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SEEK Limited spends $118 million on OES as Zhaopin controversy hots up

Globally focused recruitment website operator SEEK Limited (ASX: SEK) is to spend $118.5 million increasing its stake in an online education business it jointly operates with Swinburne University of Technology.

SEEK will spend $118.5 million to lift its stake in Online Education Services (OES) from 50% to 80% and expects the transaction to be earnings per share accretive from FY 2018, with OES consolidated into SEEK’s financial statements. OES currently has $69 million in assets on its balance sheet including $60 million in cash.

SEEK’s entrepreneurial flare is returning after it recently went to Singapore to raise the equivalent of $1.4 billion via the issuance of debt and it appears a virtual takeover of OES is at the top of its shopping list, with its new found financial firepower.

Also on SEEK’s shopping list is greater control of Chinese jobs website Zhaopin and not for nothing either.

Zhaopin is growing like wildfire with big potential and SEEK is looking to de-list it from the NYSE via investment from well-connected private equity backers and partners who will buy the outstanding shares in Zhaopin SEEK does not own.

SEEK’s partners have offered US$18 per share for the NYSE-listed Zhaopin, which reportedly has not enthused Zhaopin’s minority shareholders who feel the business is worth more.

Kevin Bertoli a Portfolio Manager at PM Capital, Asia, reports that the deal only values Zhaopin: “At approximately 13x trailing EV/EBITDA which is well below historical M&A comparables”.

Mr Bertoli also commenting: “Zhaopin does not pay a dividend and their capex needs are relatively low, which has meant cash on balance sheet exceeded $US340 million or US$5.5 per ADS at the end of the December 2016. This equates to over 30% of its market capitalisation at the proposed price of US$18.”

Whatever happens to Zhaopin it seems the OES deal will go ahead.

OES has reportedly delivered FY 2014 – FY2016 compound annual growth in revenues of 37% and compound annual growth in earnings of 33% with “dividends paid to shareholders of $37 million, versus $10 million in capital invested”.

SEEK has suffered significant setbacks recently as a result of government reforms to funding of the higher education sector, although today’s news suggest it still sees a lot of opportunity in diversifying into online education as a long-term growth sector.

I agree that Online or E-learning is a big growth opportunity for SEEK with education (as one of the world’s largest industries behind healthcare) globally shifting online in a sector that is forecast to produce strong compound annual growth rates for the decade ahead.

SEEK itself today flagged the strategic rationale behind the deal being to increase OES’s addressable market via greater education partners and to develop new programs, retention initiatives and international expansion.

Others in the online education space include SEEK spin-off Idp Education Ltd (ASX: IEL), Kip McGrath Education Ltd (ASX: KME) and 3P Learning Ltd (ASX: 3PL).

Out of this bunch, I still expect SEEK will deliver the best performance thanks to its long-term focus, scalability and global operations that offer serious growth potential. I rate its shares as a buy at today’s price of $14.84.

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Motley Fool contributor Tom Richardson owns shares of SEEK Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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