The SEEK Limited (ASX: SEK) share price will be on watch this morning after the employment business announced it was selling down its stake of Zhaopin.
Zhaopin is a Chinese employment business that SEEK owned a major stake in.
What did SEEK announce about Zhaopin?
SEEK plans to sell down its stake in the Chinese business from 61.1% to 23.5%. It’s expecting to receive gross proceeds of $697 million, which implies a total valuation for Zhaopin of $2.2 billion.
The buyers of the stake is a consortium of investors, including Primavera Capital Group, which is a leading Chinese-based global investment firm and will become Zhaopin’s largest shareholder. The consortium is joined by Zhaopin management which will take a meaningful stake through the conversion of pre-existing employee options and investing for more shares.
Why is SEEK doing this?
The company said that the consortium has a strong track record of growing online businesses in China.
Another reason is that the change in ownership and corporate restructure will create additional capital market opportunities.
SEEK will realise/crystallise a strong financial return of its investment. The internal rate of return is around 23% per annum, representing a return of over 5x whilst retaining a 23.5% stake.
The final benefit is that it will rebalance SEEK’s portfolio exposure.
Is Zhaopin still a good business?
It’s worth asking – if the business is going to do great, then why is SEEK selling down? Perhaps it will indeed do better with other investors on board.
SEEK explained that Zhaopin continues to deliver good earnings growth and its lead indicators are showing improving performance in FY21. After the transaction, Zhaopin will be well capitalised and has significant financial capacity. It’s still focused on increasing its market share and growing profit.
What will SEEK do now?
It didn’t announce any new acquisitions, but it plans to put the money into “high return initiatives” across the group.
This sell-down will hurt SEEK’s goal of $5 billion revenue over the long-term. But it does plan to pay a dividend of $0.20 per share for shareholders.
SEEK will tell the market what it expects the financial impact on FY21 guidance will be when the deal is completed.
Ultimately, I think this is a disappointing move. China is a huge market and offered large growth potential for SEEK with the ANZ business getting to a mature stage of its core offering. It now won’t capture as much of that potential growth. I’d be less likely to want to own SEEK shares after the sale, unless it can put the money to really good use.
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