(Ankit Mittal & Jack Williams)
On July 21st it was announced that eBay’s Classifieds Group was to be acquired by Adevinta in a cash and equity deal that is set to create the largest classified advertising business in the world.
The classified advertising business model involves generating leads for sellers by pairing them up with potential buyers and facilitating direct transactions from seller to buyer. Revenue is generated in the classified industry through seller listing fees, promotion fees (where sellers pay to promote their listing) and charging per number of clicks on the listing.
eBay’s Classifieds Group has sites spanning the globe, including Gumtree and Autotrader Australia. Meanwhile Adevinta holds a diverse portfolio of online classified sites in 15 countries that gather 1.5 billion visits on a monthly basis.
The deal comprises an equity and cash deal worth $9.2bn, with Adevinta paying $2.5bn in cash whilst allowing eBay to become the largest stakeholder in the company with a 44% equity stake and a 33% voting share. Shares in Adevinta rose by more than 33% after the news of the merger was revealed, resulting in an extra $2bn for eBay as the paper value of the deal rose. The acquisition-turned-merger allows eBay to remain exposed to the classified ad business whilst also upholding activist shareholder wishes of increasing focus on their primary marketplace.
In opening biddings for the eBay subsidiary, Adevinta’s $8bn cash and stock bid came up short compared to its main rival Prosus’ all cash bid of $9bn. Despite the increased pressures to divest non-core assets from the new directions appointed by Starboard Value and Elliot Management Corp, both key activist investors in eBay, the company still expressed a desire to remain exposed to the classified ads industry. Adevinta’s bid was given a boost through their shares offering as it satisfied eBay’s appetite for remaining active in the classified ad industry whilst aligning with shareholder calls to dispose of assets and increase focus on the primary marketplace. eBay’s Chief Executive, James Iannone, hence negotiated an increased bid from Adevinta, and pursued the transaction further.
This is the biggest deal of its kind and is set to create the world’s largest classified advertising business operating in over 20 countries, with the combined business exceeding revenues of $1.8bn and operating profits of $600mn last year. The deal allows Adevinta to surpass its rivals in size, becoming the number one player within Europe’s largest economies.
The deal is set to increase the number of people exposed to the business. The merged business covers a population of one billion people and facilitates three billion monthly visits to their sites. There is also slated to be significant synergy potential, and predictions suggest there to be $150-185mn of run-rate EBITDA (meaning earnings before interest, taxation, depreciation and amortization) synergies by year 3, deriving mainly from reductions in cost as a result of the deal. These cost reductions are primarily derived from product, technology and IT efficiencies, as well as the deduplication of certain functions across the two organizations. Additional synergies include opportunities to accelerate transactional service roll-out, advertising platform efficiencies and further product enhancements.
Adevinta’s CEO, Erik Ryssdal, upholds the idea that the two businesses are a close cultural fit, making the pursuit of shared goals and a smooth integration easily attainable. Ryssdal also prided the benefits arising from the shared set of strategic principles developed through a common history of acquiring and scaling generalist online classifieds platforms and successfully verticalizing them to create value by both management teams. The breadth of talent across the companies and the collective experience across the combined portfolio will serve to optimize strategies for the various assets at different stages of development, accelerating monetization and creating value for consumers and advertisers. Furthermore, synergy potential is extended to eBay’s assets as they could strongly benefit from Adevinta’s expertise in the real estate sector. Undoubtedly, eBay has made an informed decision in selecting its partner, placing itself in a position that outperforms its potential deal with Prosus, should that have been pursued.
Although the synergy potential is exceptional, its realisation is expected to give rise to pre-tax one-time integration costs of c. US$125 million, to be incurred over the first three years following completion of the transaction. However, the cost seems a fair price to pay given the pro forma run-rate EBITDA of approximately US$150-185 million derived from these benefits.
The deal is expected to close in Q1 of 2021 provided there is approval from shareholders and regulators. Having said this, Schibster, who currently own 59% of Adevinta but have agreed to a reduced stake as a result of the deal, and Stiftelsen Tinius, who own 6%, have already agreed to giving the deal the green light. To facilitate this deal, Goldman Sachs Group Inc. and LionTree Advisors advised eBay, whereas Citigroup Inc. acted as financial adviser to Adevinta.
The State of the Classified Advertisement Industry
Ad spending in the classified industry has seen steady growth globally, with total spending expected to reach $19,867mn in 2021 with an expected growth rate of 4.6% annually (CAGR) from 2020-24. Despite the emergence of Covid-19 resulting in reductions in classified advertising spending in 2020, figures are expected to bounce back quickly and continue to grow at a rapid rate in the next 4 years. The expected growth of the industry will primarily be driven by the ever-increasing use of smartphones and mobile applications, as well as continued internet penetration.
Having seen the forecasted growth, it is insightful to check a report into the industry issued by McKinsey & Co. to gain full insight into the state of the classified ad business. The report highlights the uncertainty regarding the level of use of classified ad sites by providing data from surveys. For example, the eBay owned ‘Gumtree’ was said to be recognised by 86% of participants in the survey, yet only 34% of those had visited the site in the past three months. Statistics like this are not uncommon in the industry as a whole and suggest there is still underlying uncertainty within the classified ad sector from threats like Big Tech and other online marketplaces.
The industry itself can be split into two primary business models, horizontal and vertical, where horizontal models offer a wide scope of products that aren’t limited to a single product group, while vertical models hone in on a specific category. The report suggests that the popularity of the models varies entirely by market and location. Because of this, the deal seems particularly attractive to Adevinta since it expands its global coverage and exposure to an increasingly diversified portfolio of sites.
In terms of market share, the deal is expected to transform Adevinta from the 5th largest in the industry into the market leader by revenue. Provided the industry continues to grow at the rates expected, it is clear that the merger will be hugely beneficial for both Adevinta and eBay, but the underlying uncertainty in regard to the longevity of the classified ad business model remains a key factor for inhibiting the growth of the industry and Adevinta itself.
Adevinta’s board of directors have already shown unanimous support for the deal and have upheld the idea that the transaction will create significant short and long-term value for the company and its shareholders. When considering that the major owners of Adevinta have already given the deal the green light, it is our prediction that the deal will go ahead as planned.
We believe the significant synergy potential and the expansion of the business into further markets will undoubtedly prove beneficial for both companies and will ensure that Adevinta can successfully cement itself as market leaders within the industry. In addition, the two companies seem to be entirely compatible in terms of shared values and business direction, something that has been reiterated by senior executives at both companies.
It is also unlikely that regulators will see a competition threat from the deal, due to the global nature of the industry, which gives us further confidence that the historic deal will go ahead as planned.
- Equity stake: The percentage of a business owned by the holder of some number of shares of stock in that company.
- Voting share: Shares that give the stockholder the right to vote on matters of corporate policy making.
- Run rate: The run rate refers to the financial performance of a company based on using current financial information as a predictor of future performance.
- EBITDA: EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is essentially net income.
- CAGR: Compound annual growth rate is the mean annual growth rate of an investment over a specified period of time longer than one year.
- Milne, R. and Massoudi, A. (2020). eBay merges classifieds business with Adevinta in $9.2bn deal. Financial Times. Available at: https://www.ft.com/content/3e34b90d-3387-4262-a5bc-689e6bad2cf4
- Adevinta. (2020). Adevinta signs agreement to acquire eBay Classifieds Group. Adevinta Website. Available at: https://www.adevinta.com/news/adevinta-signs-agreement-to-acquire-ebay-classifieds-group/
- Statista. (2020). Classifieds – worldwide | Statista Market Forecast. Statista Website. Available at: https://www.statista.com/outlook/221/100/classifieds/worldwide
- Meffert, J., Morawiak, D. and Schumacher, T. (2015). Online classified ads: Digital, dynamic and still evolving. McKinsey & Company. Available at: https://www.mckinsey.com/~/media/McKinsey/Industries/Technology%20Media%20and%20Telecommunications/Media%20and%20Entertainment/Our%20Insights/Online%20classified%20ads/Online-classified-ads.pdf
- Ryssdal, R. and Raman, U. (2020). Adevinta + eBay Classifieds Group. Adevinta Investors Website. Available at: https://static.adevinta.com/wp-content/uploads/2020/07/21101320/ade-ebay-classifieds-group-acquisition-investor-presentation.pdf
Featured Image: Adevinta