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Trade Me fair value boosted on strong likelihood of takeover

Emma Rapaport  |  15 Jan 2019Text size  Decrease  Increase  |  
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Morningstar has increased its fair value estimate for popular New Zealand classified website Trade Me after giving British private equity firm Apex Partners' takeover offer a strong likelihood of success.

Technology analyst Gareth James raised Trade Me’s (TME-NZ) fair value by 13 per cent to be in line with Apex Partners' offer of NZD6.45 per share.

James said the terms of Apex Partner's agreement with Trade Me and the long-planned resignation of chief executive John Macdonald increased the chances of the transaction proceeding.

Trade Me NZ

This is in addition to the fact that the offer has been recommended by the Trade Me board, and rival bidder US private equity firm Hellman & Friedman does not intend to increase its previous NZD6.45 offer. Trade Me is currently priced at NZD6.34.

"Trade Me's agreement with Apex Partners restricts the company from soliciting and proving due diligence access to other offers which further reduces the likelihood of alternative bids," James says.

James's stand-alone fair value estimate remains at NZD5.00 – but he acknowledges that it's now more likely that shareholders will realise Apex's offer price than the intrinsic value.

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Apex Partners made a NZD2.56 billion ($2.4 billion) takeover bid for the classified website considered the "eBay of New Zealand" in December 2018. Apex agreed to acquire 100 per cent of the shares for NZD6.45 per share – representing a 27 per cent premium on November's average share price according to reports. 

The offer was recommended by Trade Me's board shortly after.

The deal represents a win for Apex Partners, which found itself in a bidding war with Hellman & Friedman. Apex was forced to increase its November bid from NZD6.40 to match a preliminary, non-binding, indicative proposal from Hellman for NZD6.45.

Trade Me’s share price has risen almost 40 cent in the past year and was among the biggest contributors to some of Australia's top performing large cap fund managers in 2018, including Hyperion Asset Management.

Morningstar expects Trade Me to deliver earnings per share compound annual growth rate of 7 per cent over the next decade.

James says strong brand equity and a network effect provides the company with a sustainable competitive advantage. Sound financial position and strong cash flow also provide Trade Me with the ability to pursue organic and inorganic growth opportunities, he says.

While James view Apex's offer as attractive, he will provide a formal recommendation following the release of the independent adviser report in March 2019.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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