Verve acquires Jun Group and completes a directed issue

Verve Group announced yesterday after-market that the company is acquiring Jun Group, a digital advertising platform, from the U.S. listed company Advantage Solutions Inc in a deal worth EUR 170 million. In conjunction with the acquisition, Verve has successfully raised SEK 450 million through a directed share issue. The acquisition will have a substantial impact on Verve’s financials and the company also raises its 2024 guidance. Our initial take on the deal is positive and we will get back with updated estimates in the coming days.

Demand side company with strong profitability

Jun Group is a leading mobile advertising company that is specialized on the demand side with direct access to over 230 Fortune 500 advertisers and agencies in the United States. The company offers a suite of proprietary technologies and tools that collectively empower clients to achieve more effective and efficient advertising outcomes through data-driven insights and automation. No existing customer makes up more than 10% of revenue and 66% of revenue from client spending is greater than 1 MUSD. In 2023, Jun Group had revenues of 72 MEUR with an adj. EBITDA of 36 MEUR, corresponding to an EBITDA margin of 50%.

Funded by cash at hand and through a direct share issue

Total consideration for the acquisition amounts to 170 MEUR on a cash and debt-free basis. However, the deal is structured in three fixed components comprising three installments:

-        120 MEUR closing consideration will be paid at hand

-        Deferred considerations are to be paid in two annual installments of 25 MEUR and will be paid out of running cash flow 12 and 18 months after closing.

Of the 120 MEUR, 80 MEUR will be paid by Verve’s existing cash balance and the remaining 40 MEUR have been raised through a directed share issue after yesterday’s close. Verve issued 27.1 million shares at a subscription price of SEK 16.6, representing a discount of 5% from yesterday's close price of SEK 17.48. The share issue was directed to a number of Swedish and international institutional investors, including the CEO Remco Westerman through his own company and the second largest shareholder Oaktree Capital Management.

The Acquisition is expected to close around September 2024, pending regulatory approvals.

Significant financial impact and Verve raises short- and medium-term financial targets

The acquisition has a substantial impact on Verve’s financials and will result in 447 MEUR revenues and 151 MEUR adj. EBITDA for 2024 (corresponding to a 33.8% adj. EBITDA margin) on a pro forma basis when accounting for expected synergies, according to the company. This can be compared to 2023 pro forma figures of 394 MEUR in revenues and 131 MEUR in adj. EBITDA, which represents a 13.5% revenue growth (y/y) and 15.3% adj. EBITDA growth (y/y). The transaction will also result in a more balanced sales model with 30% demand-side business and 70% supply-side business.

As a result of the acquisition, Verve updates its mid-term financial targets to 25-30% Revenue CAGR (unchanged), 30-35% EBITDA margin (25-30%), 20-25% EBIT margin (15-20%) and reduces the net leverage target significantly to 1.5-2.5x (2.0-3.0x).

As for the 2024 guidance, Verve increases the revenue target range to 380-400 MEUR (350-370 MEUR), and the adj. EBITDA range to 115-125 MEUR (100-110 MEUR).

The strong profitability and high cash conversion of Jun Group will not only enhance Verve’s profitability and cash profile but enable lower leverage through improved quality of earnings. As a result, Verve aims for a pro forma leverage ratio of 2.4x by the end of 2024 (2.8x including deferred payment) and 369 MEUR in pro forma net debt, up from 319 MEUR before the transaction (3.2x leverage ratio).

Initial take and acquired multiples

Our initial take of the acquisition is, even though it came as a slight surprise, that it makes sense in many ways. The demand side has been a priority for the company to enhance its overall value to advertisers/brands and publishers. Jun Group provides Verve with premium access to Fortune 500 brands and publishers, from which Verve can faster scale and access first-party data to further accelerate its AI capabilities, and from that lay the foundation of further innovation and enhancement of its current ID-less targeting solutions. The improved quality of earnings will strengthen the cash flow generation ability and deleveraging ability.

In terms of valuation, Verve acquires Jun Group at a 3.8x EV/adj. EBITDA multiple, based on the 2024 pro forma EBITDA including annualized synergies. If we would instead look at Jun Group's 2023 adjusted EBITDA, the corresponding multiple would be 4.7x, still well below the multiple that Verve’s trade at. We believe it is a fair price for a company that grows at a low single-digit number with strong profitability and cash flows, especially when taking into account the synergies that Verve can realize from it.