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Aurum Deal of the Month – November 2016

MakeMyTrip and Ibibo, two of the biggest online travel platforms in India, have announced a merger that will combine the two businesses under the former’s brand, with Ibibo getting a 40% stake in the combined entity.

The Transaction

Naspers and Tencent through their jointly owned company (91% – Naspers, 9% – Tencent) are selling ibibo Group to MakeMyTrip in exchange for a 40% stake in the combined entity. The merger is expected to close by the end of 2016 and is subject to approvals by MakeMyTrip’s shareholders and Competition Commission of India. Naspers will also contribute proportionate working capital upon closing. Additionally, prior to closing , the USD 180 million, 5-year convertible notes issued by MakeMyTrip Limited to Ctrip will be converted into common equity, resulting in Ctrip having an approximately 10% stake in the combined entity.

Deep Kalra will remain Group CEO & Executive Chairman. Co-founder Rajesh Magow will remain CEO India of MakeMyTrip. The founder & CEO of ibibo Group, Ashish Kashyap, will join MakeMyTrip’s executive team as a Co-founder and President of the organization. Management indicated that both the platforms and brands (including redbus) will be run on an independent basis and back-end operations/infrastructure will be integrated over a period of time.

Market Perspective

The merger will create a dominant player in Indian online travel. MakeMyTrip and goibibo account for 50% of online hotel bookings (28% and 21% each respectively), respectively. MakeMyTrip is the leader in online flight bookings with a 30% market share, followed by ibibo.

deal of the month nov 2016

The deal will combine such travel brands as goibibo, MakeMyTrip, redBus, Ryde and Rightstay with combined 34.1 million transactions processed in FY16.

chart for deal of the month nov 2016

Aurum Perspective

The combination of top two players in the Indian OTA space could be a driver towards enhanced profitability by reducing competitive intensity and promotional spend. In the long term, the strategy seems to be a sound one and value accretive. Lower discounts would result in better unit economics, besides which, the company can also be expected to have better bargaining power with airlines and hotels. However, the current valuations accorded to Ibibio group seem to be very rich.

The combined entity will have a valuation of USD 1.8 billion (INR 120 billion) as per Morgan Stanley, the bankers to the transaction. MakeMyTrip had a market capitalisation of USD 850 million before the deal was announced, besides which it had debt worth approximately USD 180 million. In all, it was valued at 6.1 times fiscal 2016 revenues. This would imply a value for Ibibo (+ synergies) of USD 770 million, a multiple of 8.4 over Ibibo’s FY16 revenue of USD 91 million.

The shareholders’ of Ibibo have managed to get 40% equity of the combined entity, even though there contribution to the combined revenue is 35%.
There is definitely merit to the thought that the profitability of the combined entity will be enhanced due to elimination of the cut-throat competition between the two parties which had resulted in significant cash burn. In FY15, Ibibo made losses of USD 62 million on the back of revenues of USD 38 million—this was largely on account of the cash burn in the hotels business. MakeMyTrip was forced to follow suite and ended up with losses of USD 89 million in FY16.

The investors at the moment do not seem to be too concerned though. MakeMyTrip’s share is trading at USD 27 (4 Nov 2016), a 33% rise after the transaction was announced. The Euphoria hasn’t stopped there. The company’s share count is expected to rise by as much as 2.4 times post the transactions, as per their filings. This implies that the investors are valuing the combined entity at USD 2.9 billion. It works out to approximately 11 times the estimated revenues of the combined entity.

Drying up of discounts will erode growth rate. There are other risks also, which need to be considered such as acquisition integration, competition, lower commissions and macro risks related to hotel and airline industry. A correction in the share price and valuations in the short to medium term will not be surprising.

graph deal of the month nov 2016

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.