TCS Group - Potential Sale to Yandex Announced

TCS Group has announced that it has come to an agreement in principle on a cash and shares sale to Yandex that is worth approximately $27.64 per TCS share - implying a $5.5 bln valuation - an 8% premium to the September 21 close. If the deal goes through it likely brings the curtain down on TCS's almost seven-year rollercoaster ride as a listed company. > The deal - what we know. TCS's founder and main shareholder Oleg Tinkov (who owns a 40.4% economic stake and 87% voting stake) and the management team (which owns 6.5%) have agreed to the deal in principle, but it has yet to be approved by TCS's board or its shareholders. Under the preliminary agreement, TCS shareholders will be offered part cash and part shares in Yandex, but we do not yet know the split. The transaction is to be implemented as a "scheme of arrangement," which means that once the terms are finalized a simple majority of all respective share classes is required for the deal to be approved (assuming regulatory approval). So, the deal could still be blocked (at least for now) by a majority of TCS's Class A shareholders voting against it, although we think a sale will ultimately go through, if needs be via a standard mandatory buyout offer. The final value of each TCS share will ultimately be determined by how Yandex's share price moves between now and closing (the swap terms have been set using Yandex's $59.09 per-share close as of yesterday). The deal will be subject to all of the usual regulatory approvals. > TCS price above its record high, but feels low. The $27.64 per share price tag for TCS is above the stock's record high (and below our $28.75 target price) and implies a not unimpressive 9.3 2021E P/E multiple. Ultimately, the list of realistic buyers for TCS was a short one, and Oleg Tinkov clearly has his own motivations for selling now given the events of the past few months, as well as in likely becoming a decent-sized shareholder in Yandex. Nevertheless, all that being said, this price feels on the low side given how well the company has been delivering for a while now, with its own ecosystem really starting to fire on all cylinders, and it implies pretty much no control premium. One source of potential consolation for TCS minority shareholders is if the deal is more stock than cash and Yandex's share price keep going up - it added almost 12% yesterday, which, if we assume a 50/50 cash/share deal would imply a TCS valuation of around $29.30 per share.> End of a rollercoaster ride. If, as seems highly possible, the deal goes through and Yandex acquires and delists TCS, this would mark the end of a rollercoaster ride for a company and stock that we have covered since the IPO in October 2013, and which we have always seen as a true fintech disruptor.