Yandex - Leapfrogging into Fintech

Yandex is in talks to acquire 100% of TCS Group for cash and a share consideration. The possible deal still needs corporate, shareholder and regulatory approvals. We are positive on the deal, seeing it as value-accretive (a 2021E P/E of 23 on a pro-forma basis), complementing existing O2O verticals and helping Yandex leapfrog into the fintech arena. Key things to watch are whether Yandex will be able to retain TCS's management and on what terms, as well as how it will deal with new kinds of banking risks. We reiterate our BUY rating on Yandex and $68.00 per share target price. > Yandex may acquire 100% of TCS. Both companies confirmed yesterday that Yandex is in discussions with TCS (Tinkoff) regarding a possible deal in which Yandex would acquire 100% of the share capital of Tinkoff for cash and a share consideration (the ratio has not been disclosed). TCS would be valued at around $5.48 bln, or $27.64 per TCS share based on Yandex's share price of $59.09 as of September 21, which implies that TCS's valuation could change with the change in Yandex's price. It could also change as the result of due diligence or due to some other conditions. TCS is covered by our financials team, which has a target price of $28.75 per share. The deal would need to be approved by Yandex's Class A shareholders and an EGM, and it would be expected to happen under a "scheme of arrangement," meaning that if the terms of the deal are approved by a Cyprus court and TCS minorities, the terms (including the equity and cash component) would be obligatory for all TCS shareholders. If any parties mentioned above fail to approve the deal, we think Yandex might still have the option to go through a standard takeover procedure. The deal also needs regulatory approvals. We note that Yandex got around $3.5 bln in cash after a recent placement.> The deal would be value-accretive for Yandex. On our estimates as of the September 21 close, Yandex was trading at a 2021E P/E of 39. On a pro-forma basis assuming a deal for 100% shares, Yandex would move to a 2021E P/E of 23. Unlike other acquisitions that have required further investment from Yandex, TCS is a cash-generating business. We expect it to generate R44.7 bln in net income in 2021, which is more than the R40.6 bln in adjusted net income that we expect Yandex to post next year.> TCS is complementary, helps Yandex leapfrog into the fintech arena. By buying TCS, Yandex would effectively get a ready-made online financial ecosystem with 10 mln customers that spans credit, payments, investments, insurance and other areas. It has a large deposit base as well. Of course, the payments backbone is super complementary to some of Yandex's O2O services, e-commerce and media verticals.> Risks: Credit risks and management retention. The flipside for Yandex is the new kinds of risk it has never dealt with before, including credit risks. Another thing to watch for is if Yandex can retain TCS's highly regarded and successful management team and how long the team will stay.