Verve — Jun helps Verve blossom

Verve (OMX: VER)

Last close As at 17/07/2024

EUR2.64

0.08 (3.13%)

Market capitalisation

EUR408m

More on this equity

Research: TMT

Verve — Jun helps Verve blossom

Verve (formerly MGI – Media and Games Invest) has announced the acquisition of Jun Group for €170m (US$185m), part funded by a €40m directed share issuance. Jun is an excellent fit and scales up Verve’s demand side (ie serving advertisers and agencies) to 30% of the group. It is being sold by Nasdaq-listed Advantage Solutions, which is reducing its leverage by selling its non-core operations. It sought a speedy transaction, hence the attractive deal pricing of 3.8x EV/EBITDA. Synergies built into raised guidance come from revenue opportunities rather than cost deduplication. Given Jun’s EBITDA margins of over 50%, Verve’s margins should rise, with EPS further boosted by lower interest as a percentage of revenue. The current rating does not, in our view, reflect the group’s strong position.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Verve

Jun helps Verve blossom

Acquisition and fund-raise

Media

24 June 2024

Price

€1.71

Market cap

€319m

€0.089/SEK

Net debt at 31 March 2024

€319m

Shares in issue (including new shares)

186.4m

Free float

71.0%

Code

VER (Nasdaq)/M8G (Xetra)

Primary exchanges

Deutsche Börse Scale, OTCQX

Secondary exchange

Nasdaq Stockholm First North Premier Growth

Share price performance

%

1m

3m

12m

Abs

0.6

13.2

76.2

Rel (local)

3.7

13.3

55.4

52-week high/low

€1.9

€0.8

Business description

Verve operates a software platform for the automated buying and selling of digital advertising spaces in real time. It is the market leader in in-app advertising in the US and among the largest providers in Europe. Verve also serves substantial CTV volumes, plus channels such as mobile web and digital out-of-home.

Next events

Interim results

End August 2024

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Milo Bussell

+44 (0)20 3077 5700

Verve is a research client of Edison Investment Research Limited

Verve (formerly MGI – Media and Games Invest) has announced the acquisition of Jun Group for €170m (US$185m), part funded by a €40m directed share issuance. Jun is an excellent fit and scales up Verve’s demand side (ie serving advertisers and agencies) to 30% of the group. It is being sold by Nasdaq-listed Advantage Solutions, which is reducing its leverage by selling its non-core operations. It sought a speedy transaction, hence the attractive deal pricing of 3.8x EV/EBITDA. Synergies built into raised guidance come from revenue opportunities rather than cost deduplication. Given Jun’s EBITDA margins of over 50%, Verve’s margins should rise, with EPS further boosted by lower interest as a percentage of revenue. The current rating does not, in our view, reflect the group’s strong position.

Year end

Revenue (€m)

Adjusted EBITDA (€m)

PBT*
(€m)

EPS*
(c)

EV/EBITDA
(x)

P/E
(x)

12/22

324.4

93.2

38.6

13.4

7.4

12.7

12/23

322.0

95.2

26.8

35.8

7.2

4.8

12/24e

390.0

120.0

44.8

18.4

5.7

9.6

12/25e

480.0

170.0

107.6

39.0

4.0

4.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Revised guidance shows positive momentum

On a pro-forma basis, Verve now expects FY24 revenues of €447m (was €360m), with Jun at 17% of the total (19% including anticipated revenue synergies). The impact at the adjusted EBITDA level is even greater. Verve was guiding to €105m (Edison modelling matched guidance, which we view as achievable). This figure is now lifted to €151m, including €8m of synergistic benefit, with Jun accounting for 30% of the group total. Completion is expected in Q324, so our new estimates only include Jun from Q424. For FY25, our revenue estimate rises from €396m to €480m, the mid-point of management guidance, with an adjusted EBITDA margin of 35%, up from 30%, as Jun’s higher-margin revenues join the mix.

Attractive deal terms

Advantage Solutions has been actively slimming its business portfolio to focus its offer and reduce leverage. Verve’s ability to fund the €120m upfront purchase price (two further payments of €25m will be made) and its extensive M&A experience meant that it could meet the vendor’s expectations on speed, in return for an attractive price of 3.8x EV/EBITDA (including synergies). While Verve is the more advanced in terms of the use of AI in targeting, Jun is well run, has a strong sales team and fits very neatly alongside existing demand-side operations. The deal will also help internationalise Jun’s reach.

Valuation: Well below peers, DCF

Looking at peer average EV/revenue and EV/EBITDA multiples across FY24 and FY25, parity now suggests a share price of €4.10, up from €3.73 as calculated in May. Our discounted cash flow (WACC: 10%, terminal growth of 2%) points to €4.64 (previously €4.14).

Earnings accretive deal from the outset

The deal is undoubtedly on very favourable terms. We view the explanation offered as highly credible, given the previous public announcements by the vendor (Advantage Solutions), and that the management teams were known to each other prior to the start of the negotiations. It is a considerable achievement to agree terms and organise funding for a deal of this scale in less than a month and is testament to the experience of Verve’s M&A team.

What is Jun and how does it fit?

Jun Group is a US-based digital media company, headquartered in New York (incidentally, close to Verve’s existing New York office), owned by Advantage Solutions (NASDAQ:ADV). Advantage Solutions is a business-to-business solutions provider to consumer goods manufacturers and retailers, so Jun was peripheral to its core business. Jun is focused on in-app mobile (of itself indicating strong compatibility), with a track record of over 20 years of building a digital media platform to enable brands and agencies to buy digital media and execute digital ad campaigns to maximise return on investment of ad spend. Its demand-side technology platform is compatible with iOS, Android and Unity in a similar way to Verve’s supply side platform. Jun’s good relationships with the agencies give Verve a clear step-up in its ambitions to grow its demand-side offering further. The longer-term aim remains parity between demand-side and supply-side. This deal should achieve a 30:70 split, but with the former growing at a faster pace.

Jun has an impressive client roster (very heavily US-weighted) and part of the attraction of the deal is the opportunity to internationalise through leveraging Verve’s sales infrastructure in other territories. Jun should also benefit from its access within the group to Verve’s AI-driven targeting solution, ATOM (see our last Verve outlook note).

The presentation to accompany the deal contains useful further details.

Impact on forecasts

As outlined above, the deal should be accretive even in the current year, assuming three months of consolidation.

Exhibit 1: Revisions to forecasts

Revenue (€m)

Adjusted EBITDA (€m)

EPS (c)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2024e

360

390

+8

105.0

120.0

+14

14.1

18.4

+30

2025e

396

480

+23

118.7

170.0

+43

26.2

39.0

+49

Source: Verve Group, Edison Investment Research

The higher adjusted EBITDA margins earned at Jun Group lift those in our modelling for the enlarged group from 29.2% to 30.8% for FY24, with just one quarter of consolidation. The impact on FY25 is naturally more marked and rises in our model from 30.0% to 35.4%.

With limited requirement for capex (typically 3% of revenue), Jun has high levels of free cash conversion (93% in FY22 and FY23, estimated 95% for FY24), so we would anticipate that the timescale for deleveraging the business would be shortened. Although the group’s net debt position does rise initially on the transaction, with a backdrop of (gradually) falling interest rates, the interest burden on the group should ease. As a percentage of revenue, the interest charge will reduce anyway as the scale of the group increases and this is reflected in the greater modelled percentage growth at the earnings per share line.

Direct share placing

Initiating a traditional rights issue might have been a more equitable approach but would not have been possible to complete within the timeframe that Verve needed to work to. It would also have introduced an unwelcome degree of uncertainty. At the end of March 2024, Verve had cash on the balance sheet of €124.7m (alongside gross debt of €443.5m), so it was in a position to put the required amount of cash for the initial consideration on the table. The bulk of debt is in the form of bonds, listed on Nasdaq Stockholm.

Alongside the acquisition, Verve carried out a directed share placing (with book build), raising SEK450m (€40m) by issuing 27.1m new shares at SEK16.60 (€1.48). The placing was oversubscribed and was backed by investors in Sweden and international markets, including the group’s two largest shareholders, Bodhivas GmbH (connected with CRO Remco Westermann) (27.7% holding at end FY23) and Oaktree Capital Management (17.7% at end FY23).

Valuation

We evaluate Verve compared to three sets of peers: (relatively) pure adtech, ad software combined with content (games or other) and (relatively) pure gaming. Although this leads to a cumbersome peer table, it allows us to see the slightly different dynamics. Adtech performance year to date has been very mixed, with particularly strong performances from Viant Technology, Magnite, The Trade Desk and Criteo, and Digital Turbine and DoubleVerify at the other end of the scale. The median performance has been a gain of 24%. Ad software and content companies also had a mixed showing, with AppLovin continuing to perform particularly strongly (+108% year to date), while the purer gaming companies have (on average) underperformed.

Looking at average EV/revenue and EV/EBITDA multiples across FY24 and FY25, parity across the peer set would suggest a share price of €4.10, from the €3.73 calculated in May, boosted by the upward revisions in estimates. This is a little below the figure derived from our DCF of €4.64 (WACC: 10%, terminal growth of 2%), up from €4.14 when we last ran these numbers in May.

Both approaches result in figures well above the current share price of €1.71, up 68% year to date. The new shares were placed at SEK16.6, which equates to €1.48 at an exchange rate of €0.089/SEK and was at a 5% discount to the previous night’s close.

Exhibit 2: Financial summary

€000s

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

324,444

321,981

390,000

480,000

Operating costs excl. D&A

(239,691)

(193,523)

(275,113)

(312,112)

Adjusted EBITDA

 

 

93,202

95,171

120,000

170,000

EBITDA

 

 

84,753

128,458

114,887

167,888

Operating profit (before amort. and excepts.)

 

 

76,556

76,943

100,771

148,086

Amortisation of acquired intangibles

(14,853)

(11,229)

(11,229)

(11,229)

Exceptionals

(27,100)

(6,500)

(3,500)

(500)

Share-based payments

(1,613)

(1,613)

(1,613)

(1,613)

Reported operating profit

34,886

57,601

84,430

134,744

Net Interest

(37,959)

(50,171)

(55,939)

(40,472)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

38,597

26,771

44,832

107,614

Profit Before Tax (reported)

 

 

(3,073)

7,430

28,491

94,272

Reported tax

(9,064)

(2,718)

(9,402)

(31,110)

Profit After Tax (norm)

21,085

57,220

30,038

72,101

Profit After Tax (reported)

(12,137)

46,113

19,089

63,162

Minority interests

(88)

(513)

(520)

(525)

Discontinued operations

0

0

0

0

Net income (normalised)

20,947

56,933

30,558

72,627

Net income (reported)

(12,049)

46,626

19,609

63,687

Average Number of Shares Outstanding (m)

156.2

159.2

166.0

186.4

EPS - basic normalised (c)

 

 

13.41

35.75

18.41

38.97

EPS - normalised fully diluted (c)

 

 

12.01

32.08

16.59

35.50

EPS - basic reported (c)

 

 

(7.71)

29.28

11.81

34.17

Dividend (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

(0.8)

21.1

23.1

Adjusted EBITDA Margin (%)

28.7

29.6

30.8

35.4

Normalised Operating Margin (%)

23.6

23.9

25.8

30.9

BALANCE SHEET

Fixed Assets

 

 

823,637

813,515

959,928

1,016,551

Intangible Assets

791,284

796,608

944,580

1,002,761

Tangible Assets

5,522

3,963

2,404

845

Investments & other

26,831

12,944

12,944

12,944

Current Assets

 

 

221,022

193,514

116,355

150,773

Stocks

0

0

0

0

Debtors

52,229

32,281

39,534

48,658

Cash & cash equivalents

149,992

121,740

37,328

62,623

Other

18,801

39,493

39,493

39,493

Current Liabilities

 

 

219,471

240,768

278,178

292,944

Creditors

68,711

80,335

95,338

110,104

Short term borrowings

31,903

34,510

58,390

58,390

Other financial liabilities

97,515

104,402

104,402

104,402

Other non-financial liabilities

21,342

21,521

20,048

20,048

Long Term Liabilities

 

 

503,443

413,804

413,804

401,804

Long term borrowings

389,386

348,038

348,038

341,038

Other long term liabilities

114,057

65,766

65,766

60,766

Net Assets

 

 

321,745

352,457

384,301

472,576

Minority interests

1,211

(182)

(182)

(182)

Shareholders' equity

 

 

322,956

352,275

384,119

472,394

CASH FLOW

Operating Cash Flow

(12,137)

46,113

19,089

63,162

Depreciation & amortisation

58,135

29,402

30,458

33,143

Working capital

68,140

31,572

7,749

5,643

Exceptional & other

(15,611)

(85,443)

1,613

1,613

Tax

6,002

2,718

0

0

Net finance cost

37,959

50,171

55,939

40,472

Net operating cash flow

 

 

142,488

74,533

114,847

144,034

Capex

(46,007)

(42,878)

(36,871)

(39,766)

Acquisitions/disposals

(138,000)

0

(130,000)

(50,000)

Equity financing

27,900

0

40,050

0

Dividends

0

0

0

0

Other

(53,413)

(52,301)

(33,710)

(21,972)

Net Cash Flow

(67,032)

(20,646)

(45,683)

32,295

Opening net debt/(cash)

 

 

198,600

273,900

297,427

369,100

FX

0

(2,881)

0

0

Other non-cash movements

(8,268)

0

(25,990)

0

Closing net debt/(cash)

 

 

273,900

297,427

369,100

336,805

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Verve and prepared and issued by Edison, in consideration of a fee payable by Verve. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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General disclaimer and copyright

This report has been commissioned by Verve and prepared and issued by Edison, in consideration of a fee payable by Verve. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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