell server. 

2000 People who have bought and sold through Trade Me now total 20,000. Company begins letting people bid on auctions via text message.

2001 Trade Me buys flat listings website Flathunt and announces plans to diversify into travel, cars and mortgages.

2003 The Dominion reports Trade Me has now cornered the online auction market. Company employs 12 staff and is seeing 500 new members sign up each day.

2005 Publisher ACP reported to be interested in buying Trade Me. A banker says there is a big gap in the price Morgan wants (which he suggests is $100m) and what buyers are willing to pay ($30m-$40m). 

2006 Fairfax Media stuns many by buying Trade Me for $700m, with Sam Morgan pocketing $227m from the deal. Trade Me is now Australian-owned.

2011 Trade Me floats on the NZX valued at just over $1b, with Fairfax cashing in about 35 per cent of the business. Trade Me's 200 staff each receive $999 worth of free shares with 25 senior executives enjoying a bonus of $687,000.

2012 Fairfax sells its remaining 51 per cent stake in Trade Me for $770m, taking its total estimated proceeds from its investment – including dividends, loans and share sell-downs – to about $1.7b. Trade Me is now an independent NZ company once again. 

2016 Trade Me announces Sam Morgan will stand down from Trade Me's board, saying he wants to rebalance how he spends his time. 

2018 British investment company Apax Partners signals desire to buy Trade Me for $2.5b, a substantial $500m premium to its market value on the NZX prior to the announcement, sending Trade Me shares to a new all-time high.