Elliott Shares Its Perspectives on Scout24
Elliott Advisors (UK) Limited (“Elliott”), which advises funds that collectively hold a long economic interest representing in excess of 7% of the share capital of Scout24 A.G. (“Scout24” or “the Company”), today released a letter outlining its perspectives on the significant value-creation potential at Scout24.
Elliott believes there are concrete and prudent steps that the Management and Supervisory Boards of Scout24 should be taking that could drive the share price of Scout24 to more than €65 per share. A more ambitious buyback programme, with leverage levels closer to those recommended by the Boards just a few months ago, as well as a comprehensive strategic review focused on achieving a full separation of the AutoScout24 business would create meaningful value for all stakeholders. Elliott looks forward to continuing to engage with the Boards of Scout24 to help deliver this outcome.
The full text of the letter follows and a copy is available on our website www.ScoutingForValue.com .
26 July 2019
FAO: Tobias Hartmann
CC: Dr. Hans-Holger Albrecht
Dear Mr. Hartmann,
We are writing to you on behalf of funds advised by Elliott Advisors (UK) Limited (“Elliott” or “we”), which collectively hold an economic interest representing in excess of 7% of the share capital of Scout24 AG (“Scout24” or the “Company”). We appreciate you taking the time to meet with us over the past several weeks. As one of Scout24’s largest investors, we remain committed to constructive engagement and open dialogue. We are hopeful that our ongoing communication can translate into meaningful and tangible progress in creating value for all stakeholders.
In an effort to continue our constructive dialogue and encourage greater ambition, we want to share with you in greater detail our perspectives on the following topics:
- The Value Potential. Our perspectives on the significant value within both ImmobilienScout24 (“IS24”) and AutoScout24 (“AS24”), two independently strong businesses;
- The Missed Opportunities. Our concerns with Scout24’s recent missteps – including the ill-advised recommendation to shareholders that they sell their Scout24 holdings at a price clearly well below its true potential as well as last week’s surprise announcement that lacked clarity and ambition; and
- The Path Forward. Our recommendations regarding the strategic steps needed to realize the full potential of Scout24.
We believe there is a growing demand among a wide array of stakeholders for Scout24’s leadership to demonstrate a level of urgency that has thus far been lacking. We hope our perspectives can help clarify what is required for Scout24 to regain credibility with its shareholders. We remain committed to working collaboratively in achieving a win-win outcome.
I. The Value Potential
As we outlined to you during our meetings, Elliott’s strong view is that, fundamentally, IS24 and AS24 are two exceptional businesses. Having spent significant time and resources researching and following Scout24 over the years, we have come to admire the businesses that the Scout24 team has shepherded from fledgling start-ups in 1998 to large, attractive businesses today. We believe that Scout24 has achieved this success through hard work and innovation on all fronts: technology, branding, business model evolution, and client service. The quality of these businesses, coupled with the dislocation between their true value and the value that the market places on them today, is why we are investors in Scout24.
Along with our team of advisors (including a leading global strategy consulting firm), we have conducted over 100 interviews with real estate agents and auto dealers; have commissioned three surveys (on real estate agents, real estate consumers, and auto consumers); and have spoken to over 30 competitors, industry experts, and other market participants (including other investors in publically listed online classifieds, several strategics with classifieds businesses >€5 billion, and many private equity sponsors with experience in the classifieds industry). All of this work has substantiated our view that the true value of Scout24 is in excess of €65 per share .
The significant interest in Scout24’s assets (rumoured or confirmed interest from two strategics and several sponsors) is a testament to the underlying value that could be unlocked. The interest from financial sponsors is especially informative for IS24’s and AS24’s standalone values (i.e. if sponsors can underwrite high valuations while generating >20% IRRs, what should public valuations be?). The interest from strategics suggests an even higher valuation might be attainable once synergies are accounted for.
IS24 : Simply put, we believe that IS24 is one of the best online classifieds businesses in the world given its leading market position in one of the most attractive classifieds markets globally, underpinned by strong lead generation and NPS scores highlighting its value to customers. We are particularly attracted to the multiple levers of further value creation available for the asset. We believe that, fully and properly valued, IS24 is worth in excess of €5 billion, i.e. almost the entire market value of the consolidated Scout24 business today.
AS24 : As the largest pan-European auto classifieds platform, AS24 offers investors unique exposure to leadership positions across the continent as well as a clear pricing runway and a promising new product pipeline. Recent unsolicited approaches from multiple strategics, as well as several sponsors, demonstrate that AS24 is a highly valuable asset. These approaches also suggest that the value-maximizing owner of AS24 is almost certainly not Scout24.
Scout24’s current market valuation does not reflect the quality and value of its assets. For instance, Scout24 trades materially below 20x EV / EBITDA while three of its closest peers trade far in excess of that level even though their prospects are arguably less bright than those of Scout24. We believe that a major reason for the valuation gap is the current structure of the business: two distinct businesses that do not have any material synergies sitting under one roof. The existing structure does not efficiently allocate resources across divisions, nor does it provide tightly aligned incentive structures for employees or a single-minded focus on customers.
Our experience suggests that focused businesses significantly outperform their less focused peers on operational and valuation metrics, and we expect this experience to apply directly to Scout24. Separated from each other, IS24 and AS24 would have an opportunity to achieve their full potential, not to mention the potential synergies a new owner could bring. Should you take the decisive action needed to remove the impediments holding back Scout24, we believe the share price could rise to in excess of €65 per share. Unfortunately, recent events have us wondering if the Scout management team shares our optimism for these high quality businesses.
II. The Missed Opportunities
Assessing the past year
In April 2019, Scout24’s Management Board and Supervisory Board recommended selling Scout24 at a price of €46 per share. This recommendation is not consistent with the underlying value of the business.
Your recommendation was also at odds with the views of your shareholders, and fewer than 30%1 of shares were tendered into the offer that you recommended. This was a significant rebuke of the Management Board and Supervisory Board. Indeed, this tender acceptance level implies that Scout24’s leadership team dramatically misread its shareholders’ perception of value. The failed bid raised a number of key questions that require answers:
- Was a proper process run to maximize shareholder value?
- Were higher bids on the table?
- Was the market price actually indicative of fair value at the time the bidders approached?
- Was the premium over fair value appropriate?
This episode also raised wider issues with the direction of Scout24. From operational issues to concerns about the way Scout24 communicates with its owners, many have been left scratching their heads:
- Why did Scout24 not update the market about its strategic vision between its April recommendation to sell at €46 and its July buyback announcement at ~€49?
- Why is the capital markets day not being held until Q4?
- Why weren’t top shareholders consulted on recent changes to Scout24’s leadership?
Assessing last week’s missed opportunity
To our surprise—and the surprise of many fellow shareholders—you issued a press release last Friday that lacked ambition and clarity. As you will recall, we had spoken just two days prior to your announcement, setting out privately many of the thoughts that we have now committed to paper in this letter; you promised to provide us with feedback on our proposals. Instead of providing us the promised feedback, you provided the entire market with yet another affirmation of our underlying concerns in the form of your 19 July press release, an announcement that widely missed the mark. The share price reaction confirms the underwhelming nature of your announcement: instead of significantly decreasing the gap to Scout24’s fair value, the 19 July announcement has barely affected Scout24’s share price, thus indicating that shareholders were unimpressed by your update.
We acknowledge that your announcement included some small steps in the right direction, most notably a modest initiative to restructure Scout24 into two cleanly separable units. However, this announcement was inadequate, failing to signal Scout24’s intention to fully separate AS24, a topic we discussed extensively on 17 July and to which you did not offer any disagreement.
Your announcement of a €300 million share buyback programme marked another disappointment: The appearance of forward momentum, yet grossly lacking in ambition. An incremental €300 million of net debt would bring Scout24 to ~3x net debt to EBITDA. For a team that had recommended only a few months ago2 that Scout24 increase its leverage to ~8x (and up to ~6x while remaining publically listed), the announcement of such a small buyback was frustratingly insufficient. Given that you are now apparently buyers of your shares at ~€49 per share having recommended unanimously that shareholders sell their shares for €46 per share two months ago, your own confidence in the business seems to have increased significantly. We do not understand how ~8x EBITDA could have been the appropriate leverage ratio a few months ago whereas today the appropriate leverage ratio is ~3x. How can you be more confident about the business prospects while at the same time being substantially less confident about the credit-worthiness of the business?
Both of the above missed opportunities (i.e. the nature of structural reform and the size of the buyback programme), as well as the ill-advised recommendation to sell at €46 per share, paint a picture of a leadership team that is lacking in ambition. This lack of ambition is particularly shocking for a public company with the qualities and prospects of Scout24.
Another key component of your 19 July announcement was the addition of three new Supervisory Board nominees. The proposed Board refresh is a welcome acknowledgment of the need for fresh perspectives at Scout24. While we look forward to meeting the candidates, we were disappointed that you did not consult widely prior to their nomination. As such, we view the changes to the Supervisory Board as yet another missed opportunity to reassure shareholders of Scout24’s commitment to improving its poor track record of corporate governance and Board decision-making.
In summary, the past year was fraught with poor judgment and suboptimal communication on the part of Scout24. Despite these concerns, we remain upbeat about the Company’s prospects. Given the substantial value of IS24 and AS24, the Management Board and Supervisory Board have an opportunity to restore trust with the shareholder base and take Scout24 to another level.
III. The Path Forward
As we have discussed in person, we strongly encourage Scout24 to put forward a plan that properly reflects the Company’s underlying value. Specifically, we recommend the following steps:
- Separate AS24, given strategic and private interest at attractive valuations
We believe that a full3 separation of IS24 and AS24 would be beneficial for all stakeholders. Employees could focus fully on their respective businesses and be compensated with greater alignment to their specific performance. With more precise focus and allocation of capital, customers would benefit from products and services delivered with greater efficiency. And shareholders would benefit from material value creation.
- Commence a more robust buyback
As mentioned above, the Investment Agreement with the sponsors contemplated significantly more leverage than what you proposed on 19 July. A more ambitious, yet prudent, buyback programme is not only appropriate, it is urgent. The opportunity to buy back shares at the current discount to fair value may not be available in the future; as such, immediate action is required.
- Meaningfully reengage with shareholders
Your top shareholders should not be surprised by big strategic announcements and major leadership changes. The lack of clarity in the 19 July press release could have been prevented with stronger shareholder engagement. We would remind you of the fact that we offered to work closely with you on a future announcement of strategic priorities and capital structure, and we were willing to enter into an agreement where we could privately collaborate in greater detail in a manner that is compliant with fiduciary duties and securities regulations.
Earnest dialogue can often garner positive change. Shareholders can often provide useful insights and fresh perspectives to a company struggling to make the most of its valuable assets. At the same time, an engaged management team help bridge areas of disagreement. We often adjust our own recommendations based upon relevant facts provided by management, producing a more informed, constructive dialogue and superior outcomes. In the wake of major missteps, there is heightened need for this leadership team to engage if it hopes to regain the confidence of its shareholders. Shareholder engagement cannot be a box-ticking exercise.
The above plan—1) Separate AS24; 2) Launch a robust buyback; 3) Reengage shareholders —must be pursued without delay. We believe this plan can take Scout24 significantly closer to its fair value of more than €65 per share. A critical question on the minds of Scout24’s major shareholders: Is the team that recommended shareholders sell their shares at €46 per share the right team to take this business beyond €65 per share? To reassure sceptical shareholders, you must demonstrate more ambition and vision. Fortunately, the 13 August earnings update presents an ideal opportunity to clarify your plans.
As ever, we remain available to discuss any of the above in more detail. We trust that you will share this letter with the rest of the Management and Supervisory Boards, and we extend our offer of open dialogue to both Boards.
Elliott Advisors (UK) Limited
Elliott Management Corporation manages two multi-strategy funds which combined have approximately $38 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest funds of its kind under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, and employees of the firm. Elliott Advisors (UK) Limited is an affiliate of Elliott Management Corporation.
As of today, Elliott holds a long economic interest in Scout24 which may cause a conflict of interest. Elliott intends to review its investments in the Company on a continuing basis and depending upon various factors, including without limitation, the Company’s financial position and strategic direction, the outcome of any discussions with the Company, overall market conditions, other investment opportunities available to Elliott, and the availability of Company securities at prices that would make the purchase or sale of Company securities desirable, Elliott Management may at any point in time (in the open market or in private transactions, including in the short term and since the inception of Elliott Management’s position) buy, sell, cover, hedge or otherwise change the form or substance of any of its investments (including any or all Company securities or related financial instruments) to any degree in any manner permitted by law and expressly disclaims any obligation to notify others of any such changes. Elliott Management also reserves its right to take any actions with respect to its investments in the Company as it may deem appropriate.
1 Excluding shares controlled directly or via proxy by the bidders.
2 As part of the Investment Agreement accompanying the tender offer.
3 For example, a partial IPO of AS24 would be counterproductive, as it would create new governance headaches and avoid the clarity and simplicity presented by the superior forms of separation.
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