buying deveoping market internet growth

8/8/2019 Buying Deveoping Market Internet Growth

http://slidepdf.com/reader/full/buying-deveoping-market-internet-growth 1/6

Dow Jones Investment Banker

2010 Dow Jones & Company

Buying Developing Market

Internet Growth

With the mail.ru IPO due to come to market on November

8th, Dow Jones Investment Banker unpicks some of the

numbers behind the prospectus documents.





The Company . . . . . . . . . . . . . . . Mail.ru Group Limited.

The GDRs . . . . . . . . . . . . . . . . . Each GDR will represent one Ordinary Share deposited with

Citibank, N.A. —London, as custodian for Citibank, N.A., asdepositary.

consisting of (i) 3,032,727 GDRs representing Ordinary Shares

with Russian law and other jurisdictions outside the United States in

Over-allotment Option . . . . . . . . 3,162,429 additional GDRs representing Ordinary Shares at the

. . . . . . . . . . . . US$23.70 to US$27.70 per GDR.

Shares Outstanding After the

. . . . . . . . . . . . . . . . . 78,596,528 Ordinary Shares and 117,688,545 Class A Sharesassuming no exercise of the Over-allotment Option and an issueprice at the midpoint of the range shown on the front cover hereof.

The Company has authorized up to 4,081,341 Ordinary Shares to be

Ordinary Shares to be issued upon Admission pursuant to optionsexercised on a cashless basis by senior managers and employees of

Voting . . . . . . . . . . . . . . . . . . . . Each GDR carries the right to vote one Ordinary Share, subject tothe provisions of the Deposit Agreements and applicable BVI law.Each Ordinary Share carries one vote. Each Class A Share carries25 votes.

Use of Proceeds

representing new Ordinary Shares to fund a portion of its acquisition

of an additional 7.5% interest in VK. The Company will receive noproceeds from the sale of GDRs by Selling Shareholders.

Listing and Trading . . . . . . . . . . Application has been made for the GDRs to be admitted to tradingon the London Stock Exchange ’s regulated market for listedsecurities. Neither the Ordinary Shares nor the Class A Shares arelisted or traded on any stock exchange.

Lock-up . . . . . . . . . . . . . . . . . . . Until 180 days after the Closing Date, applicable to the Company,the Selling Shareholders, the Senior Managers and certainnon-selling shareholders, subject to certain exceptions. In addition,we have instructed the Depositary not to accept deposit of Ordinary

Shares, or issue GDRs, for 180 days after the date hereof (other than

There is a dual sharestructure - GDRs representOrdinary Shares, but Class Ashares have 25 votes

Shares issued depend on pricein market, but around 205 million shares will be issued, sovalues the equity of companyat $4.85Bn to $5.70Bn

Mostly owners selling down,but company also raising cash

The company will have net cashof around $85 million, thismeans company valued(simplistically) at 2011 24xEv/Ebitda and 17.5x 2012 (notaccounting for minorities)





So the dual class of

shares mean that theoriginal owners have

98% of the votes

Consolidated Financial Statement Data Six monthsYear ended December 31, ended June 30,

2007 2008 2009 2009 2010(in millions of US$)

(audited) (unaudited)

Income Statement Data

Online advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 62.8 24.5 38.6

IVAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 63.4 20.2 56.0

Payment processing services . . . . . . . . . . . . . . . . . . . . . . . . . . 16.6 — —

Online recruitment services . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 17.5 8.2 11.4

Dividend revenue from venture capital investments . . . . . . . . . — 0.1 1.6 0.6 1.2

Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 — 3.1 1.0 1.5

Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0 0.1 148.3 54.6 108.7

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16.4) — (34.3) (12.2) (25.7)

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 0.1 114.0 42.4 83.0

Net gain/(loss) on venture capital investments and associated

derivative nancial assets and liabilities . . . . . . . . . . . . . . . . (10.9) (12.7) 1.5 1.2 1.6

Research and development expenses . . . . . . . . . . . . . . . . . . . . — — (1.0) — (1.3)

Selling, general and administrative expenses (1) . . . . . . . . . . . . . (9.7) (54.6) (96.8) (33.6) (53.2)

Impairment of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . — — (1.8) — —

Depreciation and amortisation (2) . . . . . . . . . . . . . . . . . . . . . . . (0.1) — (29.9) (11.4) (22.4)

Operating prot (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16.0) (67.2) (14.0) (1.4) 7.7

Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 1.2 1.5 0.8 0.4

Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.4) (3.3) — — —

Net gain/(loss) on derivative nancial assets and liabilities overthe equity of strategic investees . . . . . . . . . . . . . . . . . . . . . . 0.3 0.5 (3.6) (1.1) (0.7)

Net gain on acquisition of control in strategic associates . . . . . . — 91.9 14.8 14.8 —

Net gain/(loss) on disposal of shares in strategic associates . . . . 20.4 (0.1) 113.1 113.1 —

Net gain/(loss) on loss of control in subsidiaries . . . . . . . . . . . . 167.8 — (7.1) — —

Net loss on disposals of intangible assets . . . . . . . . . . . . . . . . . (0.3) — — — 0.7

Net foreign exchange gains/(losses) . . . . . . . . . . . . . . . . . . . . . (0.2) 34.7 13.5 12.1 10.7

(Impairment losses)/reversal of impairment losses related to

associates and available for sales investments . . . . . . . . . . . . — (53.1) 46.7 — —

Share of prot/(loss) of equity method investees . . . . . . . . . . . 3.9 (16.5) 18.0 7.3 (12.4)

Gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 0.7

Other gains/(losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 0.1 — (1.1)

Prot/(loss) before income tax expense . . . . . . . . . . . . . . . . . . 174.5 (11.9) 183.0 145.6 5.4Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.8) (0.1) (17.3) (10.6) (8.6)

Net prot/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173.7 (12.0) 165.7 135.1 (3.1)

Major Shareholders and Related

Party Transactions . . . . . . . . . Our three largest shareholder groups are (i) three companies

controlled by Alisher Usmanov, (ii) MIH Russia Internet BV (part

of the Naspers Group) and (iii) the Company ’s founders. Following

the Oering and conversion of certain Class A Shares to Ordinary

Shares, these shareholders will together benecially own and control

close to 98% of the votes cast at the general meeting.

The Company has entered into a Relationship Agreement with its

aliate, DST Global ( ‘‘DSTG ’’) governing the relationship between

the Company and DSTG. The Relationship Agreement includes

tag-along rights in the event DSTG or any aliated transferee sells

certain shares in Facebook and Zynga.

Just gone profitable at theoperating level

The sell-side analysts are

going for around $220million Ebitda next year and approximately $300million in 2012





Obviously should grow aseconomy rebounds.

Selected Segment Data

which are the segments that (together with ICQ) will form the core of our consolidated operations after

ownership interest in and consolidation of all key subsidiaries and associates composing the segments in

attributable to the group for the applicable segment would have been had all applicable IFRS adjustments

been applied for the periods indicated.

Mail.ru Segment

The following table sets forth the Mail.ru segment income statement for the periods indicated. This

the respective dates at which we acquired control in 2009.

Year ended Six monthsDecember 31, ended June 30,

2007 2008 2009 2009 2010(in millions of US$)


Revenue

Online advertising:

Display advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.8 44.4 44.5 17.1 26.7

Context advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 17.8 16.0 6.8 11.0

Total On-line advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.8 62.2 60.5 24.0 37.8

IVAS:

MMO Games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 38.9 64.9 25.0 44.4

Community IVAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 3.6 7.1 3.0 9.3

Other IVAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 6.7 5.8 2.4 2.6

Total IVAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 49.3 77.9 30.5 56.4

Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 — — — —

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.5 111.5 138.4 54.5 94.2

OK Segment

The following table sets forth the OK segment income statement for the periods indicated. Our OK

segment includes OK and its subsidiaries for all periods presented, assuming 100% ownership. In contrast,

June 30, 2010.

Year ended Six monthsDecember 31, ended June 30,

2007 2008 2009 2009 2010(in millions of US$)


Revenue

Online advertising:

Display advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 14.4 13.0 6.0 8.0

Context advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 2.1 1.6 0.9 0.8

Total On-line advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 16.5 14.6 6.9 8.7

Community IVAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4.2 29.7 12.9 21.5

Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.3 — — —

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 20.9 44.3 19.8 30.2

The mail.ru division had a poor

2009 as did many similar companies, but is reboundingstrongly this year. Sell-side con-sensus expects group revenue 30%CAGR growth for next threeyears.





Group Structure

strategic minority investments, international investments and other Russian and Ukrainian investments.

Mail.ru Group Limited

(Founded in 2005)

Minority Investments

Investments (available-for-saleMail.ru Internet NV

(equity accounting)(100% equity interest)method (My World Social Network, Agent IM,

Facebook Inc.accounting) Email, Games, Mail.ru Portal)(2.38% equity(Consolidated since December 2008)

interest) (3)VK.com

(32.49% Odnoklassniki LimitedZynga Game

equity (100% equity interest)Network Inc.

interest) (1)(OK Social Network)

(1.47% equity(Consolidated since August 2010)

interest) (4)

GrouponInvestments (91% equity interest) (2)

Inc.(25.09% (Headhunter Online Recruitment Services) (5.13% equity

equity (Consolidated since February 2009) interest) (5)

interest)

ICQ LLC

(100% equity interest) Other Russian and(ICQ IM network) Ukrainian

(Consolidated since July 2010) Investments

(fair value through

accounting)

15 Russian and

Ukrainian venture

capital investments

Facebook is being valued at $35 billion in the grey market,implying $833 million holding for company.

Zynga and Groupon valued at $5.6 billion and $1.46 billion on grey market.

If we assume the international minorities are worth $900 million, the rest of the business is then valued at19x Ev/Ebitda for 2011 and 14.5x 2012

On a P/E basis, if we back out minorities, valuation becomes 30x 2011 and 20x theyear after. This valuation is close to that for the Chinese players, so the shares becomea macro play on both China and Russia

US peers such as Google or Yahoo trade P/Es of on 19x and 16x 2011 and then 15x

and 13.5x the year after. But the Chinese peers such as Alibaba.com, Tencent andCTrip are much higher and are on 25x, 30x and 33x P/E 2011 respectively.

QIWI

Strategic Core Concolidated Subsidiaries

Newton Rose Limited

International





About Us

Contact Us

The Dow Jones Investment Banker columnist team brings years of experience of corporate finance and strategic insight, being a mix of financialprofessionals drawn from investment banks, hedge funds and researchhouses and proven journalists.

Our exclusive insight is totally independent and adheres to Dow Jones’standards of editorial ethics

Our focus is exclusively on the interests of investment bankers

[email protected]

(+44) 20 7842 9343 (London)

(+1) 212 416 2101 (New York)

Twitter: twitter.com/dowjonesibanker

Our content is available only to subscribers.

To secure a trial please visit our website: dowjones.com/ib/

buying deveoping market internet growth

Documents