Description

Adevinta is a Norway-based classified marketplace formed by the April 2019 spinoff of Norwegian publisher Schibsted’s classified operations outside the Nordic countries (Finn.no (Norway), Blocket.se (Sweden), and Tori.fi (Finland) stayed with Schibsted in the Adevinta spinoff).  Schibsted is still the majority owner of Adevinta.  At spinoff, Adevinta was one of the global leaders in the classifieds business, and the CEO of Schibsted went with the Adevinta division in the spinoff (he had been Schibsted CEO for ~10 years prior to the spinoff), always a promising sign of management’s view of a spinoff division’s potential.

On July 21, Adevinta and eBay announced an agreement for Adevinta to acquire eBay Classifieds Group, which will create the world’s largest online classifieds group, a pure-play in online classifieds with an extensive footprint and portfolio of leading marketplace brands.  Prior to the transaction, Adevinta has leading digital marketplaces in 15 countries with 35 digital products and websites, including leading brands leboncoin in France, InfoJobs and Milanuncios in Spain, and 50% of OLX Brazil (Prosus owns the other 50%).  eBay Classifieds has leading local classifieds marketplaces in 13 countries with brands including Mobile.de, Gumtree, Marktplaats, dba, Bilbasen, Kijiji, 2dehands, 2ememain, Vivanuncios, Automobile.it, Motors.co.uk, Autotrader (Australia), Carsguide (Australia), and eBay Kleinanzeigen.  The combined entity will have the #1 market position in all 20 countries (net of overlap), with both generalist and vertical (real estate, cars, jobs) marketplaces, covering one billion people with 3 billion average monthly visits.

The combined company will be the largest classifieds company in the world:

The combined entity will benefit from a balanced portfolio of assets centered around Germany, France, and Spain. The management teams of both companies have a common history of acquiring and scaling generalist marketplaces and successfully verticalizing them to create value. 

Although the stock increased meaningfully with the acquisition announcement, I believe the market value does not fully reflect the improved profitability likely to result from the combination (see below).  I have considered a range of scenarios with varying growth and profitability improvements driven by market share gains, but think it is likely that today’s pro forma EV / 2023 EBITDA multiple will represent a meaningful discount to the comps, and which should offer a ≥2-2.5x increase in the stock price over that time period.  A variety of DCF scenarios support the same conclusion.

Merger of Adevinta and eBay Classifieds Group

The transaction is valued at $9.2 billion (based on Adevinta’s share price of US$12.38 on July 17).  eBay will receive $2.5 billion in cash (including US$330mm for eBay Classifieds Group’s Denmark marketplaces (DBA.dk and Bilbasen.dk), which will be acquired by Schibsted at closing; the eBay Denmark sale reduces cash consideration from Adevinta to ~US$2.17 billion) and ~540 million Adevinta shares. 

The cash consideration will be financed with new debt: a committed secured bridge facility of US$3.0bn and cash on Adevinta’s balance sheet.  A bridge term facility will be used to fully refinance Adevinta’s existing €400 million revolving credit facility and cover the financing and transaction fees and includes support for $330m Schibsted’s purchase of eBay Denmark at close. 

Pro forma for the eBay Denmark acquisition, gross debt at Adevinta will be US$2.75bn.  The combined entity is expected to de-lever quickly through a combination of strong EBITDA growth and high cash conversion.

Post transaction, eBay will become the largest Adevinta shareholder, with a 44% stake, a 33.3% voting stake, and the remainder non-voting shares.  The deal is expected to be completed in the first quarter of 2021, subject to shareholder and regulatory approvals, including clearances in the UK, Australia, Germany, Austria.  Schibsted, which currently owns 59% of Adevinta, and Stiftelsen Tinius, which currently owns 6% of Adevinta, have signed voting agreements to vote in favor of the transaction.  As a result of the transaction, Schibsted’s ownership will decrease from 59% to ~33%.  In connection with closing of the transaction, Adevinta will publish a listing prospectus for the listing of the new shares issued to eBay on the Oslo Stock Exchange.

The combined company will become the most diversified classified company in the world:

Merger Synergies

The companies believe that the merger will result in US$150-$185 million in synergies in run-rate EBITDA by year three, two-thirds of which are expected from cost synergies, and they estimate $125m one-time pre-tax integration costs.  They will realize cost synergies from product, technology, and IT efficiencies; G&A efficiencies from reduced functional duplication and procurement efficiencies, and overlapping geographies (e.g., Italy, Mexico) and in-market consolidation.

I believe they are sandbagging the revenue synergies, intentionally so, because as Rolv Erik Ryssdal (CEO) said on the merger conference call, “There are clear synergies between our businesses. We’ve been looking at this. I’ve been very impressed when I look at eBay and what they have been able to do in their big markets such as Germany, both with how they have been growing Kleinanzeigen, and I would consider them to be best in class with Mobile.de.  A lot of that knowledge can be transferred between the companies. That’s something I’m truly excited about. That said, cost synergies are like 2/3 of it, and I know that you guys are always a bit skeptical to revenue synergies.  But when I look at what the two companies are doing in terms of excellence in their different fields, then I am very optimistic as to what we can achieve together.”

Revenue synergies will include opportunities to accelerate the roll out of transactional service marketplaces and payments (which will strengthen relationships with professional customers like real estate agents, recruiters, and auto dealers), optimize pricing across the enlarged portfolio, cross-border transactional services, and advertising platform efficiencies and improving yields, and additional product enhancements: payment, shipping, delivery, personalized shopping, improved discovery, and improved matching of sellers/buyers.

Another summary of potential revenue synergies can be found in the description of Adevinta competitor (and OLX joint venture partner in Brazil) Naspers / Prosus of its “convenient transactions” model, which plugs into the existing business, enhances the offerings, and drives transaction volumes (from Naspers’ FY2019 conference call transcript, pages 13 and 15):

Martin Scheepbouwer (CEO of OLX Group): Thank you for your question on the convenient transactions. The way we look at that is anything that helps the customer solve a problem buying or selling on one of our platforms that we historically don’t help out with. So they come in very different forms. It is payment and delivery in Russia and Ukraine. It is a price inspection report in Russia. It is car inspection and direct purchasing in a number of countries. What these have in common is it’s deeply ingrained locally and led by local teams, and it has an offline component to it. And what we like most is it is really valued by our customers that we help them out in this way. So NPS on these products is typically is extremely high. Some of them we charge for at cost. Others are an investment cycle. I think what you will see more of is build these as part of a broader ecosystem of different product formats, especially in our most important countries. And as always, as Basil alluded to, we will push what works and we will be strict about stopping what doesn’t generate the right [economics]…

Kevin Mattison: Hi. A few questions. The first one is it seems that as you’re investing more in your classified businesses, particularly cash for cars, that maybe your capital intensity is changing. If we could also put the same thing through to you on the food delivery business as you move from 3P businesses to 1P businesses. Are you finding you have to invest more in terms of harder assets in order to generate rates of return? And then the second question. You noted a couple of times in the presentation today that over the last four reporting periods your earnings have grown faster than Tencent’s in constant currency. Do you expect that trend to continue? 

Bob Van Dijk: Kevin, thanks for the questions. I will cover the first one as it covers several segments, and then Basil can comment on your second question. I think you are right in observing that you will see in convenient transactions as well as in food the real world playing a bigger role in our proposition. And I would want to say that strategically I think that is a secular trend that is not just happening in our business. If you look at the first 20 years of the internet, it was all about life models being disrupted. Think about digital content. Think about advertising. They were very easily and quickly disrupted. And I think the next major phase of growth that is driven by technology will necessarily have a larger offline component. I think the main conclusion for us as we looked at that in our strategy extensively is actually the opportunity is bigger. 

I would say the opportunity in the next wave of technology touching the real world and bringing offline experiences online is a larger opportunity. Now, food is the best illustration. We said just connecting customers with restaurants was a great thing. Now if you actually play a bigger role in disrupting the ecosystem it’s just a much bigger business opportunity than we previously thought. And similarly for convenient transactions in classifieds. So I think your observation is correct. It actually is an illustration of much further potential. I think it also makes these business models very locally defensible. If you are integrated with the real world, you do it well and customers like it, it becomes a not very easy to disrupt the model. So I think you’re correct. I think it illustrates a larger opportunity. And finally, I think it makes for a very defensible and attractive local business model. 

Classifieds Business

Global classified ad spending is projected to be US$18.5 billion in 2020.  The global online classified market is benefitting from the shift of commerce from off line to online, the shift to online advertising, increasing digitalization of commerce, and the proliferation of mobile devices.  Classified marketplaces are two-sided (i.e., buyers and sellers) marketplaces with strong direct network effects (more sellers attract more buyers, and more buyers attract more sellers; it provides a better experience to customer “n+1000” than it did to customer “n” directly as a function of adding 1000 more participants to the market).  This network effect is more valuable than mere economies of scale, and can lead to increasing returns over time rather than reversion to the mean as a company’s competitive advantage gets stronger over time, not weaker.  Classified marketplaces also have winner-takes-most market dynamics, a high degree of operating leverage, and low cap ex requirements.  

Vostok New Ventures did a nice job of summarizing vertical vs. horizontal marketplaces (see: Avito Case Study), and some key considerations for the strongest categories of vertical marketplaces: real estate, jobs, and auto: 

“Classified companies are often divided into verticals (Rightmove, Autotrader, Zillow, REA Group, etc.) or horizontals (Blocket, Leboncoin, OLX). Verticals have the benefit of a more specialized offering and a more clearly defined market positioning, which often make them the go to resources for anyone who wants to sell something of value in that specific vertical. Furthermore, market-leading verticals become “must haves” for professional sellers and therefore have substantial pricing power. However, they have limited touch points with consumers. Horizontals, on the other hand, have a much higher stickiness with consumers. In the mobile age, they often get a piece of the very valuable real estate on consumers’ smartphones. In market after market, we have seen horizontals expanding their traffic market share at the expense of verticals. However, due to a too generic product, limited sales efforts and lack of a strong vertical positioning, they have historically not had the pricing power of verticals. They have also been seen as more vulnerable to disruptors (e.g., Facebook Marketplace) and to pressure on advertising revenues.”

“By working across verticals, Avito gets economies of scale versus purely vertical competitors. The economies of scale translate into lower costs than vertical competitors, which means higher margins which, everything else equal, warrants a higher valuation. In addition to the above, Avito also has a considerable advantage by being a single entry point. As more and more traffic moves to mobile devices, the real estate on consumers screens becomes more and more valuable. Having a single entry point to a number of verticals is a great advantage here – consumers often simply do not bother to download multiple vertical offerings but tend to use one horizontal marketplace. This is reflected in the higher share of mobile traffic of horizontals compared to verticals, which can be seen in multiple markets. Implications for how investors will look at Avito’s future valuation potential We believe there are three concrete implications for Avito’s long-term potential when looking at Avito as a collection of verticals rather than a horizontal. 1. Higher pricing power to drive top line growth By comparing Avito to other horizontals, we believe investors are underestimating the future earnings power of Avito given their current positioning in each of the verticals. The future earnings power of Avito is better estimated by benchmarking each vertical independently to vertical leaders in other market. Avito has moved away from selling “pay as you go” products to moving professional clients to recurring subscriptions, very much in line with the leading vertical players internationally. 2. Lower risk of disruption reduces discount rate and warrants higher multiples Investors tend to view horizontals as more vulnerable for disruption than verticals, and this is probably reasonable. But given Avito’s strong positioning in the verticals and given the high share of revenues coming from professional users in high ticket categories (a segment where social networks have historically been very weak), the risk of disruption in Avito’s case is lower than for horizontal players. Another risk factor has been pressure on advertising revenues as giants such as Facebook and Google take a larger and larger share of advertisers’ revenues. Avito currently has a very low dependence on third party advertising revenues and we believe that future revenue growth will mainly come from other sources.  3. Synergies between verticals to deliver best in class margins Avito has a cost advantage over vertical players due to fact that they can develop common solutions where it makes sense. Furthermore, advertising efforts also have scale effects since advertising for one vertical Avito brand often spills over to others. Lastly, Avito operates in a very large market and has already reached significant scale. We believe that Avito will be able to reach best in class margins of at least 70%.”

Attractiveness of various classified categories:

Real Estate: “Our view is that the intrinsic value of a classifieds property can be derived from the total addressable market multiplied with the property’s share of leads generated in that specific vertical. The logic behind this is quite simple. Advertisers in a given vertical have a bag of money to spend on advertising. This bag of money can grow bigger (or smaller) with time, but the size of the advertising spend is unlikely to change with more than single digit percentage numbers per year. The total addressable market is often fairly stable. What can change relatively quick, however, is how advertisers chose to distribute this spend. In the last decade we have seen a tremendous shift in spend from offline to online. Advertisers have simply followed consumers as they have shifted their time allocated from offline to online, from print classifieds to online classifieds. As consumers’ time allocation shifts from one type of media to another, so does the number of leads generated. And as one resource starts working better than the other – that is, starts generating more leads – advertisers move their spend to the best performing sources. In the long run, a property’s share of leads generated and share of spend should converge. In the short to medium term there might be nuances in different properties’ monetization strategies, sales capabilities, etc., but we prefer to take the long view.”

Auto: “Auto has traditionally been one of the strongest classifieds verticals globally. There are plenty of success stories – AutoTrader in the UK, Autoscout24 in Germany, carsales. com in Australia and Blocket in Sweden, to mention a few. What is common for all these success stories is that they make the bulk of revenues from car dealers who advertise used cars on their platform. They are also active in countries with very well-developed dealer networks that have been active in the used car space for a long period of time. In emerging economies, the car market is often structured differently. Dealers are primarily focused on selling new cars, and the used car trade is more done by privates or by so-called “grey” or “unofficial” dealers. A structure like that makes it harder to make substantial revenues from the traditional model of classifieds – private sellers are harder to monetize and no classifieds player has really cracked how to make real revenues from new cars as of yet. There is a lot of innovation going on in the digital car trading space. A common theme for most new models is the push to increase trust and transparency. Auto1 has built a multi-billion-dollar business by bringing liquidity and transparency to private sellers and professional car traders, and a number of clones have emerged across a number of geographies including Russia. This model includes an offline component with physical inspections being made of the car, and classifieds companies have not been late to offer the same service. There is also innovation happening in the new car space, with companies like TrueCar in the US and Carwow in the UK leading the charge. Regardless of model – auto is a vertical where huge values are being transacted, and companies that connect buyers and sellers in a seamless way stand to profit handsomely.”

Jobs: “Our view is that the intrinsic value of a classifieds property can be derived from the total addressable market multiplied with the property’s share of leads generated in that specific vertical. While we believe this holds true for the Jobs vertical as well, one could argue that the picture is slightly more complex in this vertical. This is because the channels to find jobs are more fragmented than in other verticals. When looking for a home or a used car, a classifieds property is the starting point for a large majority of people. But for finding a new job – or a new employee – there are many alternative ways: recommendation from friends or colleagues; using a headhunter (or being headhunted); finding candidates or openings through offline advertising; recruiting from an internal or external database of CVs; etc. Globally, there are fewer success cases in the Jobs vertical compared to e.g. Auto or Real Estate, and our view is that the fragmentation of ways to find a job is the main reason. The pricing power decreases when there are viable alternatives to the online platforms.  That being said, a couple of players (Avito being one of them) has managed to build successful and highly profitable businesses in this vertical. SEEK of Australia (with a strong international footprint) is another notable example, with a USD 7 bn market cap.”

General: “General encompasses a wide range of very different categories. It consists of Personal belongings, Children’s goods, Construction and renovation, For home and dacha, Electronics, Hobby and leisure, Pets, For business and Spare parts. In some respects, it is more a way to collect what is left into one bucket than a logical vertical of its own. Even if those categories are all very different, they do share some common features that sets them apart from the other verticals: Goods are traded (unlike in Jobs and Services);  They can be shipped and moved (unlike in Real estate); The value of the items is relatively low (unlike e.g. Auto);  Private users make up the bulk of advertisers (unlike Real estate, Services or Jobs), but professional power users (often selling new goods) make up for a disproportionate share of items;  The categories have a relatively high competition from e-commerce (unlike all other categories).”

“Advertisers who publish ads in the General categories also represent a large share of total advertisers on the platform, especially among privates. It is therefore extremely important to have a strong position in these categories in order to keep being relevant and top of mind for a large share of the population.

But from a revenue perspective, the most item-heavy categories such as Personal Belonging and Children’s goods are less important. As in the other major verticals, the bulk of revenues come from professional users (we estimate that up to 75% of revenue in General comes from professionals). The lower the share of professional sellers and the lower the value of an average item, the harder it is to monetize a category through the standard classifieds monetization tools (i.e. visibility features and listing fees). Few privates are simply ready to pay to get rid of stuff they don’t need anymore, especially if the value is low. But with a high share of professional sellers who have an inventory to sell, you can make a lot of revenues even if the average value of an item is moderate (as in e.g. Spare Parts or Construction and renovation).”

Combined Financials

The combined company had an estimated pro forma US$1.81 billion in revenues (11.7% y/y growth; Adevinta grew 14.8% y/y and eBay grew 9.3% y/y) and US$596 million in EBITDA (32.95% margin) in 2019.  They project synergies of ~US$150-185 million of run-rate EBITDA synergies by year three, two-thirds of which expected from cost synergies.

Adevinta’s 2019 financials including JVs, converted using EUR:USD exchange rate of 1.10 (1.17867 on 8/7). eBay Classifieds Group EBITDA adjusted to reflect allocated direct corporate costs, carve-out costs and impact of stock based compensation. USD:NOK exchange rate of 9.29 (9/04 on 8/7).

Valuation

As with all network-driven businesses, online classifieds is an industry with economies of scale, which consolidation helps improve.  In any given geography and vertical, one to two competitors generally take the majority of the market, and enjoy attractive economics. Many leading classifieds platforms operate with 40%-60% EBITDA margins, with some EBITDA margins as high as 75%. 

As a result of these strong market dynamics, attractive economics, and significant advantages from incumbency, leading classifieds businesses garner attractive valuations. There has been significant acquisition interest in the industry from both strategic and financial acquirers, with transactions all valued at >20x LTM EBITDA, and the average publicly traded classifieds business trades at a mid-to-high-teens forward EBITDA multiple:

Source: Elliott Management’s letter to the Board of Directors of eBay January 2019

While those multiples may appear high on first pass, the Competitive Advantage Period “CAP” for businesses with direct network effects is far longer than more typical businesses facing diminishing returns, and the multiples are far more reasonable in the context of a DCF with a forecast period longer than a traditional forecast period (DCF’s using a traditional forecast period typically undervalue companies with network effects that experience increasing returns, because their competitive advantage continues or even grows beyond a traditional forecast period (e.g., Craigslist and eBay still competing well after 25 years)).  That is true even assuming static margins, but Adevinta should actually experience increasing EBITDA margins as it continues to scale.

I think a key underappreciated aspect of the merger is the potential for improved profitability that comes with increasing market share.  Schibsted did an analysis of its classifieds portfolio and found a causal link between the relative size of a #1 marketplace vs. the #2 in its category/geography, and the profitability of that marketplace: