By Mikhail Terentiev, CFA, Head of Research; Oksana Mustiatsa, CFA, Analyst; and Andrey Mikhailov, Senior analyst
We believe the proposed acquisition of Tinkoff (TCS) by Yandex (YNDX) is a win-win for both companies. From YNDX’s perspective, TCS’ valuation looks reasonable, and its takeover should create a vast scope for synergies, cross-selling and product bundling, solidifying the united company’s competitive positions. Even with an equity component, the deal should be EPS-accretive from year one, on our estimates, thanks to TCS’ strong profit generation. The key risks revolve around management execution, integration and TCS’ asset quality, as well as the “conglomeratization” of YNDX’s business model.
The proposed deal
YNDX confirmed yesterday, 22 September, that it is in talks to buy 100% of TCS. The key parameters of the deal are as follows:
- The proposed buyout price is c. $5.48bn for 100% of TCS, or $27.64/GDR. This implies an around 6% premium to TCS’ closing price as of 22 September.
- On our estimates, this translates into 2020-21 P/Es of 12.1x-10.7x and P/BVs of 3.3x-2.8x, which does not look excessive to us, especially given the potential synergies (see below). YNDX itself is currently trading at 2020-21 P/Es of 82.4x-49.5x, on our numbers.
- YNDX is planning to pay using a combination of cash and shares, although the exact proportion has yet to be announced. Vedomostiquoted sources this morning as saying that YNDX is going to pay with cash and stock on a 50/50 basis. This makes sense to us, since YNDX should have c. $2.6bn in cash on its balance sheet as of now (excluding Yandex.Taxi’s cash), which would cover just under 50% of the proposed takeover price.
- The acquisition of TCS is meant to happen “by means of a scheme of arrangement” under Cypriot corporate law. On our understanding, this should enable YNDX to buy 100% of TCS shares from all of their holders in one go instead of first buying a controlling stake and then submitting a tender offer.
- The deal would be subject to the approval of YNDX’s Class A shareholders and the general meeting of the company’s shareholders, where only a simple majority is required.
- The transaction parameters could change, “subject to the satisfactory completion of due diligence and the agreement on definitive documentation, including the agreement regarding conditions to closing.” We understand that the acquisition may not happen at all under certain circumstances.
- The timing of the completion of the proposed deal is also unknown, but we would be surprised if it drags on for too long.
Key positives for YNDX
1. A vast scope for synergies, cross-selling and product bundling.
Some obvious opportunities include:
- Leveraging YNDX’s user knowledge to improve TCS’ credit-scoring decisions.
- Putting TCS’ capabilities to work to facilitate payments on YNDX’s e-commerce and taxi platforms.
- Offering financial products to YNDX users (the monthly unique audience of YNDX’s own ad properties stood at 84.4mn in August, according to Yandex.Radar), as well as to Yandex.Taxi drivers and Yandex.Market merchants.
- Learning more about users’ financials behavior to improve ad targeting and to better sell other products.
- Leveraging YNDX’s advertising platform to cut TCS’ marketing costs (TCS spent over RUB 3bn on marketing and advertising in 1H20).
Overall, the inclusion of financial services in YNDX’s ecosystem should help improve user loyalty and make the united company’s competitive positions more defensible.
2. Earnings growth and EPS accretion
On our estimates, in order to fund 50% of the purchase with new equity, YNDX may have to increase its share count by approximately 12% (based on its current share price). Assuming TCS is consolidated from the start of 2021, the acquisition screens as EPS-accretive for YNDX as soon as next year thanks to TCS’ strong profit generation and the gap between the two companies’ P/E multiples. However, this exercise does not take into account possible integration costs and ignores potential synergies.
Likewise, we estimate that the consolidation of TCS from the beginning of 2021 would improve YNDX’s adj. EPS 3Y CAGR to 2022 from 24% to 46% (in ruble terms).
On a more strategic note, consolidating TCS’ cash-generative business should give YNDX additional firepower to spend on long-term initiatives with heavily back-loaded paybacks, such as driverless cars.
3. TAM expansion
Unlike some of its international peers such as GOOG, BIDU or UBER, YNDX operates in a smaller economy and has a limited presence outside of Russia. Tapping into new sectors (financial services, in this case) would help YNDX broaden its TAM, which is otherwise relatively limited. In the long run, we would not be surprised to see YNDX going deeper into logistics or exploring entirely new areas like digital healthcare or enterprise software, largely for the same reason.
4. Investability of YNDX stock
The deal could further improve the investability of YNDX’s stock and help to increase its weight in major equity indices.
1. Execution and integration risk
Consolidating TCS and making sure its team stays on and remains motivated, as well as making sure its organizational machinery does not fall apart after the change in control, could be easier said than done. Any management distraction could lead to costly mistakes and slippages in YNDX’s core business, while any synergies will probably take time to materialize. YNDX is likely to have a challenging two to four quarters following the acquisition. One question is whether VTB would play any role in YNDX’s financial services business and what impact this could have.
2. TCS’ asset quality could prove lower than expected
This is especially the case if taking into account the tough macroeconomic environment and the rapid growth of TCS’ loan book in the past 18 months.
3. Complexity and conglomeratization
YNDX is already “a Google, UBER and Amazon of Russia”, with smaller verticals such as media services, classifieds, cloud computing and driverless cars. However, adding a RUB 320bn+ loan book takes YNDX’s corporate complexity to a new level and raises entirely new challenges, from having to comply with banking regulations to unpalatable issues like bad debt collection that are hardly compatible with the image of a user-friendly internet company. The conglomeratization of YNDX’s business model may not be good for its valuation multiples either, and not all investors will be happy with the newly introduced credit risk.
Other thoughts and considerations
- The acquisition of TCS should make YNDX a more cyclical stock with greater exposure to Russia’s macroeconomic performance and oil prices.
- YNDX’s successful consolidation of TCS and the further development of its financial arm could eventually make the company more of a proxy stock for the Russian equity market as a whole, meaning more competition for investment dollars for names like SBER.
- Competitors’ response: We believe YNDX’s acquisition of TCS could encourage some of its key competitors, particularly the SBER/MAIL duo, to increase their ecosystem investments.
This investment research is produced by SOVA Capital Limited, authorised and regulated by the Financial Conduct Authority (FCA), and has been prepared by non-US research analysts who are not FINRA registered/qualified as research analysts. Important information is available on the Sova Capital website and through this link about disclosures.