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We think Groupon is unlikely to acquire Yelp because of the following reasons:
Groupon's revenues are double that for Yelp, primarily due to the higher average revenue per user (ARPU) that Groupon has. However, both companies have similar EBITDA levels. A potential deal would, hence, be akin to a merger of equals.Based on our estimates (detailed further below), we believe that Groupon will need to shell out $3.6 billion to acquire Yelp - a figure that is 2.2x the company's current market cap of $1.6 billion. Considering Groupon's last reported financials, the company had $596 million in cash and $ 208 in debt. Groupon will need to raise most of the money externally to finance this deal - very likely through high-yield debt securities.Groupon is currently transforming its business model to convert itself from a deal-centric company to a marketplace. The transformation has taken much longer than was expected.Taking the added risk of integrating a similar-sized business at the cost of a highly levered balance sheet to at the same time as it reworks its organic growth plan hardly seems feasible.
Comparing Key Metrics For Yelp vs. Groupon
Yelp's Revenues are nearly half those of Groupon's, but by way of users, Yelp leads.
Yelp Revenue [AxB]
Yelp Monthly Average Users [A]
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Yelp's ARPU [B]
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For Yelp:
User base - 2018: 33 million, 2020E: 47.4 million
ARPU - 2018: $28.6, 2020E: $26.5
Revenue - 2018: $943 million, 2020E: $1256 million
Note: In its SEC filings, Yelp discloses that "App users generate a substantial majority of activity on Yelp," which is why we use the number of disclosed App users to determine the ARPU. While Yelp generates a small portion of its revenues from unregistered users accessing its webpage through mobiles or desktops, we believe that a combined figure for total users (adjusted for duplication) is not representative of revenue-driving active users, and will dilute the ARPU figure considerably.
Groupon Revenue [CxD]
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Groupon average active users
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Groupon ARPU [D]
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For Groupon:
User base - 2018: 49 million, 2020E: 50.3 million
ARPU - 2018: $53.8, 2020E: $54.8
Revenue - 2018: $2636.7 million, 2020E: $2756.1 million
In terms of EBITDA per User, Yelp does marginally better.
Adj EBITDA - Yelp
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Yelp Monthly Average Users
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EBITDA / User - Yelp
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For Yelp:
Adj EBITDA - 2018: $183.1 million, 2020E: $309.5 millionEBITDA/user - 2018: $5.5, 2020E: $6.5
Adj EBITDA - Groupon
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Groupon average Active Users
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EBITDA / User - Groupon
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For Groupon:
Adj EBITDA - 2018: $234.7 million, 2020E: $266.6 millionEBITDA/user - 2018: $4.8, 2020E: $5.3
Quantifying The Impact Of Gains For Yelp If It Is Acquired By Groupon
If Groupon acquires Yelp, we expect synergies to materialize from:
Yelp's access to a potentially larger user base: With similar sized user bases, we assume that half of Groupon's users could be new to Yelp's platform.
ARPU improvements: Given that our estimate for Yelp's ARPU is nearly half that of Groupon's, an acquisition could potentially result in Yelp's core business ARPU increasing to Groupon's expected ARPU of $54.8.
EBITDA synergies: We suspect that due to the similar unit economics, not much will be achieved at the cost level. However, incremental users could help generate $75 million of synergies at the EBITDA level.
CONCLUSION
In the best case even if 50% of Groupon users were to be new to Yelp, we estimate that incremental EBITDA gain could be $75 million.Applying an 11x EV/EBITDA multiple (which is a small premium to our estimate of Yelp's intrinsic value multiple of 10.5x) the total value of synergies comes to $824 million.Since Groupon and Yelp will be contributing meaningfully to the total synergies, we estimate that at a 50% share of synergies, Yelp could cost Groupon $3.6 billion We estimate Yelp's equity to be worth $3.3 billion and add another 330 million (i.e. 40% of 824 million of synergies to it).Overall, Groupon would be paying 4.4x ( = value of asset paid / value of synergies) for the synergies from the dealCompared with our analysis of Google acquiring Nutanix (0.63x = $9.3 bil / $14.9 bil) and Facebook acquiring Yelp (0.47x = 5.8 bil / 12.3 bil), the multiple of synergy paid is quite high and thus the consequent IRR will be fairly low.
