The Blackstone Group L.P. [BX: NYSE] – Market Cap as of 26/02/2019 $41.77bn
Scout24 AG [G24: XETRA] – Market Cap as of 26/02/2019 €4.96bn
Introduction
On Friday 15 February 2019 Scout24, the leading German online classifieds group, received a voluntary public takeover offer by Blackstone and Hellman & Friedman. At a cash offer of €46 per share, the bid has won the approval of Scout24’s management and supervisory boards, which had previously rejected an offer at €43.5 per share. The all-cash offer represents a 27.4% premium to Scout24’s undisturbed share price.
Scout24 AG
Scout24 is German online classifieds company based in Munich that maintains online market places with a focus on car platform AutoScout24 and real estate platform ImmobilienScout24. Overall, the firm is active across 18 European countries. The firm was founded in 1998 by Joachim Schlosser and subsequently became a subsidiary of Deutsche Telekom. In November 2013 Telekom announced the sale of 70% of shares to Hellman & Friedman, with an additional undisclosed stake being sold to Blackstone in February 2014.
Scout24 successfully listed on the Frankfurt stock exchange in October 2015. The IPO valued Scout24 at €3.2 billion with a total issue volume (incl. greenshoe) of approximately €1.16 billion. Both Blackstone and Hellman & Friedman sold down their stake in the IPO and in September 2016 Hellman & Friedman sold all its remaining shares in the company.
FY 2018 results for the company exceeded analyst expectations with an increase in revenues by 12.5% to €532m. EBITDA from ordinary business activities grew by 15.3% YoY reaching €292m which represents an impressive 56.5% EBITDA margin. After-tax profits for FY 2018 are expected to amount to €165m or €1.53 per share. In 2018 Scout24 completed the acquisition of Finanzcheck.de, an online platform for consumer credit, for €285m. The acquisition is in line with its strategic plan of growing its consumer services revenues to €250m.
The Blackstone Group L.P.
The Blackstone Group is an American Private Equity firm founded in 1985 initially as an M&A boutique by Peter G. Peterson and Stephen A. Schwarzman. Blackstone went public on the New York Stock Exchange in 2007 with a $4bn IPO, one of all-time biggest IPOs for a financial sponsor. The firm is based in New York City.
The company is currently one of the largest Private Equity funds in the world, operating on a global basis. Its $472bn (as of FY2018) of AUM include investments in private equity, real estate, public debt and equity, non-investment grade credit, real assets and secondary funds. Blackstone deploys capital to make sound investments for its shareholders with the purpose of generating returns through to a combination of cost cutting and management expertise.
FY 2018 saw a 9% YoY growth of AUM coupled with inflows of $101bn for the year. Total capital deployed reached $44bn for the year, of which 42% went into real estate and 37% into private equity investments. Performance across segments generated record Fee Related Earnings of $1.5 billion and Segment Distributable Earnings of $2.8 billion. Both real estate and private equity funds saw appreciation for the year, with a remarkable 19.1% appreciation of corporate private equity despite a 2.9% drop in Q4 2018.
Hellman & Friedman LLC
Hellman & Friedman is an American Private Equity firm founded in 1984 by Warren Hellman and Tully Friedman. Over the firm’s 30-year history it has raised over $50bn of committed capital and has invested in over 90 companies. The firm has historically had proportionally high exposure to service-based businesses, focusing on financial, business & information and insurance services. The firm’s current portfolio also contains businesses operating within healthcare, retail, energy and internet.
Hellman & Friedman maintains offices in San Francisco, New York and London. According to its latest SEC filing on January 14, 2019, the firm has 80 employees and $28.9b in Regulatory Assets Under Management (RAUM).
Industry Overview
Going through the history of marketplaces, we see that the initial wave of marketplaces from the 2000s such as Leboncoin, Marktplaats, Rightmove tended to be supply-driven (that is aggregating an existing supply of second-hand goods to increase transparency), asset-light and with a classified listing fee business model. Then, the second wave enabled the transaction to take place on the platform and facilitated payments: an example could be the transition from yellow pages (listing fees) to Just Eat (where you have a commission). The third wave of marketplaces added logistical processes to form a full-stack marketplace which can be described by the evolution from Just Eat, where restaurants have to do delivery themselves, to Deliveroo or Glovo, which hire riders to deliver. Each step involved greater ownership of the transaction and a need to unlock new markets, and this trend is continuing as the next generation of marketplaces are often taking inventory supply from the seller, the so called iBuying.
One example of iBuying is Auto1 Group which buys used cars directly from consumers, using its own balance sheet, and sells the car at a small mark-up, usually to a dealer network. For the consumers, this creates some assurances that the product is sold both fast at a fair price, without having to negotiate. The model of course is more complex with respect to the one of classified marketplaces, which is asset light; in fact, it requires scale, capital, and years of market experience. The model is gaining traction even in real estate: Opendoor buys homes directly from consumers, refurbishes them and puts them on the market, while Kodit also buys real estate directly from the consumers but trough a pool of investor’s resources to keep its own balance sheet light.
Houses, cars but also jobs marketplaces may be soon experiencing a wave of M&A, as was observed in the mobility and food sector. New models (iBuying) and tech (AI) are enabling formerly asset-light marketplaces to take greater ownership of transaction even for products that are traditionally difficult to transact online, thus pushing the boundaries as to which markets can be ran as full-stack service. Another characteristic of the industry is that overall market size is not a key driver per se. Successful marketplaces have shown that being very efficient in matching supply and demand in a smaller niche can lead to much more value.
Since Scout24 can be defined as an online classifieds business, it is possible to add information on the field. The big five European classifieds are: Scout24, Ebay, Naspers, Axel Springer and Schibsted Media Group, and together with some smaller companies, have a combined market value of nearly $50bn. The industry, which is known for high barriers to entry due the network effects, is characterized by listing fees paid by advertisers (real estate agents, car dealers, individual sellers) which are often highly predictable and profitable for market leaders who enjoy high margins, between 30% and 60% typically. The European classifieds spend around $8bn per year (of which $6.2bn goes to home and car sector together) and grow at around 5% per year.
Deal Structure
On 15th February 2019 the board of Scout24 has backed the €5.7bn takeover offer from Hellman & Friedman and Blackstone. The offer, which values Scout24 at €4.9bn (before including about €800m debt), is all-cash and, at €46 per share, represents a 27.4% premium to Scout24’s undisturbed share price before the Financial Times revealed in December that the company was exploring the possibility of a sale.
The bid, which will be made through a holding company called Pulver Bidco, jointly controlled by funds advised by H&F and affiliated of Blackstone, will now be subject to a minimum acceptance threshold of 50% plus one share from investors.
Deal Rationale
Under Hellman & Friedman and Blackstone’s previous ownership, Scout24 successfully transitioned into a leading European classifieds platform and enhanced its engagement with customers and consumers.
The Hellman & Friedman board has shown itself to be more than keen to re-engage with Scout24 and help the company build upon the historical success that they achieved together, by partnering with their agent and dealer customers to offer value-added marketing propositions and to promote the digitalization of their business models. The return of the two companies to the old investment follows a current market trend. In an environment where high-quality secondary buyout assets are hard to find, financing is cheap and abundant dry powder is available, PE funds have been keen on coming back to well-known grounds. Last December, for instance, CVC Partners offered to buy the remaining shares of Ahlsell AB for 2bn in order to gain full control of the company.
Both Scout24’s Management Board and Supervisory Board support the offer and believe that the transaction is in the best interest of the company. The control by H&F and Blackstone will provide Scout24 with the stability needed to address future opportunities. Moreover, they are fully committed to make the necessary investments in people, products and technology, and to support the Management Board in turning its strategic vision into reality and overcoming the challenges related to the dynamic market place and pending regulatory changes.
Thanks to this partnership, Scout24 will be able to further strengthen its value proposition for its customers, seize long-term growth opportunities and retain its reputation as a highly attractive employer.
The duo won’t use heavy leverage to boost their IRR: they are buying listed shares, with an expected IRR of about 15% given a scenario where stock price would show yearly returns of 10%. Such an IRR isn’t what the backers of Blackstone and Hellman&Friedman are hoping for. A possible explanation which can better justify such decision comes from the likely earnings power of Scout24 in 5 or 7 years’ time, given its potential dominance of this winner-takes-all market.
Market Reaction
Scout24 AG shares soared early on Friday after the company declared its support to the takeover offer announced by Hellman&Friedman LLC and Blackstone Group LB BX, +0,74% for all its shares.
Advisors
Morgan Stanley and Allen & Overy are advising the Management Board of Scout24 as financial and legal advisors, respectively. Citigroup is acting as financial advisor for the Supervisory Board of Scout24 and Gleiss Lutz as legal advisor. Latham & Watkins is advising Hellman & Friedman and Blackstone on M&A, debt, and equity finance matters. Latham previously advised Hellman & Friedman and Blackstone on the acquisition of Scout24 in 2013, and on Scout24’s subsequent IPO in 2015.
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