Description

This is a special situation that should yield ~15%-20% in a relatively short period of time (6-9 months) with limited downside. The write-up is short and concise as the situation is pretty straightforward and we believe offers an attractive risk/reward. 

58.COM (NYSE:WUBA) is the leading online classified business in mainland China. The company was founded in 2000 by current Chairman and CEO Jinbo Yao, who currently owns 10.2% of outstanding shares and 42% of the voting power. The largest shareholder is Tencent with 22.4% of s/o and 28.3% of the votes. We believe that online classified is generally a fantastic business (when you have a market leading position), and WUBA is no different with 87% gross margins, 23% EBIT margins, strong FCF profile and impressive top line growth rates (33%/30%/19% in 2017/2018/2019, respectively).

WUBA is also attractively valued, especially when looking at other leading online classified businesses around the world. With $2B in net cash and ST investments, and a market cap of $7.15B, WUBA currently trades at 8.6x EV/EBITDA and 8.3% FCFE yield on pre-Covid 2019 figures. Covid is gonna have an impact H1-20 numbers but remember this business came into the crisis growing around 15% y/y, and it’s likely that there’s plenty of runway to grow post-Corona as well.  

Don’t get too excited now, because we are not going to enjoy the real upside here that is embedded here. The company is most likely to go private as Jinbo Yao has joined a consortium of private equity funds (General Atlantic, Warburg Pincus and OceanLink Partners) for an offer to take the company private at the ridiculous price of $55 per share. 

We believe the offer is:

1. Very serious. The consortium & Jinbo Yao control 44.1% of the voting rights, and in the offer letter they made it clear they will not sell their shares to a competing offer, if one arrives.  
2. Highly likely to either be accepted as is or negotiated slightly to the upside. We have yet to see a truly independent BoD in a Chinese tech company and this situation isn’t going to be different. If Jinbo Yao is in, we think it’s game over. There’s some chance that as part of the game the special committee will be able to “negotiate” another $2-$3 per share to appear professional and independent, but I’m not counting on that. 
3. Likely to be consummated quite rapidly as they’re practically stealing this company on the cheap. 

Timeline:

• Oct 2013: 58.com (Wuba) IPO on the NYSE at $25 per share.
• June 2014: Tencent buys a 20% stake for $40 per share.
• April 2018: Tencent invests another $200m into a 58.com subsidiary called “Zhuan Zhuan”, classified business focused around the 2nd hand market (Chinese equivalent to Craigslist).

   

• 2013-2019; 58.com grew revenues ~10x from RMB 1.6b to RMB 15.6b, with 2019 EBIT margin at 23%. Stock peaked at $88 per share in 2018 and declined from there, mostly due to concerns around long-term growth trajectory.

Deal related: 

• April 2, 2020 (Stock is $47): 58.com announces it has received a preliminary proposal from Ocean Link Partners to acquire all of its outstanding shares for $55 in cash (USD 8.3B). Ocean Link plans to partner with a consortium of buyers to fund the acquisition.
• April 13, 2020 ($51.91): 58.com adds Bob Dodds to its BoD. Mr. Dodds is the founder of DRP Capital - a China focused M&A investment bank. According to his own Linkedin profile, Mr. Dodds is “Leading the review and negotiation of a non-binding proposal to take the company private. If completed, it will be the largest China-related M&A deal of 2020.”
• April 20, 2020 ($52): 58.com announces formation of a special committee to evaluate and consider the acquisition proposal from OceanLink Partners.
• April 27, 2020 ($51.88): 58.com announces appointment of independent financial advisor and legal counsel to the special committee.
• April 30, 2020 ($51.95): 58.com announces receipt of updated preliminary non-binding proposal. This is where the story changes a bit since now we know that the consortium includes:
• Warburg Pincus Asia.
• General Atlantic Singapore Fund.
• Ocean Link Partners (China-focused PE shop).
• The Company's Founder & CEO - Mr. Jinbo Yao

   

• This is some new information that completely changed our view of the situation: We now know that this is practically a management buyout, so there's close to zero risk this falls down due to stuff they find out during the due diligence. Plus the consortium members already own 44.1% of the voting rights.
• May 29 2020 - Wuba share price falls below $48 as trade tensions between the US and China have escalated once again. This provides a nice ~15% return at the proposed transaction price which I assume will take less than 9 months to complete (potentially even 6 months). This implies IRR of 20%-30% with potential further upside from a (slightly) improved bid.

Risks:

Tencent - a 22% owner, may try to tear the deal. I think this is unlikely as Tencent initially invested in Wuba with the intention to cooperate on building an “online-to-offline” platform to compete with Meituan and Ele.me. That effort has failed and Tencent now owns a stake in Meituan directly anyway. Regardless, I doubt the CEO of 58.com went in the way of management buyout without getting Tencent's permissions beforehand given how things work in China's tech landscape. In fact I think it's likely that Tencent was offered to participate in the consortium but it has declined since they're more focused on investments in greenfield growth opportunities rather than cash cows which is probably the future of WUBA.

Deal falls due to intense negotiation between the special committee and the consortium. I can’t even describe how unlikely this is, but since we're buying the stock at the same price it was prior to the initial offer and at an underwhelming valuation, I think the downside is quite limited. In fact this scenario is more of a potential upside for the long-term investor than a risk, but as I said - it’s very unlikely to happen.

Summary

From April 2 and until May 19, WUBA shares traded between $51-$53, reflecting only 4%-8% upside to the offered price of $55 per share. As political tensions intensified over the last week and a half, shares fell to their pre-offer price of $48 and below today. This provides a nice opportunity for a ~15% low-risk upside in a relatively short period of time and an IRR of 25%-30%. We are of the opinion that the consortium is ripping off shareholders and fair value is at least 50% higher, but given the circumstances - we’ll take what’s currently on the table. 

Catalyst

Signing of a definitive agreement and closing the deal.