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Is iCar Asia Ltd a takeover target for Carsales.Com Ltd?

Shares of iCar Asia Ltd (ASX: ICQ) slumped 17% on Monday after South East Asia’s leading automotive classifieds company reported weak earnings. The fall in share price has raised speculation that Australian competitor Carsales.Com Ltd (ASX: CAR) may launch a full takeover bid of iCar Asia following its strong results on Tuesday.

I, however, beg to differ.

iCar’s results

iCar reported forecast revenue growth of up to 23%, equating to A$6.75 million to A$7.75 million for the full-year.

Nevertheless, management disappointed the market with a negative update to its outlook, indicating earnings (EBITDA) will come to a loss in the range of A$14.5 million to A$15.5 million for the full-year. The change to outlook was in part due to weaker demand in its key operating market (Malaysia) and an increase to its investment to maintain its market position.

Although the latter might facilitate future growth, investors expect more from a company with a market capitalisation of $134 million and revenue of around $7 million. This drove the share price lower on Monday.

Takeover potential

iCar’s fall in share price sent the rumour mill into overdrive with speculation that a takeover bid could ensue.

Carsales appears to be the natural acquirer of iCar, given the synergies that could be generated through a combination of the two businesses. With iCar already 20.2% owned by Carsales and operating the leading automotive portals in Malaysia, Indonesia and Thailand, a takeover by Carsales would make sense if Carsales wishes to increase its presence in Asia.

Nonetheless, I believe Carsales’ management has its hands full at the moment with the foray into Latin America (through its acquisitions of Chileautos and SoloAutos during the year). With both acquisitions completed in the financial year, it is likely that Carsales’ management will not want to take on additional risk until both businesses are generating solid earnings growth.

Accordingly, with iCar shares not a bargain by any means, I do not think a takeover bid is imminent (unless iCar’s share price falls further).

Foolish takeaway

Takeovers of businesses focused on South East Asia by larger domestic leaders are not uncommon, especially following substantial falls in share price. For example, REA Group Limited’s (ASX: REA) acquisition of iProperty Group at the end of last year carried similar hallmarks of the iCar and Carsales relationship. In that case, REA Group slowly increased its stake in iProperty before launching a full takeover bid amid iProperty Group’s share price weakness.

Although history suggests iCar’s shareholders could expect a similar outcome, I do not believe the current price of its shares justifies a takeover by Carsales given iCar is still not profitable (whereas iProperty group was). Given iCar’s weak results and the relatively high price of its shares, investors should not hold their breath for a takeover bid just yet.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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.