Blocket: A Swedish Franchise

Blocket – Some Background

Blocket was founded in 1996 in Fjälkinge, a small Swedish town, by Henrik Nordström. It started out as a small local market place in the region of Skåne (the southernmost region in Sweden), from where it grew and started offering buy and sell ads for the whole country to become what it is today, Sweden’s biggest marketplace for for selling and buying stuff you need or want to get rid off. 

blocket_logo_org_2013

In 2003 Blocket was acquired for 183 MSEK by the Norwegian media company Schibsted. Already back in 2001 Schibsted had been negotiating with the founders to buy Blocket, but decided not to since the asking price of 90 MSEK was deemed to be too high. Instead Schibsted started their own version of Blocket, but it turned out to be a failure. Having had this experience Schibsted kind of adopted the motto “If you can’t beat them, join them.” In hindsight, the initial 90 MSEK looks superb, but at the same time the 183 MSEK still turned out to be a great deal too. Operating profits during 2008 to 2013 totaled approximately SEK 2 billion. 

At the time of the acquisition Blocket had revenues of 34 MSEK and a profit of 13 MSEK. Using these numbers to get some rough measure of the purchase price paid by Schibsted and by assuming a 28% tax rate, no interest-bearing debt and also no excess cash results in a P/E multiple of 14 and EV/EBIT multiple of 10.

eBay also wanted to grab a share of Blocket’s ever growing profits and most certainly came to the same conclusion as Schibsted. Unfortunately, eBay wasn’t able to “join them,” instead they acquired Tradera, a swedish business not really as good as Blocket—at least from looking at the earnings and profitability. 

Let’s have a look at a few more stats provided by Blocket.se.

Blocket vs. Tradera

To get a quick summary of Tradera and its business, let’s turn to Wikipedia: 

Tradera.com is one of the leading online commerce services in Sweden, with over 2,5 million members and about one million listings (2011). Although Tradera welcomes members from all over the world, most are Swedish. Tradera was founded in 1999 but was acquired by eBay Inc. in 2006. Tradera was originally based completely on private auctions but today visitors can purchase both new and second hand items through auctions as well as fixed price listings.

On 24 April 2006, Tradera.com, along with its sister site Traderamotor.com, was acquired by eBay for 365 million SEK (about 50 million US dollars)

The table below summarizes some financial metrics for Tradera and Blocket. From looking at the change in net sales, earnings and profitability we see that Blocket seems to be the more solid business. At least this has was the case during 2011-2013.

At the same time as Tradera posted an accumulated negative EBIT for this three year period, Blocket managed to earn an accumulated EBIT of SEK 1 128 billion. When looking at ROE in the table below, keep in mind that it may not tell the whole truth about the underlying profitability due to the capital structure and inter-company receivables and liabilities. At least this seems to be the case for Blocket. 

BT1

Blocket’s relative share of total net sales for both businesses has been slowly rising during 2011 to 2013, from 80% to 85%. Looking at EBIT, Blocket has posted great earnings at the same time as Tradera has had a hard time avoiding red numbers. 

BT2

The growth in Blocket’s net sales and profit before tax has been pretty consistent during the last ten years (Source: allabolag.se). Net sales for Tradera grew at a high speed between 2004 up until 2010, showing some decline from 2011 to 2013 and profit before tax has not been that impressive. 

BT3

A Profitable Growth Story

The financial statements speak for themselves and reveals a great growing business with high returns on capital. Net sales grew from 409 MSEK in 2008 to 786 MSEK in 2013, a compounded annual growth rate (CAGR) of 14%. Accumulated operating earnings during 2008 to 2013 approximated roughly SEK 2 billion, growing from 239 MSEK to 398 MSEK, a CAGR of 10.7%.

The question then is: How much investments were required to achieve this growth in sales and earnings? The answer: None. Net investments, that is investments in working capital and capital expenditures (both tangibles and intangibles) totaled a positive of 10 MSEK. Sound pretty good right? Earning SEK 2 billion in accumulated EBIT in a period of six years without having to invest anything in the business to make it happen, instead you get an additional 10 MSEK for doing it.  

Without exaggeration, Blocket seems like a pretty decent little business. A fair question to ask then is: What competitive advantages does Blocket enjoy (at least during the last decade)? If someone else had been able to do it, I’m pretty sure they would have liked to take away some of Blocket’s earnings. 

To keep it short, it seems reasonable to assume that Blocket probably enjoy some combination of local economies of scale coupled with habit and switching costs from the network effect. If you are going to sell something you want to go where the buyers are. The same is true the other way around. As buyer you want to go where there’s a lot of sellers. Sellers and buyers seem to like Blocket, and most likely Schibsted love the business. And who would not, one just have to look at free cash flow margin, averaging almost 53% during 2008-2013. 

B1

Free cash flow grew from 191 MSEK in 2008 to 417 MSEK in 2013, a CAGR of 17%. During 2008 to 2013 Blocket’s average operating margin was 55% and profit before tax margin 56% (the corporate income tax rate in Sweden during these years was reduced from 28% to 22%). In the same period the free cash flow margin was about 53%. 

B2

Profitability has been great with pre-tax return on equity (ROE) and pre-tax return on assets (ROA) averaging 166% and 60% respectively.

B3

If one was to account for the inter-company receivables and liabilities and adjusting for excess cash, it most likely would be the case that business doesn’t really require any invested capital (as measured by net fixes assets plus net working capital). But the point is already pretty clear. Blocket during the last decade has turned out to be a pretty good investment for Schibsted.

Schibsted has also used its ownership of Aftonbladet and its large number of unique visitors (number one of all media sites in week 9 according to http://www.kiaindex.se/), and by placing ads on Aftonbladet’s site driving traffic to Blocket. A great advantage when it comes to achieving the scale of Blocket’s network of sellers and buyers, that when achieved is pretty hard to overcome for any competitor.

Blocket has also expanded at the edges of its business, adding Blocket Jobb (in 2011, with the goal of becoming the biggest site for job ads) and Blocket Bostad (in 2014 with the goal of becoming the biggest housing site in Sweden).

Annual reports

All financial statement data taken from Blocket AB’s annual reports (click link to read PDF): 

Sources

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

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