Adevinta ASA -- Moody's changes outlook on Adevinta's Ba3 ratings to stable

Rating Action: Moody's changes outlook on Adevinta's Ba3 ratings to stableGlobal Credit Research - 20 Jan 2022London, 20 January 2022 -- Moody's Investors Service, ("Moody's") has today changed the outlook on Adevinta ASA's (Adevinta) ratings to stable from negative. At the same time, Moody's has affirmed Adevinta's Ba3 long term corporate family rating (CFR), Ba3-PD probability of default rating (PDR) as well as the Ba3 ratings for its E1.3 billion (equivalent) senior secured term loan B, E450 million senior secured revolving credit facility and the E1.06 billion (equivalent) senior secured notes.Moody's decision to change the outlook on Adevinta's ratings to stable reflects (1) the successful completion of the acquisition of eBay Classifieds Group (eCG) as planned; (2) good operating momentum for the combined business with an expected reduction in Moody's adjusted gross leverage (Moody's adjusted) to below 5.0x by the end of 2022 and (3) the solid future revenue and EBITDA growth prospects for the business over the coming 3-5 years with an initial focus on de-leveraging and organic growth investments.Adevinta successfully completed the acquisition of eCG on 25 June 2021. Under the terms of the acquisition agreement, eBay received $2.5 billion in cash and around 540 million shares of Adevinta, accounting for a 44% stake in the new combined group. Adevinta issued to eBay voting shares accounting for around 33.3% of the total voting rights, and a new class of non-voting shares for the remainder of its 44% stake. As a result of the transaction, Schibsted's percentage ownership of Class A shares was reduced to around 39%, equaling roughly 33% of Adevinta's total outstanding share capital.In December 2021, eBay completed the sale of a 10.2% stake in Adevinta to funds advised by Permira. This transaction allowed eBay to meet certain demands made by the Austrian Federal Competition Authorities for the eCG transaction to proceed. As part of the of eCG acquisition regulatory clearance process and in line with the undertakings approved by the UK Competition and Markets Authority, Adevinta also concluded the sale of Shpock, Gumtree UK and Motors.co.uk in the second half of 2021.RATINGS RATIONALEIn 2020, the combined group's revenue (on a pro-forma basis) declined by -3.7% in the wake of the Coronavirus pandemic. While France saw 10% growth in 2020 despite Covid disruptions, revenue in Germany dipped by -2.1% while revenue in other European Markets also declined by -3.6%. Revenue in international markets dropped sharply by -22%. Revenue saw a solid recovery in 2021 with 12.4% growth year-on-year growth in overall revenues in the first nine months ending 30 the September 2021. Growth in Germany was however muted at 3.9% in the first nine months of 2021 driven by the chip shortage affecting the car transactions in Germany since the last two years. The low volume of listings on Mobile.de have been partially offset by the pricing growth and the uptake of value added services. Adevinta expects its revenues in Germany to return to pre-pandemic level from the second half of 2022 as listing rebound to pre-covid level and continued pricing and value added growth comes through.The company's gross leverage (Moody's adjusted) is expected to improve to below 5.0x by the end of 2022 (down from a pro-forma leverage of 6.1x estimated for the full year 2020). We expect the company to achieve low double digit revenue growth in 2022 and around 15% growth annually thereafter while targeting reported EBITDA margins of 40%-45%, which should be supportive of its de-leveraging ambition over the coming years.In order to drive the aforesaid revenue and EBITDA growth, Adevinta has announced its 'Growing at Scale' strategy in November 2021. The strategy is underpinned by the following 3 priorities -- (1) focusing the portfolio, by investing in and growing its five Core markets of Germany, France, Spain, Benelux and Italy; (2) concentrating on high-quality verticals: Motors and Real Estate; (3) becoming fully transactional in consumer goods, expanding into a growing and profitable online commerce market; and (4) leveraging technology and transforming advertising to preserve revenue and adapt to the evolving market. While Adevinta's growth strategy sounds credible, we cautiously factor in some risks related to its successful and timely implementation.Moody's positively recognizes that the management representatives coming from Adevinta and eCG share a similar set of strategic values, but it cautiously takes into consideration the execution risks associated with successful and timely integration of the two businesses of considerable scale and complexity. The breadth and depth of eCG business is higher than Adevinta's and has required rigorous integration planning.The transaction offers good potential to achieve synergies, with a target of around E130 million of run-rate EBITDA contribution likely to be achieved by 2024. Cost synergies are likely to account for two thirds of the total amount and will be primarily derived from product, technology and IT efficiencies, and the de-duplication of certain functions across the two organizations. The synergy realization is likely to give rise to pretax one-time integration costs of around E130 million, to be incurred over 2020-23.Moody's considers Adevinta's liquidity as strong. Adevinta benefits from its good liquidity, supported by the E450 million revolving credit facility, which was drawn by E150 million at the closing of the transaction. There is a springing covenant on the RCF, tested quarterly only when drawings net of cash in the group exceed 40% of the total facility. The test is a senior secured net leverage ratio set at 40% headroom above the net leverage at transaction close. The combined entity benefits from a long-dated maturity profile with no significant debt maturing before 2025.Given the limited capital expenditure needs of the company and despite the cash outflow towards acquisition integration costs, cash generation is expected to be healthy with Moody's adjusted Free Cash Flow (FCF) / Debt of 8%-10% expected in 2022 and higher thereafter. Moody's recognizes that the company FCF generation would be impacted as and when Adevinta decides to introduce regular dividend payments.Adevinta's PDR of Ba3-PD is at the same level as the company's CFR, reflecting the expected recovery rate of 50%, which we typically assume for a capital structure that consists of a mix of bank credit facilities and bond debt. The bank credit facilities (B1, B2, and Revolving Credit Facilities) have been raised by Adevinta ASA and Adevinta Finance AS and the B3 facility are raised by Oak DutchCo, all ranking pari passu with the new senior secured notes. The notes / loans are guaranteed by operating companies accounting for at least 80% of consolidated EBITDA, and secured by share pledges, bank accounts and intercompany receivables of the group.ESG CONSIDERATIONSWith the transaction closing, the size of the board has increased to 10, allowing eBay and Schibsted to appoint two directors each. Both eBay and Schibsted have certain information and cooperation entitlements. After the closing of the transaction between eBay and Permira in December 2021, a new board member has been appointed by Permira to Adevinta's board of directors.The company has also announced its medium term target reported net leverage range of 2.0x-3.0x. Its reported net leverage stood at 4.0x for the last twelve months ended 30th September 2021. The company intends to use its future internally generated cash towards organic growth investments as well as de-leveraging. Any excess cash will be used towards strategic M&A and/ or shareholder returns.STABLE RATING OUTLOOKThe stable rating outlook reflects our expectation that the company will continue to grow its revenue and EBITDA in line with its medium term growth plan and achieve further de-leveraging in the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure could arise if (1) Adevinta maintains double digit revenue growth, (2) the company's Moody's-adjusted gross leverage declines below 4.0x, and (3) Free cash flow/ debt (as adjusted by Moody's) is maintained at a healthy level of around 10%, both on a sustained basis.Negative pressure on the rating could develop if (1) Adevinta's operating performance slows down visibly (2) its Moody's-adjusted gross leverage is maintained at above 5.0x on a sustained basis, and (3) Free cash flow/ debt (as adjusted by Moody's) decreases sustainably below 5%.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEAdevinta ASA (Adevinta) is a global online classifieds company that operates generalist, real estate, car, job and other digital marketplaces. Following the completion of the eCG acquisition in June 2021, the company holds the leading market position across 15 countries . The company generated E1,437 million in revenue and E470 million in reported EBITDA in 2020 on a pro-forma basis. For the first nine months of 2021, the combined company reported revenue of E1,176 million and an EBITDA of E395 million, pro-forma for the eCG acquisition transaction.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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