US private equity player Hellman & Friedman has bid $6.45 a share for Trade Me, valuing the ASX/NZX-listed company at $2.56 billion.
Trade Me shares jumped 2.81 per cent to a new all-time high of $6.22 on the back of the news, bucking the broader market fall of 1.2 per cent following Wall Street's overnight bloodbath.
The Hellman bid trumps an earlier $6.40 a share ($2.54b) offer from British PE outfit Apax Partners, which was revealed on November 22.
Neither offer is binding at this point. Both are subject to due diligence. Apax is set to make a binding offer on December 12.
As with the Apax offer, Trade Me's board has given itself legal wiggle room to field other bids as it mulls Hellman's alternative non-binding offer.
Hellman has previously invested in similar companies, and has recently raised a US15b fund. Its dealmakers are said to have been recently in NZ.
China's Alibaba could be next to bid
Craigs Investment Partners deputy head of institutional research Stephen Ridgewell describes Hellman's $6.45 bid as a "tepid" increase on Apax's offer.
"The scope for further significant re-raises by private equity bidders may be limited, with the best scope for a significantly increased offer being from a potential trade buyer," he says.
Earlier, 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 added that, "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.
As the Apax offer came in, Devon Funds Management chief investment officer Mark Brown also 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 are still not 100 per cent convinced a deal will go through. Shares have jumped from $5.10 to this morning's $6.22 since the Apax bid was made public, but are still shy of its $6.40 indicative offer or Hellman's $6.45.
Ridgewell says with a second offer now on the table, a deal is more likely, so he expects the shares to narrow their discount.
"Assuming a formal bid is made, we see the main hurdle to a successful takeover offer as the need for Overseas Investment Office approval," the Craigs analyst says.
Good for investors, bad for NZ
Brown 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 $64m 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.