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Carsales.com Ltd just bet $244 million on South Korean growth

Carsales.com Ltd (ASX: CAR) today announced it plans to spend $244 million acquiring the remaining 51% stake of South Korea’s Encar.com that it does not own. Encar.com is a market leader in the online South Korean second-hand car market and has been operated by SK Group in a joint venture with Carsales since April 2014.

Carsales’ CEO saying: “Our increased investment is testament to our increased confidence in the strength of the South Korean market and the long-term growth potential of Encar.com”.

Over FY 2017 Encar.com grew revenue and EBITDA 29% and 32% respectively.

The purchase will be funded by new debt facilities and is expected to be earnings per share “neutral” on an adjusted basis over FY 2018 and “accretive” in FY 2019 and beyond. The deal is also expected to create a non-cash $100 million gain in the total valuation of the Encar.com asset on Carsales’ balance sheet.

The group has a mixed track record in the overseas acquisition space after recently writing down $7.1 million of its investment in iCar Asia Ltd (ASX: ICQ) that it still owns 15.1% of.

iCar Asia shares have fallen 89% since the over-inflated prices of July 2014 and with the stock at just 17.5 cents today its shareholders may hope Carsales comes up with a full takeover bid. The problem is the soft operating metrics iCar continues to deliver and it’s possible Carsales decides to move on and sell down its stake, rather than increase it.

iCar Asia heralds from the stable of digital companies founded by Australian entrepreneur, Patrick Grove, the CEO of iCar’s major shareholder Catcha Group.

Catcha was also behind the sale of the collection of South East Asia focused iProperty Group websites to REA Group Limited (ASX: REA) for a song at the end of 2015.

Since then REA Group has written off $180 million of the value of its iProperty purchase, although investors appear happy to be ignore this blunder by sending REA Group shares 40% higher in 2017 to record levels.

The stretching of Carsales’ balance sheet to fund the Encar.com deal ratchets up the risk for investors given the unpredictability of overseas markets. The market seems uncertain over the deal with the stock closing flat at $13.53 today.

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Motley Fool contributor Tom Richardson owns shares of Seek, Cochlear and REA Group 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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