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EUR274m
Research: TMT
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.
Verve |
Jun helps Verve blossom |
Acquisition and fund-raise |
Media |
24 June 2024 |
Share price performance
Business description
Next events
Analysts
Verve is a research client of Edison Investment Research Limited |
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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* |
EPS* |
EV/EBITDA |
P/E |
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
|
|
Research: TMT
With the successful Samsung litigation now in the rear-view mirror, Nanoco’s focus will be fully on building the business as a developer, manufacturer and licensor of nanomaterials. With its extensive expertise in quantum dots, validated IP and high-volume manufacturing facilities backed up by a strong balance sheet, we believe that the business has a robust platform for growth. Partnerships with STMicroelectronics and an Asian chemicals supplier position Nanoco strongly to participate in the anticipated adoption of infrared sensors in handsets and a wide range of other devices. If all goes to plan, there could be an inflection in revenues from late FY25 or FY26. We believe the FY24e EV of £15m significantly overlooks Nanoco’s commercial potential and the value of its validated IP.