AO.com to acquire MusicMagpie
It's not all bad news...
On Wednesday (02/10/2024), AO.com announced their intention to acquire the entire share capital of MusicMagpie for a touch under £10m (USD13m, EUR12m) at 9.07p per share1. Despite an acquisition being entirely expected, I can only see the valuation as bad news for sector confidence. Since the IPO in April 2021, when the opening share price was 198p and the business was valued at over £200m, a 95% decline in valuation is precipitous.
It seems the (investor) world quickly fell out of love with the business. The share price has only gone one way since the IPO and never recovered after falling off a cliff post the 2021 full-year results announcement2. Listing on Backmarket seemed a desperate attempt to slow down the revenue declines, but prices on that platform only seem to go one way, so putting any additional pressure on your primary revenue stream with your biggest competitor didn’t make sense, at least to me. Perhaps management decided it was inevitable.
Less than a year ago, unquoted city sources suggested the business could be sold for around £40m3 around the same time as acquisition talks with BT began publicly and abruptly ended publicly, a week later. Hopes of a change in fortune seem to have gone out the window when the latest interim results4 were published in June this year. Revenues took another tumble after switching the US “decluttr” operation to sourcing only. Outright tech sales in the UK were up a bit but the drop in tech rental customers due to cash management was worrying - an inability to fund the only growing line of business. Clearly, slower declines in Media & Books revenue wasn’t the good news shareholders wanted to hear and stretching the brand to buy fashion items was (is) clutching at straws. I can’t see AO continuing to invest in that.
But, it’s not all bad news. “AO believes the acquisition will augment its capability and value capture in the mobile and consumer technology categories” and selfishly, I’m getting some valuation multiple data points, just not the ones anyone really wanted to see (use with caution):
H1 2024 EV/EBITDA = 4.95x5
FY 2023 EV/EBITDA = 3.10x6
H1 2024 Price to Sales = 0.0937
FY 2023 Price to Book = 0.8138
With due respect given to the economic headwinds over the last few years and management’s strategic decision making, the IPO valuation was clearly optimistic; timing may have played a part with online business valuations being boosted by the pandemic and; unrealistic growth expectations, or at least unchallenged growth expectations probably added a few million on top.
I’ll continue to claim the sector needs consolidating, but buyers and sellers are going to have to work hard to bridge the valuation gap with multiples like these.
Peace.
sb.
https://otp.tools.investis.com/clients/uk/appliancesonline1/rns/regulatory-story.aspx?cid=865&newsid=1871059&culture=en-GB&val=638634686191996815
https://otp.tools.investis.com/clients/uk/musicmagpie/rns/regulatory-story.aspx?cid=2630&newsid=1555223
https://finance.yahoo.com/news/smartphone-refurbisher-musicmagpie-puts-itself-154559667.html
https://otp.tools.investis.com/clients/uk/musicmagpie/rns/regulatory-story.aspx?cid=2630&newsid=1836609
Based on the half-year results from release in June 2024 (Market Cap (£9,982,105) + Net Debt (£13,800,000) = £23,782,105 EV/EBITDA = £23,782,105 / £4,800,000 = 4.95)
Based on the full-year 2023 results (EV/EBITDA = £23,081,105 / £7,452,000 = 3.10)
Ibid (P/S = £9,982,105 (Market Cap) / £107,600,000 (Est. Annual Revenue) = 0.093)
Based on the balance sheet from the last full-year results released in March 2024 (Market Cap / Book Value = £9,982,105 / £12,276,000 = 0.813)