Whoppers

I was interested in this, from the recent NZ Herald profile of David Kirk:

“Kirk was personally responsible for its decision to fork out a whopping $700 million for online auction site Trade Me – a sum that initially bewildered analysts on both sides of the Tasman.

The deal was announced the same week Rupert Murdoch bought MySpace, and Kirk is quick to note he isn’t the one who is now experiencing buyer’s remorse.

Trade Me contributes around $85 million a year to Fairfax’s coffers, whereas MySpace, which has absorbed many more millions, has yet to make a profit.”

Fairfax paid NZ$750 million for Trade Me (there was a further $50 million of earn-out payments on top of the $700 million paid up-front).

News Corp paid US$580 million for MySpace or about NZ$860 using the exchange rate at the time of the acquisition in 2005.

By just about any measure Fairfax would have to be happy with their purchase.

Perhaps analysts in Australia were “bewildered” when they heard the announcement, but this was probably more likely because they had never heard of Trade Me than anything to do with the price, once they saw the revenues.

$750 million is actually not a “whopping” amount to pay for a business that generates $85 million of cash, just three years later, and continues to be in a strong position.

What do you think?

3 thoughts on “Whoppers”

  1. A month or two before TM sold, I did an exercise to work out valuations for several privately held tech companies, mainly for my own amusement. TradeMe was one of them. The exercise was not very rigorous, but it basically involved working out a valuation for the company by multiplying an annual sales estimate with the PE ratio of a publicly listed company in a similar industry. In TM’s case I simply used eBay. When I multiplied my sales estimate (based on various news articles about TM) by eBay’s PE ratio, the final valuation came out to about NZ$1.0 Billion.

    I later worked out that my earning estimates were slightly off. However, I hope you don’t mind me saying this, I still think Fairfax got a bargain. If you repeat the exercise today using the $85m yearly sales, and eBay’s current PE of 21, you get a valuation of well over $1.5 billion. So Fairfax have more than doubled their investment since buying TradeMe.

    I think anyone who says it was a “whopper” or “the deal of the century” or any other nonsense like that is either loopy, or simply ignorant of the facts.

  2. David Kirk was very smart, it was a good buy at a fair price, to continue TradeMe’s growth required expertise & skill, not to mention being able to get advertising synergy with other Fairfax assets. Which would be the difference 1.0B to 0.7B IMHO.
    Interesting commentary on the merits of Social Media ( Twitter/MySpace/Bibo/FaceBook ) vs an online commerce site. To be fair to Fox, they were not the only big media company in the US to have to write off large amounts of money & even with Hulu it’s hard to believe that the the big US media companies truly understand how to make money out of New Media, which offers a real opportunity for an organisation the size of a Fairfax to be disruptive in the US market.

  3. Part of the reason analyst’s were astounded by the transaction was that they simply did not understand the business – I know I didn’t. That did change when the numbers came out and it was obvious that Trade Me was a very profitable business growing very fast – and already much larger than people expected (from a revenue perspective). My initial reaction was – “that is a big number” – which quickly moved to “was it a big enough number”.

    I think history will be kind to David Kirk and the Trade Me acquisition. But as Chairman Mao (b.1893 – d.1976) said when asked to judge the impact of the French revolution (1789–1799) – “It is too early to tell”. That may be the case with judging the success of the Trade Me acquisition for Fairfax as a strategic play.

    Here is a massive disruption occurring in the media space and Fairfax are at the sharp end of that. The move of attention from traditional media (especially newspapers) to on-line and the impact on advertising (especially classifieds) has been material. Fairfax’s (FJX) share price is down 59% since the 31 March 2006 (around the time of the Trade Me acquisition). That isn’t the result of the Trade Me acquisition but rather the changes in the traditional media landscape.

    Fairfax lost A$234 million at the EBITDA line in 2009 on revenues of A$2.61 billion (down from A$2.93 billion in 2008). Fairfax’s current market cap is A$3.85 billion with net debt (long-term borrowings less cash) of A$2.22 billion to give an enterprise value for Fairfax of A$6.07 billion. Trade Me’s profits make the Fairfax losses from traditional operations even worse and if Trade Me is worth at least A$1.0 billion that is 16.5% of the total Fairfax enterprise value.

    Is Fairfax brave enough to build a new media business around Trade Me and a radically restructured traditional media offering – Trade Me + a Scoop.co.nz type offering (on an Australasian-wide scale)? Or will Fairfax stay with their traditional media offering – maybe having to sell profitable assets like Trade Me to keep the traditional media lights on? If nothing else Trade Me has given Fairfax an option on a new strategic direction and positive cash flows.

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