After several quarters of fully focusing on reducing debt while waiting for the ad market to rebound, Verve surprised us with a transformative acquisition of Jun Group, a mobile-first digital advertising company in the US. Founded in 2005, Jun Group focuses on the demand side, with 97% of its revenues stemming from the US. Like Verve, Jun Group has experienced solid growth in terms of the number of clients in recent years, although this growth is not clearly reflected in the P&L due to the softer ad market.

In 2023, the company had EUR72m in sales, growing 1% organically after experiencing a negative organic growth of 4% in 2022. The company is highly profitable, with EBITDA margins of 45-50% in 2022-2023 and a cash conversion rate of around 93% (defined as adj. EBITDA - Capex / adj. EBITDA). Given that companies in this space typically operate with negative working capital, we believe this definition is a good proxy for the cash conversion. Additionally, Jun Group has a broad customer base with more than 230 clients, including Fortune 500 brands, and no single client accounts for more than 10% of total revenues.

Verve is currently the market leader in the US in in-app advertising on the supply side. By acquiring Jun Group, the company will improve the balance between supply and demand, with 30% of sales stemming from the demand side and 70% from the supply side after the transaction.

Following the transaction, Verve updates its 2024 guidance to EUR380-400m (from EUR350-370m) in revenue and EUR115-125m (from EUR100-110m) in adj. EBITDA. The new group is expected to reach revenues of EUR447m and adjusted EBITDA of EUR151m on a pro forma basis in 2024, including annualized synergies.

Additionally, due to Jun Group's higher margin profile and the expected synergies, Verve has increased its mid-term financial targets: the EBITDA margin target has been raised to 30-35% (from 25-30%) and the EBIT margin target to 20-25% (from 15-20%). Furthermore, Verve has reduced its net leverage target (Net debt / adjusted EBITDA) to 1.5-2.5x (from 2-3x).

The transaction will reduce the company’s leverage to 2.8x 2024 (including deferred payment and on a pro forma basis). Of the total consideration of EUR170m, EUR120m will be paid upfront upon closing, while the remaining EUR50m will be paid in two annual installments of EUR25m over the next 12-18 months after closing, which is expected in September 2024, pending regulatory approval.

To finance the first installment of EUR120m, Verve carried out a directed share issue yesterday of SEK450m (cEUR40m). The subscription price was set at SEK16.6, a 5% discount to yesterday’s closing price, resulting in approximately 27.1m new shares and a dilution of approximately 14.5% for existing shareholders. It is encouraging that Verve’s CEO and largest owner, Remco Westermann, and the company’s second-largest owner, Oaktree, participated in the issue.

Overall, we take a positive stance on the transaction. Firstly, from a strategic point of view, Jun Group will increase Verve’s exposure to the demand side, which aligns with the company’s strategy, and strengthen its position in mobile advertising in the US. As scale and data are crucial in the adtech space, Jun Group should also enhance Verve’s existing product offering by bringing in more data, reach, and AI capabilities.

Moreover, the acquisition should improve Verve's supply-path optimization by connecting Jun’s advertisers directly to its publishers. Since supply-path optimization is becoming increasingly important due to the growing complexity of the supply chain, having a strong presence on both the demand and supply sides is advantageous. Additionally, since Jun is primarily based in the US, Verve can expand Jun’s product offering to other markets. In summary, we believe the transaction makes strategic sense and will strengthen the combined group’s product offering.

From a financial point of view, we see a very attractive multiple of c3.8x adj. EBITDA (based on Verve’s 2024 estimates, including annualized synergies) or 4.7x EBITDA based on Jun’s reported 2023 numbers. Given a cash conversion rate of 93-95%, this implies a cash flow yield of c19.6-25%, which is highly value-accretive, in our view. This means that the deal should be attractive even without any synergies or growth from 2023 levels (Verve expects Jun to grow 21% organically in 2024 on a pro forma basis).

We believe the favorable purchase price is due to Verve’s strong negotiating position. Our understanding is that the seller, Advantage Solutions, wanted to complete the transaction relatively quickly. Additionally, Advantage Solutions, listed in the US, has communicated its ambition to divest non-core assets while maintaining relatively high leverage. For instance, after the transaction, Advantage Solutions’ leverage will still be just below 3.5x, implying that leverage was high before the transaction.

Although Verve traded at relatively low multiples before the transaction, and we would typically prefer not to see a directed share issue at these levels, we understand the company's decision given the favorable terms. As mentioned, we believe no synergies are needed for the deal to be value-accretive. Even though it is typically challenging to extract synergies, we see some low-hanging fruits, such as Jun gaining access to Verve’s Google Cloud contract and Verve getting direct access to Jun’s advertisers.

We expect the transaction to be completed in September, but not to have any material P&L impact until Q4 2024. We increase our sales estimates by 7% for 2024e and 20-21% for 2025e-2026e. Given the higher margin profile in Jun and expected synergies (especially in 2025 and onwards), we also increase our margin assumptions. Overall, we are at the lower end of the new 2024 guidance of EUR380-400m in sales, while we are at the midpoint of the guidance of EUR115-125m in adjusted EBITDA. We have also incorporated the new shares from the directed share issue, leading to a lower change in EPS compared to net income. We increase our base case from SEK30 to SEK33, and our fair value range from SEK12-42 to SEK14-49.