iClick Interactive Asia Group (ICLK) – Merger Arbitrage – 8%+ Upside

Current Price: $6.95

Offer Price: $7.50

Upside: 8%+

Expected Closing: TBD

This idea was hinted by snowball.

 

It’s been a while since we’ve posted a non-binding U.S. listed Chinese takeover case, however, this one seems a bit more interesting due to buyers’ reputation and protected downside.

Chinese marketing cloud platform services company Click Interactive received two non-binding acquisition proposals from PE buyers. The first one came from Oasis Management and PAG Pegasus at $6.75/share on the 24th of September. A month later Infinity Equity Management offered $7.50/share. Following the second offer, the company formed special committee and hired Nomura International. 8% spread remains to the latest bid with a speculative chance of another price bump. Downside is protected by the lower bid.

Management has 11% economic and 62% voting interest in the company. Both buyer groups expect management together with some other shareholders to join the consortiums and roll the ownership.

The rationale for staying public is limited given the current market hostility towards U.S. listed Chinese companies. The company used to burn cash and has raised substantial amounts of equity since its IPO (2017), but the need for that has now disappeared as the company turned profitable. Being a Chinese microcap, ICLK will hardly be able to reach any meaningful valuation levels despite strong business growth. Mid-August shares were trading almost 40% lower at $4.20+/share. At the +current market price, ICLK is valued at only 2x 2021 revenues despite one of the segments growing at a +160% clip (subscription-based cloud software) and another one at +22%.

Oasis/PAG consortium are highly reputable investors. Oasis is a prominent Asian activist hedge fund with a solid track record (e.g. Nintendo campaign to focus on mobile games and, more recently, RENN litigation settlement). PAG is a large US$45bn Japanese asset manager.

Infinity (the second bidder) is a much smaller player – their website states that it is an Israeli-Chinese equity fund backed by China Development Bank with US$1.5bn AUM and 23 funds. ICLK buyout would likely be the largest investment of the fund so far – its largest “successful exit” seems to have been worth $140m vs ICLK EV of around $630m.

10% ICLK shares are held by BZUN (a Chinese e-commerce firm listed in the U.S. with a $1.5bn market cap) after both companies started cooperating on certain projects development activities back in Jan’21. Apparently, Infinity was one of the earlier BZUN investors and held around 6.6% after its IPO in 2015. Infinity’s website still shows it as an active investment, although they are no longer among the major BZUN shareholders.

Aside from management and BZUN (10%), there are no other major shareholders.

In the worst case scenario, management could reject both offers. In such case, the downside to pre-announcement stands at 17%, however, ICLK share price used to be depressed due to being a micro-cap Chinese firm with limited business visibility and ongoing dilution due to cash burn. Now that the business is profitable and several PE firms have pretty much confirmed the legitimacy of the business, the actual downside could be lower.

 

Business Background

The company has two business segments:

• Marketing Solutions – integrated cross-channel platform/software, which helps clients to distribute marketing content and reach target audience across various channels. Revenues are fee-based driven by the size of client’s marketing budget.
• Enterprise – in May 2018 ICLK decided to leverage its data pools and launched the SaaS-based Enterprise segment, which is focused on data analytics, campaign/target audience analysis and also offers various mini-programs for customer engagement, etc. The enterprise segment is based solely on Tencent’s API connection and WeChat ecosystem. Revenues are subscription-based and have higher margins compared to Marketing Solutions segment.

Historically, the Marketing Solutions segment has been growing at around 20%+ annually. The Enterprise segment has been highly successful (partly from cross-selling) and continued at 100% albeit from a smaller base. The segment now generates 17% of total ICLK revenues (table below). At these growth rates, the value of subscription Enterprise Solutions segment alone could justify the valuation of ICKL (i.e. 10x revenues, compares favorably to other listed SaaS businesses).