New bidder: US player could push Trade Me price above $2.5b

Under the hammer. Photo / File.

Trade Me users are well aware a bidding war can drive a price through the roof - now that could be about to happen for the company itself.

On November 22, Trade Me's board revealed it had an indicative $6.40 per share offer on the table from UK outfit Apax Partners, valuing the ASX/NZX-listed company at $2.54b.

Now US private equity player Hellman & Friedman is said to be actively considering a bid.

Hellman has previously invested in similar companies, and has recently raised a US15b fund. Its dealmakers are said to have been recently in NZ.

Craigs Investment Partners deputy head of institutional research Stephen Ridgewell noted the Apax offer was 25 per cent above Trade Me's pre-offer close, and a 26 per cent premium on the company's average post IPO forward price/earnings ratio.

But he could also see a scenario where a higher bid emerged.

"We see potential for a competing bid to emerge, including potentially from cashed-up trade buyers who could add value to Trade Me's platform," he said.

Devon Funds Management chief investment officer Mark Brown said he saw room for some sweetening, given Trade Me's market power as an incumbent and because it's attractive as "enormously cash generative and has very little debt".

And he says that beyond the potential bidding war between rival private equity players Apax and Hellman, it's possible that a trade buyer like Alibaba could place a bid.

The Chinese giant "has bought players in other parts of the world rather than start from scratch. You could see someone in the industry making that play," he says.

Trade Me investors have not been entirely convinced. Shares have jumped from $5.10 to a recent $6.09 since the Apax bid was was made public, but are still shy of its $6.40 indicative offer (Apax is currently carrying out due diligence and won't make its final, binding offer until December 12).

Trade Me shares have shot to an all-time high of $6.09 on the back of Apax Partners' $2.54b ($6.40/share) takeover offer, now subject to a possible counter from Hellman & Friedman.

Brown doesn't doesn't want to speculate how high bidding for Trade Me could go, but thinks it will be a good result for shareholders - if not so much for the NZX or the country.

"In some respects, it's sad because we're losing another excellent New Zealand business off the bourse. It's bittersweet. We're getting an excellent outcome for our investors but the long-term outcome for capital markets in New Zealand is not good."

Meanwhile, Morningstar analyst Gareth James says if Apax or one of its peers is the successful buyer, Trade Me could be about to be saddled with a ton of debt in the grand tradition of private equity companies.

The average leverage among Apax companies at March 2017 was 4.5 times, meaning Trade Me could be saddled with about $738 million. The company's net debt was $64 million as at June 30, although that increased in September when Trade Me paid a special dividend funded through debt.

On August 22, Trade Me said it was distributing $100m via a 22 cents per share special dividend, as the online auction company announced it turned over more than $250m for the first time to deliver a 3.9 per cent increase in net profit for the year to June 30 of $96.6m.

The company was founded by Sam Morgan in 1999.

Morgan sold it to Fairfax in 2006 for $700m. The Australian publisher, in turn, floated Trade Me in late 2011 at a $1.07b valuation.