Bold Seek buys flexibility

Despite coming amid a dramatic sell-off from investors worldwide, Seek's decision to undertake a capital raising is sound and will give it a chance to expand further overseas with some bargain buys.

SmartCompany

Well, for once the sharemarket did exactly as was expected. After the weekend’s savage sell-off across global markets, the Australian market fell 2 per cent yesterday to levels not seen since September.

The ASX 200 is below the 4000 point barrier (it’s just a number, but clearly there’s some psychology at play here), the Japanese market is down to 28-year lows, the dollar is down and everyone is looking to the RBA to ride to the rescue with some big rate cuts.

It’s all pretty gloomy to be frank. It’s the sort of environment where spooked investors throw their hands up in the air and declare they’re staying out the market.

Which made it a little strange to see online job ads giant Seek go to the market yesterday and announce it would raise $125 million to pay down bank debt and fund potential investments.

But while Seek’s timing looked a little off (to be fair, the capital raising would have been in train well before the ugly events of the weekend), its thought process looks to be pretty smart.

Raising money through a subordinated notes issue will give Seek something that will prove extremely important in the coming months – flexibility.

The balance sheet strength will mean that Seek can pounce on opportunities as they become available – or when bargain prices emerge.

When most of us think about Seek we think about its dominant Australian position. But the company is also trying to extend its global footprint and has investments in classifieds businesses in Brazil, China, Hong Kong, Mexico and South East Asia.

Indeed, in the last few weeks Seek has increased its stake in Brasil Online from 30 per cent to a controlling 51 per cent, and grown its stake in Online Career Centre Mexico from 41 per cent to a controlling 57 per cent.

In both cases, Seek is pushing hard into emerging markets, where it believes it can achieve the sort of market share that has made it such as unassailable powerhouse in the Australian market.

Presumably, other such opportunities will present themselves in other growth markets. Raising cash now – yes, even in this gloom – buys Seek some real flexibility at the right time.

It will help that in announcing the capital raising, Seek has also reaffirmed its earnings guidance; the company says second-half revenue and underlying earnings will be well ahead of last year, and similar or slightly ahead of the first half of the 2011-12 financial year (where we saw revenue of $208 million, EBITDA of $90 million, suggesting a very solid margin).

After producing a compound annual average growth rate of 38 per cent between the 2004 and 2011 financial years, Seek is unlikely to have much trouble getting support for this capital raising.

The challenge will be to use the cash and flexibility it gains to find the next set of investments that can produce that sort of growth.

This article first appeared on SmartCompany on June 5. Republished with permission.