Guest Pitch: musicMagpie (MMAG.L)

Potential Takeover – 200%+ Upside

This pitch was shared by Daniel.

 

musicMagpie trades at around 3x FY24 EBITDA and remains in discussions with interested parties. Far higher peer valuations and strong shareholder slate suggest that any offer or MBO could come at a substantial premium to today’s prices.

MusicMagpie is an online retailer known for its “recommerce” operations, focusing on buying and selling refurbished consumer electronics and physical media, such as mobile phones and books through online channels including its own website. It has strong brand recognition within the UK amid a very competitive landscape. The Group has the highest number of seller reviews on both Amazon and eBay in the world, selling 42m items on the latter. musicMagpie also has US operations, centred on a processing facility in Atlanta, under the brand name ‘Decluttr’, which until recently provided more than a quarter of total sales, but has been converted to a sourcing operation for the UK amid struggles.

The company used a bumper Covid period, where revenues in 2021 increased 20% YoY, to go public on London AIM exchange at a £200m valuation. This ultimately proved too optimistic as growth soon evaporated and margins came under pressure. Matters have been made worse with various forays into ancillary services, such as a ‘rental’ push that was largely unsuccessful and increased overall leverage.

Financial performance over the last few years has been a story of normalisation off the back of the exceptionally strong 2020-2021 periods and weakening consumer confidence pressuring margins.

*EBITDA is adjusted for exceptionals but includes impairments as I believe this gives a clearer picture that management’s preferred metric.

Recent trading has been mixed, with signs of stabilisation. Revenue still declined in the first half of 2024 (albeit mostly caused by the planned conversion of US operations to sourcing-only, but adjusted EBITDA less impairments improved to £2.0m from £1.9m in the prior period. musicMagpie generates the majority of its profits in the second half of the year, particularly around the Black Friday period.

Catalyst

After several years of a slumping share price, speculation grew about an opportunistic bid. On 20 November 2023, the company confirmed it was in discussions with UK telecoms giant BT and PE house Aurelius, only for BT to brief a week later than they had ended their interest. The share price has since tumbled from around 20p to a range between 5-10p. musicMagpie however is still in a statutory takeover period today as it has repeatedly confirmed it remains in discussions with several parties:

musicMagpie plc has been in an offer period since 27 November 2023 during which time various conversations have taken place with interested parties.  Several discussions remain ongoing and as such the Company remains in an offer period.

Below are the largest shareholders as of the 31 January 2024:

‘Northern Entities’ mostly consist of various venture capital trusts, tax-advantaged investment structures that focus on smaller UK companies and have been shareholders since 2015, many years before musicMagpie’s IPO. Having realised roughly half of their investment, their cost basis seems to be around 15-20p. I believe they are highly aligned with the current board.

Schroder is a relatively new investor with an unclear cost basis, but they accumulated most of their stake in late 2022 at a range between 10-20p.

Steve Oliver is co-founder and CEO, Walter Gleeson is the other co-founder but no longer has a role in the business. I expect these two individuals are relatively aligned, and Steve has in the past been very bullish about the company’s value (even going as far to say it could be worth a billion pounds). The leadership, backed by Northern’s support, commands a significant voting bloc, comprising over 30% of the total, wielding considerable influence over any potential sale of the business, whether in part or in its entirety.

More recently, two more individuals have built up sizeable stakes. The first is Damian Hanson, a northern businessman with experience in telecoms and retail, who has built up a 2.1% stake. Peter Hargreaves, the co-founder of the Hargreaves Lansdowne investment business has also accumulated a 4.1% stake. Damian’s average entry was around 6.5p, while Peter’s wasn’t disclosed but was again likely in the 5-10p range. Damian could be a potential suitor, however either of them could also be part of a MBO consortium ahead of a take-private.

Recent transactions and valuation

The UK retail sector has obviously not been the most attractive investment destination over the past few years, blighted by COVID disruptions, a dismal consumer environment and Brexit. Transactions have concentrated largely on fashion, where the market has been ripe for consolidation for some time and the level of distress has risen.

Currys plc is one of the largest electronics retailers in Northern Europe, and was recently approached by Elliott Management at a FY2025 EV/EBITDA multiple of around 4x, which was rebuffed as “significantly undervalued”. Analysts commented that the board would only entertain offers exceeding 80p, or an equivalent EV/EBITDA multiple of 5x. It’s worth bearing in mind Currys is a legacy brick and mortar chain which still generates most of its sales offline, however it is a much larger business than MMAG.

AO World plc, another large electronics and appliance retailer is likely a closer peer, given its e-commerce focus, and trades at a FY2025 EV/EBITDA multiple of 10x thanks to its higher growth.

At 20p, the enterprise value of musicMagpie is circa £34m, or 5x my conservative estimate of FY2024 EBITDA. I feel this is the minimum a transaction would price at given the interests of the various stakeholders, and could be a pivotal reason why the talks with BT/Aurelius broke down last year (at the time MMAG was already trading at a 5x forward multiple). With interest rate cuts scheduled to begin this summer and a new government spearheading greater levels of investment, a bidder may be tempted by a potential turnaround in the UK consumer story. It’s also worth bearing in mind the company has good environmental credentials given its circular economy theme.

There are very few direct listed peers. The closest is likely Envela Corporation (NYSE:ELA), a recommerce company that focuses on luxury goods and bullions for consumers and recycling end-of-life electronics, that trades at a forward EV/EBITDA multiple of 11.5x.

If no bidders were to come forward, I would expect a management buyout given the strong incentives from insiders to go private. The company has ceased receiving any analyst coverage and is not likely to be able to raise any substantial amounts of equity going forward given the lack of market confidence. As of the start of July 2024, the company trades at just 3.3x FY24e EV/EBITDA. The market clearly anticipates no third party offers at present. I wouldn’t, however, expect a MBO at a simple 30% premium to the current depressed share price. As mentioned above, I don’t believe serious institutions like Schroders and other large shareholders would accept an offer at that price, and boards have become increasingly more demanding around takeovers on the back of enormous volumes of M&A seeking to take advantage of the cheap UK market. Management will require the approval of a majority of shareholders. They will also need to organise financing for a buyout which requires keeping people on side. MMAG was trading around 19-21p before the takeover period began, more than 150% upside from current levels. The fact the board still has parties interested in acquiring the company demonstrates the value opportunity and how any MBO could be challenged.

There is a divergence between prospective buyers and sellers, and this could narrow, but I believe the more likely scenario is a management buyout at least 50%, or even 100% above current levels. With the takeover period now entering its eighth month, I anticipate clarity sooner rather than later.

Risks

Likelihood of insolvency is near zero given MMAG has strong support from its lenders and room for maneuver within its RCF from HSBC and NatWest.

AIM is a market with less regulatory scrutiny, and as such is seen as more of a wild west, particularly when it comes to corporate transactions. On the back of outflows and plummeting valuations in the last few years, the UK’s growth market has seen scores of administrations, delistings and acquisitions that are questionable at best and ignorant of fiduciary duties at worst. musicMagpie insiders hold a large portion of the stock and it is entirely possible that they may abuse this position to take the company private at an unfavourable valuation to public investors, just as the company floated at a favourable one. The familiar points around illiquidity also apply here – musicMagpie’s entire market capitalisation is under £10 million, so this opportunity is unsuitable for larger investors.

There is a moderately high chance no bidder is forthcoming, and the takeover period gets terminated, in which case MMAG’s share price is likely to decrease. Even if a MBO is agreed, this may not be at a significant premium if it is uncontested by shareholders. Any deal may also involve a part of the business, such as the US arm only. There is little information as to what prices any transactions would be agreed at, why certain shareholders have bought or sold during the takeover period, or why BT decided abandon talks, and this large degree of uncertainty is likely driving the divergence between the stock price and its intrinsic value.