Newsletters

During the month we exited Schibsted following a re-rating in the shares

As readers may remember, we first invested in Schibsted in June 2022. At the time the company was trading at an 45% discount to our estimated NAV, with its listed stake in Adevinta accounting for c.70% of Schibsted’s market cap. We believed this inefficient group structure masked the highly attractive and valuable unlisted Nordic Marketplace business, with the stub assets trading at an implied c.6x forward EBITDA.

It was our contention that resolving the stake in Adevinta was crucial to unlocking value, and indeed this is what occurred. In November 2023 Blackstone and Permira agreed to take Adevinta private at 115 NOK per share. The transaction saw Schibsted crystalise 24bn NOK (48% of its then market cap) whilst also retaining an 11% stake worth 16bn NOK (32%).

Shortly after, Schibsted delivered a second transformational transaction, selling the legacy News Media assets to its controlling shareholder, the Tinius Trust. This removed a capital consumptive and terminally challenged asset from the group and transformed Schibsted into a purer play classified marketplaces business.

Taken together these actions simplified the group structure and forced investors to pay attention to the Nordic Marketplace assets, which have re-rated to trade at >20x forward EBITDA.

Whilst we believe there is still considerable value to be extracted from increasing monetisation in-line with international peers and improving margins, as well as from the unlisted stake in Adevinta, this is better reflected in the valuation. When we initially invested and were adding to the position, the valuation was inordinately wrong. This is no longer the case and, as such, it makes sense to exit the holding.

Over the course of the investment Schibsted generated a +67% ROI and +47% IRR which compares favourably to the +31% / 22% returns of the MSCI AC World Index over the same period (all figures in NOK).

Despite us having written extensively about Schibsted last month, a further update is warranted.

In early December Schibsted positively surprised both us and the market with the announcement that that the Tinius Trust, the controlling shareholder, intends to acquire Schibsted’s legacy News Media division for 5.4bn NOK and Schibsted’s stake in Polaris Media for 0.8bn NOK. As well as this, the company intends to collapse the dual A-B share class structure. This is a significant positive development that should help reduce the conglomerate discount at which Schibsted trades and force investors to pay attention to the attractive qualities of Schibsted’s Nordic Marketplace assets – which have hitherto been overlooked.

Using the price of the B shares which we own, Schibsted has a market cap of 62bn NOK. Pro-forma of the completion of the two transactions, deducting the value of the retained stake in Adevinta (16bn NOK), News Media (6.2bn NOK) and net cash and other adjustments (18bn NOK) implies the Nordic stub assets are trading at an implied value of 22bn NOK, or approximately 9.5x 2024 EBITDA.

Whilst this has increased from the low of ~6x (inclusive of News Media) earlier in 2023 we believe there is ample room for the shares to re-rate higher and the valuation gap to global classified ads peers to narrow under the simplified structure, with peers on average trading at 18x 2024 EBITDA. The combination of the potential multiple rerating and strong earnings growth prospects provide for attractive upside. In the near term we believe that the returning of excess capital to shareholders is a key catalyst to drive the shares higher, with proceeds from the Adevinta and News Media sales just shy of 30bn NOK (48% market cap).

In the September newsletter, we explained that Permira and Blackstone had entered negotiations to take Adevinta private. In November, this came to fruition with a 115 NOK per share offer. This sent shares in Schibsted +21% over the month.

The transaction will see Schibsted sell 60% of their 28% stake for 24bn NOK, which accounts for 48% of the preannouncement market cap (based on the B share price). Schibsted will retain an 11.1% stake in Adevinta posttransaction, which at the 115 NOK per share value equates to 16bn NOK (31% of Schibsted’s market cap). Inclusive of just over 1bn NOK of capital released from a total return swap Schibsted had entered on Adevinta shares, Schibsted will have c.25bn NOK of capital to return to shareholders. We view this as a sub-par outcome and believe that – in the absence of an offer that fairly reflected Adevinta’s dominant market positions, under-monetisation, and margin expansion potential – shareholder value would have been enhanced by an in-specie distribution of Adevinta to shareholders, thereby fully simplifying Schibsted’s structure. Proponents of the achieved outcome argue that an in-specie distribution would have led to a fall back in the Adevinta shares and an overhang.

This is certainly the case, however if given the choice between a bumpy higher return or smooth lower return, we will always choose the former. Such a distribution would have – over time – helped clear the overhang and we were excited about the prospects for earnings growth, non-core asset sales and tighter cost control as direct owners of Adevinta. Moreover, and equally importantly, such a solution would have simplified Schibsted’s structure, and in our view, paved the way for a re-rating in the inordinately low stub multiple. We believe the proposed structure will continue to attract a significant conglomerate discount.

In light of this, and with Schibsted having grown to an outsized >8.5% position, we sold approximately half of our holding over the month – such that Schibsted is now a 4.4% position. Notwithstanding our criticism, we believe there is a lot to be excited about, with the prospect of significant NAV growth and shareholder returns.

We believe Adevinta and debates around structural simplification have overshadowed the stub assets generally and Nordic Marketplaces specifically. We believe Nordic Marketplaces can comfortably grow sales at double-digit rates well into the future. Despite ultradominant positions there remains considerable low hanging fruit to improve monetisation, as evidenced by recent progress in the real estate vertical where Average Revenue per Ad has increased +77% from 2021 levels following changes to pricing packages. We believe similar improvements can be made in other verticals, most notably in autos. The high incremental margin nature of such revenues, combined with our expectation of reduced losses from the re-commerce strategy (which were a ~470bps margin headwind in the last quarter) and efficiency improvements from the on-going technological vertical re-organisation, should drive margins and profits higher.

On top of this, we believe the prospects for NAV growth from the retained stake in Adevinta to likely be highly attractive. Away from the short-term pressure of public markets, and with highly incentivised, financially savvy and focused owners, there are numerous levers to unlock value such as potential non-core asset sales (OLX Brazil plus Italy and maybe Spain); improving monetisation rates at Mobile and Leboncoin which currently under-earn relative to global peers and the economic utility they provide; and improving margins with tighter cost control. Although we are sceptical of how much credit Schibsted’s share price will receive for this in the near-term, over the long run this should translate to material NAV and share price growth.

Despite the strong performance, Schibsted trades at a 32% discount to our estimated NAV. Using the price of the B shares which we own, Schibsted has a market cap of 56bn NOK. Deducting the value of the retained stake in Adevinta (16bn NOK) and net cash and other adjustments (19bn NOK) implies the Nordic stub assets are trading at a value of 22bn NOK, or approximately 7.4x NTM EBITDA. Whilst we are cognisant that the stub should trade at some discount, we think this is excessive in the context of the asset quality and earnings growth profile, with stub EBITDA expected to grow from 2.5bn NOK in 2023 to >3.5bn NOK in 2025 (~20% p.a.). We believe that the returning of excess capital to shareholders is a key catalyst to drive the shares higher, with 25bn NOK earmarked for returns equating to 45% of market cap. To date AGT have generated a local currency ROI/IRR of +47%/+40% on its investment in Schibsted, which compares to the MSCI AC World index which has returned +24%/+21% over the same period.

Shares in Schibsted rose +7% over the month as a key part of our investment thesis started to play out.  We will provide an update here notwithstanding the numerous unknowns at the time of writing.

As a reminder, we initiated a position in the summer of 2022. We wrote up the investment in the September 2022 newsletter, highlighting the extreme undervaluation of Schibsted, with its then 33% listed stake in Adevinta swamping its enterprise value.

Overall, we argued that Schibsted exhibited a number of attributes we look for – high quality assets, a discounted valuation and catalysts to unlock value.  More specially, Schibsted offers  1) exposure to high quality online classified ads businesses which have  dominant market positions protected by a powerful network effect, high levels of pricing power and strong margin expansion potential which should compound in value; 2) an inefficient and unsuitable group structure leading the company to trade at a wide discount to NAV and the stub at an inordinately low (then) c.6x EV/EBITDA; and 3) potential catalysts to unlock value, with either an in-specie distribution or sale of Adevinta suitable outcomes to both re-rate the stub and help realise Adevinta’s fair value.

During the month it was confirmed that Blackrock and Permira made a non-binding proposal to take Adevinta private. This will see Schibsted crystalise a large portion of its value, whilst also retaining a stake in the private company. Of course, the devil will be in the detail, with the pertinent questions being around price and the size of the stake that Schibsted will maintain, but we believe this to be a successful outcome.

The deal will allow Schibsted to garner a control premium (albeit an unknown one at this stage) and removes some of the friction of an in-specie distribution. Most importantly, it will simplify the group structure and shine a light on the undervaluation of the stub assets.

On the other hand, this raises the risk of capital (mis)allocation – something we will continue to discuss with Schibsted management. We are also frank about the low value the market will likely ascribe to Schibsted’s remaining unlisted stake in Adevinta. However, we very much concede that the return on this position has the potential to be highly attractive, with significant low hanging fruit from non-core asset sales (OLX Brazil plus Italy and maybe Spain); improving monetisation rates at Mobile and Leboncoin which currently under-earn relative to global peers and the economic utility they provide; and improving margins with tighter cost control (particularly at HQ which runs to the tune of ~€250m p.a.). Over time this value creation will shine through in Schibsted’s NAV growth, with a future crystallisation of value likely allowing for capital returns.

Schibsted remains cheaply valued at a 34% discount to NAV and with the stub trading at 6.7x NTM EBITDA. Further news on Adevinta will be the key catalyst to drive both NAV and discounts. We remain excited about prospective returns.

Schibsted was the most material detractor over the month, reducing returns by 130b ps. The shares declined 15%, driven exclusively by a widening of the discount from 35% to 45%. This was compounded by a 3% weakening of the NOK versus GBP.

During the month the company held an investor day in Oslo, which we attended. The day was (almost ) entirely focused on Schibsted’s unlisted Nordic Marketplace assets and the shift to a vertical operating model. We came away impressed with the strategic vision and growth potential.

However, this was entirely lost as two separate issues drove the share price 11% on the day. 1) Management poorly communicated a not that surprising and not that material guidance cut for Q1 as results in the New Media division have deteriorated; 2) A lack of clarity on their stake in Adevinta, where comments made by the controlling shareholder on the day of the CMD have dampened expectations of a near term distribution.

Following the setback, Schibsted B shares trade at a 45% discount to NAV, with the stub trading at an implied 6.6x EV/EBITDA multiple and an implied discount on the unlisted assets of 69%. This is a fraction of the multiple the market awards global classified
marketplaces, which are rewarded for their pricing power, organic growth prospects and wide margins. Some level of discount is warranted given the conglomerate group structure and the more cyclical nature of the News Media division; however, the current discount is unduly wide, reflecting structural not fundamental issues.

We believe the status quo poses risks to long term value creation and continue to engage privately with all key stakeholders. We will provide further updates when we are in a position to do so. We added to the position over the month.

Over the last few months we have built a new position in Schibsted, a £3bn market cap Norwegian listed holding company offering exposure to high quality online classified ads businesses at a discounted valuation, with multiple potential corporate events to unlock value.

The origins of the company date back to Christian Schibsted establishing a publishing company in 1839, however the more modern history is defined by his great-grandson, Tinius Nagell-Erichsen, who built the business into a media conglomerate in the latter half of the 20th century, taking the business public in 1992.

From the turn of the millennium Schibsted have built and bought a collection of online classified ads businesses, which today account for 93% of portfolio value. This is spread across Schibsted’s unlisted Nordic assets (54% of portfolio), and a stake in Adevinta (39% of portfolio) which they listed in 2019 as a vehicle to house their international classified ads businesses and pursue sector consolidation (which it has done via the acquisition of eBay’s classified ads business for $9.2bn in 2020).

Such businesses exhibit winner takes most dynamics, with strong network effects whereby listing inventory and user traffic mutually reinforce one another. The dominant #1 player in a category becomes the reference point for individuals or businesses looking to buy and sell in that vertical. This integral position translates into high levels of pricing power and excellent financial profiles, with healthy organic growth rates, EBITDA margins of 40-60% and high free cash flow conversion.

Attune to these attractions we had monitored Schibsted from afar for a number of years. However, it took a more than 60% decline in the shares from the summer of 2021 to June 2022 to pique our interest. Both Schibsted and Adevinta have been caught in a perfect storm of earnings downgrades and multiple compression. On top of this, at the Schibsted level, investors have increasingly questioned capital allocation and the group structure.

Schibsted B shares – which we own – trade at a 45% discount to our estimated NAV. Ex-Adevinta the Stub trades at 5x forward EBITDA, with EBITDA expected to grow +14% p.a. 2022-24. This equates to an EV-EBITDA-Growth multiple of 0.4x, versus global classified peers at 1.4x and legacy media peers at 1.0x. Some discount is warranted given the group’s conglomerate structure, but the current level appears unduly wide.

Management are acutely aware of Schibsted’s undervaluation, and have bought shares in the open market, as has the controlling Tinius Trust. We believe a resolution of their stake in Adevinta is key to unlocking value and that the status quo will not persist in the medium term. An in-specie distribution of Adevinta to shareholders, or the sale of Schibsted’s stake, most likely to a private equity buyer as part of a take-private transaction, are in our view potential outcomes that would unlock value. As well as this, there is potential further upside from a collapse of the A-B share class structure, and near-term non-core asset sales (such as Lendo).

Schibsted exhibits many of the traits we look for: high quality assets, discounted valuations, and potential events to unlock value. Prospective returns appear attractive.