Morningstar Research gives British private equity firm Apax Partners' $2.54 billion takeover tilt at Trade Me a 50/50 chance of success.
The UK firm has been granted access to the local online auction site's books to undertake due diligence after making an indicative offer at $6.40 a share, a 25.5 per cent premium. Trade Me shares soared 16 per cent yesterday and were recently up a further 2.9 per cent at $6.10, valuing the company at $2.42 billion.
Morningstar analyst Gareth James said the bid wasn't entirely surprising given recent private equity interest in other firms such as Navitas, MYOB, Healthscope and Greencross. And Trade Me's relatively small net debt meant it could easily cope with the usual debt loading accompanying private equity ownership.
"Like the other targets, Trade Me is a reasonably defensive and highly cash generative business which should support a significant increase in net debt," he said in a note.
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.
While getting due diligence was a major hurdle to cross, James said the acquisition wasn't a foregone conclusion given the early stages of the negotiations.
"At this stage, we think there's a 50 per cent probability of the transaction proceeding and we've increased our fair value by 50 per cent of the offer premium."
Morningstar put a fair value of $5.70 on the stock, but warns if a deal doesn't happen the price will probably lose its premium.
The $2.54 billion indicative offer would be a price-to-earnings multiple of about 26 times. When Trade Me was floated in its 2011 initial public offering, the $1.08 billion valuation was at a multiple of 15.6 times. Fairfax Media's $700 million acquisition in 2006 was at an earnings multiple of 15.6 times.
Trade Me chair David Kirk has a long association with the business, buying it when he was chief executive of Fairfax and chairing the online auction site since it was carved out of the Australian media group.
Kirk chaired cinema chain Hoyts when its private equity owner sold to ID Leisure in 2015 and as Kathmandu chair he fended off a cash-and-scrip offer by Rod Duke's Briscoe Group the same year.
Morningstar's James said Trade Me's strong brand and network provided a sustainable advantage to rivals, and effectively blocked global giants such as eBay breaking into the local market.
"Trade Me's strong network effect should stand it in good stead to ward off potential competitors for the foreseeable future," James said. "Considering the popularity of the firm, we expect a significant jump in the number of transactions through the website during the next three to five years."