Formidable value in a $2.5b journey
Last week’s compelling takeover offer is another milestone for a company that has nurtured a generation of web entrepreneurs.
Sunday March 5, 2006, was a busy night at Trade Me. The leadership team – Sam Morgan, Jon Macdonald, Jessi Morgan, Rowan Simpson and myself – had the job of calling all 50 staff members and telling them that Trade Me was about to be sold to media company Fairfax Media.
The next morning Fairfax staged a press conference at the Park Royal Hotel. Morgan and Fairfax chief executive David Kirk sat on a stage beside Fairfax New Zealand boss Joan Withers. Macdonald and I crept into the back row as press packs were passed out.
In front of me was Bernard Hickey, the then business bureau head of Fairfax New Zealand. He scooped up the pack, ran his practised eye across the media release and did a double-take. Then he leaned across to me and said: ‘‘Hey MOD, I think there’s a typo here. It says Fairfax has paid $750 million for Trade Me. Don’t you mean $75m?’’
Hickey’s response, one of astonishment that this online garage sale had been snapped up for $750m, was typical of the time. The Warehouse’s Stephen Tindall reportedly went into a funk for days and many commentators said Fairfax was mad.
However, over the next seven years – through a process of staggered IPOs and a steady stream of dividends – Fairfax ended up netting $1.7 billion from Trade Me.
Even in 2006 the maths was impressive. A 50-person company that had $50m of forecast earnings, with strong growth and a profitability ratio of about 91 per cent. And Fairfax managed to pick it up at a multiple of 15 times earnings. A compelling deal, really.
Last week another compelling deal was tabled. British private equity house Apax Partners launched a takeover offer for all of Trade Me at $6.40 a share. That’s a 25 per cent premium on the recent trading price and values the company at $2.54b, about $500m more than prior to the offer.
While Trade Me described it as a ‘‘preliminary, non-binding, indicative proposal’’, the figure has been finely set.
It’s at a level that means bottomfeeders and hastily put together consortiums of old-world media and scavenger funds won’t bother putting in a cheeky counter-offer.
More importantly, it gives all existing shareholders a 25 per cent premium to exit, off the back of a history of solid dividends and growth across the three verticals.
It also gives them liquidity with no brokerage costs at a time when equity markets are starting to look a bit iffy. A time when cash is king and if you can get yourself that cash, while also enjoying a bit of profit-taking, then you’d be a mug not to.
Particularly when all the easy money had been taken off the table by Trade Me, so future growth is likely to be tougher for the business.
Of course, Trade Me isn’t one business – it’s four.
A marketplace business that stalled for several years but is now showing hard-fought growth of 1.3 per cent with revenues of $70m.
A terrific motors business that is delivering revenue of $70m, is still managing to show growth of almost 13 per cent, and is almost 10 times the size of the No. 2 player.
A healthy property business giving $38m of revenue and 10.2 per cent, with fewer properties than its main competitor but more traffic.
A good jobs business that’s doing $28m in revenues and is growing at 14.1 per cent off the back of new ‘‘depth’’ products. And a lesson that it’s entirely practicable to run a strong No. 2 vertical that is nicely profitable.
The fact that Apax has picked up three other e-commerce assets in the past year or so shouldn’t go unnoticed. In Israel it picked up Zap, a classified verticals business similar to Trade Me.
In its native Britain it took a major shareholding in the motors behemoth AutoTrader. It also acquired transnational e-commerce solution
Global E.
Like any private equity player, Apax will have a number of possible plans for the new assets up its sleeve and a number of possible exit strategies. But what’s likely to happen in the short term?
First, they won’t want to sour the secret sauce. A key part of this for Trade Me is a round-the-clock trust and safety team who ensure that out of 300,000-odd trades a week, only about 100 go haywire and of that only about 25 are fraudulent.
Another ingredient of the sauce is a consumer centricity that dates back to Morgan’s early bias towards buyers.
Second, Apax will immediately be able to strip out about $2m of compliance costs that comes from being a listed company in two countries. There’s the economic saving, but also the distraction saving that comes from having your chief executive, chief financial officer and other senior managers having to stroke a global collection of investors rather than focus on making the boat go faster.
Third, Apax will look at synergies and the changing face of local e-commerce with Amazon, Alibaba and Facebook all playing an increasing role in New Zealand and Australia. Fee rises have meant a growing number of punters now turn to Facebook first to sell items.
In its first 10 years Trade Me benefited from an e-commerce xenophobia. Parochial Kiwis were reluctant to send their money overseas and had worries about items arriving or being able to swap them. Worries that have now evaporated.
My two teenage daughters are 100 per cent comfy buying off the likes of Asos, Zalando and AliExpress. Meanwhile, Amazon’s ability to put things right is now legendary.
Standing back and trying to put the whole thing in perspective, two things stand out for me. Both point to technology’s trajectory to become our most valuable sector.
The first is that a youngster with a laptop and a couple of hundred thousand dollars tipped in by workmates and family can create a business that distributed $750m to its Kiwi shareholders.
A company that then delivered another $1.7b to Fairfax, and now looks set to deliver another $2.54b to its shareholders, which by number are still mainly Kiwis.
Adding in the dividend stream, that’s $5b and change. Not trivial.
But the more exciting thing for me is how Trade Me acted as a combined agar dish and kindergarten for the next wave of local web entrepreneurs.
I can count more than a dozen local companies whose founders learnt their trade at Trade Me and now inject considerable value into the economy.
StarNow is run by early Trade Me techo Cameron Mehlhopt. Retail software company Vend is run by Trade Me’s former head of strategy, Alex Fala.
Health and beauty website Timely is run by Ryan Baker, who did his time at Trade Me after it snapped up BookIt. Online retailer Trade Tested is run by former Trade Me analytics guy Richard ‘‘Fast Ricky’’ Humphries.
Meanwhile, home services website GoodNest was founded by former Trade Me guru James McAvoy. The Punakaiki Fund’s Lance Wiggs also did time at Trade Me. The full list is longer but put a rough slide rule over just these six and you’re looking at another billon dollars of value, and they’re just beginning.
In the coming weeks there will be detractors of the Apax offer and reactionary criticism that the 19-year-old company is not as good as it used to be.
But one thing that can’t be argued is the formidable value it’s created for Aotearoa New Zealand. And that’s no typo.
Mike ‘‘MOD’’ O’Donnell is a professional director and adviser. He is a former chief operating officer at Trade Me and authored the book Trade Me – The Inside Story. MOD holds no shares in Trade Me but writes its motoring blog, MOD’s Motors.