Carousell’s $850m valuation dazzles – but it’s not so simple

Carousell, a leading mobile classifieds company in Southeast Asia, has made a big announcement – it’s merging with fellow classifieds firm 701Search, owned by major Norwegian telco Telenor, to fetch an eye-popping price tag of US$850 million.

The deal comes just seven months after Tech in Asia exclusively reported that it raised money at a valuation exceeding US$550 million.

Industry players that we spoke to, however, question the valuation, timing, and synergy of the merger. But on the flip side, the deal buys Carousell more time to reach profitability. It also makes the company the undisputed general classifieds leader in Southeast Asia, which means the valuation could make sense in the long run. Carousell and Telenor could not immediately respond to Tech in Asia’s questions.

Siu Rui Quek, co-founder and Group CEO of Carousell / Photo credit: Handout

To state the obvious first, Carousell and 701Search’s individual market values haven’t increased from their previous deals.

In other words, Carousell did not suddenly generate US$300 million in value in less than a year. If it did, that would be truly impressive. Instead, it simply merged with a firm that, added together, gave it the new valuation figure.

We know that 701Search last earned a US$327 million market value when Singapore Press Holdings sold its stake in the entity back to Telenor in 2017.

Now, by adding up Carousell and 701Search’s separate prices, you get US$877 million – coinciding with the announced number. This represents almost a financial status quo for all parties involved: except that Telenor’s 32% stake in Carousell, worth around US$272 million, seems like a slight downgrade from 701Search’s previous valuation in 2017 – even if you count the fresh cash that Telenor pumped into Carousell.

Regardless, is the price tag still too high?

Carousell revealed to Bloomberg that – after adding in sales from 701Search – it’s expected to hit an annual revenue of US$40 million this year (it did not reveal the net loss).

This indicates a valuation that’s roughly 21x its revenue. While it’s certainly an improvement over Carousell’s 2018 numbers, the company still needs to double its sales and become profitable in order to reach the 10x multiple that’s typical of online classifieds businesses.

In addition, revenue is losing traction as an indicator of worth. “Investors these days look at cashflow, if you follow the recent mega IPOs that tanked or didn’t pull through,” says Valerie Law, an analyst with HSBC Securities, who publishes on SmartKarma.

Ringing endorsement?

From Telenor’s point of view, its Carousell foray could be interpreted in two extremes: it’s either an all-in bet on the prospects of digital classifieds in Southeast Asia or an attempt to salvage its overvalued 701Search asset.

The case is probably not the former, which would have meant a full acquisition of Carousell. According to Bloomberg, Telenor will invest US$20 million into Carousell, a rounding error for the telco that barely covers the startup’s 2018 net loss.

The timing of the move speaks volumes, too. The deal comes at the end of the financial year, meaning Telenor could be trying to fetch an attractive price for 701Search through any transaction and prevent a write-down, says the head of a venture capital firm who wished to stay anonymous. It doesn’t hurt either that the merger involves Carousell, which is perceived as a hip, cutting-edge mobile classifieds startup.

Brewing a clear winner

Is there real synergy though?