Highly anticipated Trade Me sharemarket float could come as soon as next month; Details emerging of NZ$1 bln valuation and 80% dividend payout ratio

By Gareth Vaughan

The hugely anticipated initial public offering (IPO) of online auction site Trade Me could happen as soon as next month.

Owner Fairfax Media announced plans in late August for a sharemarket float of between 30% and 35% of Trade Me's shares on the NZX, and potentially also on the Australian Stock Exchange. Interest.co.nz understands that with a float targeted before year's end, despite turbulence in international financial markets, the share sale is likely during November to beat the Christmas run in.

Fairfax is being advised by investment bank UBS and fund managers considering buying Trade Me shares have signed confidentiality agreements to prevent them talking publicly about the impending IPO. Interest.co.nz was told Trade Me could be marketed as a "cashflow story", or dividend play - reportedly paying out 80% of profit in dividends - with both customers and retail "ma and pa" investors set to be targeted.

The pricing of the shares will be closely watched given Trade Me's high profile and cash producing ability. One market source said despite a view in some quarters that Trade Me was a strong IPO candidate whatever is happening in the international markets, fund managers were still likely to look at the businesses full investment case, which would need to stack up in its own right.

"In environments like this people tend to be more careful," the source said.

Valued at around NZ$1 billion

The Fairfax owned Australian Financial Review reported today that a pre-marketing UBS research report values Trade Me at between NZ$1.13 billion and NZ$1.26 billion, or between NZ$966 million and NZ$1.1 billion when its NZ$166 million net debt is excluded. Based on that valuation range, which the AFR says represents 14 to 16 times Trade Me's projected 2012 calendar year net profit of NZ$68.6 million, Fairfax would make more than NZ$300 million from the float.

However, some investors question whether Trade Me's strong growth may be poised to slow, and whether it can find new categories for auction and advertising growth, as making the jump overseas, notably to Australia where eBay is ensconced, is seen as unlikely. The AFR says its earnings growth is expected to slow to 6.3% in 2011-12 from 9.4% in 2010-11 because of a 36% rise in staff costs to NZ$17.9 million, a 27% rise in advertising costs to NZ$6.5 million and NZ$1.3 million of costs created by the sharemarket listing.

However, the AFR says UBS is predicting a "gradual improvement in market activity" and growth from new businesses including the Treat Me website will boost Trade Me's revenue growth to 13.4% in the six months to December 2012 and earnings growth to 10.4%

The AFR also says Trade Me will pay out 80% of net profit in dividends.

Bought for NZ$750 million from founder Sam Morgan and other shareholders in 2006, Fairfax says Trade Me delivered a 13% return on capital employed in its June 2011 financial year. At NZ$99.2 million, Trade Me's earnings before interest, tax, depreciation and amortisation have roughly trebled since 2006 and rose 9% in the 2010-11 year.

Trade Me has a community of 2.8 million New Zealand members. Most of its revenue comes from listing fees for general items such as clothes and electronics. About a quarter comes from listing fees for cars and property, while the rest comes from jobs listing fees, advertising and 'other' items. The AFR says Trade Me's growth strategy is based on an ongoing move of classified advertisements to the internet from newspapers, developing new products based around the buying habits of its customers, building up its online travel and group buying businesses and boosting its share of the New Zealand online retail sector which is put at 10%.

UBS also predicts increasing broadband penetration will lift Trade Me's growth.

Beating the SOEs to market

A pre-Xmas Trade Me float would beat the National Party's proposed sell-downs of up to 49% of state owned enterprises Meridian Energy, Mighty River Power, Genesis Energy and Solid Energy, to market, with these floats to begin in 2012 assuming National is re-elected to government on November 26.

The expected Trade Me float comes as Fairfax reportedly struggles to sell seven Australian capital city radio stations, which it has had on the block for five months. The AFR reported yesterday that Fairfax's board was considering three bids for the stations, which include 3AW in Melbourne and 2UE in Sydney, including one from MediaWorks' parent Ironbridge Capital, but there's a "better than good chance" the board will decide to keep the stations, which are said to be worth up to A$300 million.

Fairfax has said it'll use proceeds from the sale of Trade Me shares and the radio stations to reduce debt and increase dividends. Fairfax reported a A$400.9 million June year loss, driven by a A$650.7 million write-down of its newspaper assets. Fairfax has A$750 million worth of debt maturing during the year to June 30, 2012 and A$1.48 billion of debt in total.

Former Fairfax CEO and ex-All Blacks captain David Kirk, at the Fairfax helm when Trade Me was bought in 2006, will be the non-executive chairman of Trade Me with Sam Morgan, who is on Fairfax's board, expected to be on the Trade Me board once it's floated.

Fairfax said in August a Trade Me float would be subject to acceptable market conditions, a standalone focus and access to capital would create value and drive future Trade Me growth, and that New Zealand retail ownership would further enhance brand profile and customer loyalty.

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