Seek (ASX: SEK) CEO Andrew Bassat is one the founders of the company and one of the most competent managers in corporate Australia. The latest move to float both Zhaopin and IDP Education seems both prudent, and well timed. I'm embarrassed to say that I sold my shares in Seek for under $11 earlier this year. I now think I undervalued the combination of top management and an excellent business.
One concern I had with Seek was that its Chinese website, Zhaopin, is only the number two jobs website in China. Seek presently owns 80% of the company and plans to float it because that will make it easier to attract and retain top staff. I have heard a variation of this claim to explain why the Malaysian property developer United Overseas Australia (ASX: UOS) is listed on the ASX. To quote Bassat: "We are convinced that there is a real benefit to being listed rather than being private."
Another advantage of listing Zhaopin is that it will allow Seek to partially divest, should it wish to do so. This ought to be of some comfort to shareholders, because there is some chance that Zhaopin will be put under pressure by the leading Chinese employment website, 51job (NASDAQ: JOBS). Seek will be in an excellent position to manage its exposure to Zhaopin once the company is listed.
Seek is a business with good economics because it benefits from the network effect. The network effect often creates a natural monopoly: one famous Australian example is REA Group (ASX: REA), which owns the website realestate.com.au. REA Group and Seek have taken slightly different approaches to expansion; the latter company has expanded overseas, and into related fields, more aggressively.
In this sense, Seek retains its entrepreneurial attitude more than does REA Group. On the other hand, REA Group has more pricing power than Seek, because of the relatively high value of the transactions advertised. The most obvious similarity is that both companies have the number one website in Australia and this is their most valuable business. Further, both companies are expensive, although I prefer Seek to REA Group at current prices.
Although Seek will retain Seek Learning and Swinburne Online, it plans to sell some of its share of IDP Education in an IPO. This would "assist in facilitating liquidity for the IPO," Mr Bassat explains, "With the proceeds, SEEK would look to redeploy capital into international online opportunities and/or return capital back to SEEK's shareholders." In light of the current enthusiasm for internet IPOs, this is a well-timed plan.
Foolish takeaway
The recent developments demonstrate that Seek continues to behave a bit like an entrepreneur or venture capitalist. This is good, because it takes advantage of the company's expertise in growing online businesses. At current prices, the company yields over 1.6%, fully franked. If you hold these shares, I wouldn't sell them. At current prices, Seek is a little too expensive for me, but this company deserves a spot on every investor's watchlist.
