Rover is going private in a $2.3 billion, all-cash sale to Blackstone, the company announced earlier this week. The pet care–focused company raised hundreds of millions of dollars while private, through a Series G, and later went public via a SPAC. Notably, unlike a great many SPAC combinations, Rover is proving that blank-check companies are not merely a way to incinerate wealth.
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The former startup has a 30-day shopping provision built into its deal with Blackstone, meaning that other offers may come to the fore. However, with the private equity group paying a stiff premium for Rover shares — 61% more than the company’s 90-day volume weighted average share price, per a release — that doesn’t sound too likely.
The Rover deal is expensive but it has some notable caveats that tell us quite a lot about the state of the market for tech, and tech-enabled, companies. I’ll bet you didn’t expect a pet-focused e-commerce marketplace to earn an 8.7x revenue run rate multiple in 2023!
This morning I want to dig into why I think Blackstone is paying so much for Rover, what we can glean from that research for other startups, and why a select few SPAC’d public companies that are trading like literal dogs may be bargains for the right buyer.
That price tag isn’t unreasonable
Rover and Blackstone announced their transaction after we got the former company’s Q3 2023 results, meaning that we have pretty up-to-date figures concerning its recent performance.
Rover reported third-quarter revenues of $66.2 million, up 30% from the same period one year ago. The company also flipped to GAAP net income and told investors that it intended to buy back more of its own shares. It also beat guidance in the quarter.
Solid, right? But the company’s Q3 revenue result puts it on a $264.8 million run rate, giving it the previously mentioned nearly 9x revenue multiple. Given that that’s above the average revenue multiple of 7x for public software companies, we need to get more information under our belts. From a neutral standpoint, pet care marketplaces should not be worth more than enterprise SaaS, right? Even with a take-private premium.
Here’s why I think Blackstone is coughing up the dosh to take Rover off the public markets:
- Bookings growth: Bookings on Rover grew 26% in the third quarter compared to its result in Q3 2022. Per the company’s earnings call, Rover saw “record new customer bookings of 290,000, up 8% over last year’s record levels.” That’s nice and bullish; accelerating new customer adds is a great way to build long-term revenues, provided that you can keep those customers on the platform.
- International: Partially driving Rover’s bookings growth is international demand. Again from the company’s earnings call, gross bookings “in Europe grew 71% and 35% in Canada” in the quarter. With international only worth 10% of Rover bookings today, it appears that there is a lot of growth yet to be found outside the United States. That’s a nice, long-term growth story to consider if you are a PE shop with money to put to work.
- Take rate up: How did revenue growth (30%) outpace bookings growth (26%) at Rover? A stronger take rate. That figure came to 23.6% in the third quarter, up 120 basis points from its year-ago result of 22.4%. Stronger take rates not only help marketplaces convert bookings to revenue more efficiently, but they also imply pricing leverage in-market for Rover itself. That’s very bullish.
- ABV up: On the same theme, Rover’s average booking value (ABV) rose 4% year-over-year to $142. Quick customer growth, stronger take rates, and larger order basket sizes? It’s a winsome combination for a marketplace to report.
- Higher long-term profit margin floor: As a result of the company’s financial performance, Rover is reconsidering its long-term profitability, with CEO Aaron Easterly saying:
We were able to continue investing in product and marketing while increasing adjusted EBITDA margin from 20% in the prior year to 26% this year. These results suggest that the lower bound of our long-term adjusted EBITDA margin target should be higher than the 30% that we have previously communicated, and we are evaluating how much to increase it.
- Raising guidance: And to close out, Rover raised its revenue and adjusted EBITDA guidance for the year.
Rover is worth such a premium revenue multiple in 2023 because it has a super-solid growth story (international), improving core economics (better take rate, larger orders), and sufficient profitability to invest excess cash flow into shareholder return. For Blackstone, it looks like a company that is going to grow quickly while owned, while generating enough cash to either look to grow even faster or to allow for a fat dividend to be extracted in the form of attached debt.
Rover looks rock-solid, and with its future bright, Blackstone had to cough up to take it off the public markets. For any startup that has yet to go public and is considering looking for a PE buyer, note how strong Rover looks across pretty much every metric we might want to consider in its value. And it had a strong forward posture and lots of cash, which meant that it did not have to sell and could demand payment today for the value it would create in the coming quarters. Folks like to own winners, in other words.
Notably, Rover is not the only Not Shit SPAC. Back when the pet care marketplace was prepping to go out via a SPAC, we covered its blank-check deck at the same time that we looked at MoneyLion’s own. Both companies eventually went out, and thus we have data from MoneyLion as well.
However, while Rover is seeing its valuations fortune recover and then some, MoneyLion has struggled:
So is MoneyLion a dog and not a dog-walker? Not really. Yes, the company did grow more slowly in its most recent quarter (22%) than it forecasted (24% to 30%), but it also posted record revenues of $110 million in Q3 2023, record loan originations and record gross profit. Even more, the company posted its third consecutive quarter of adjusted EBITDA profit, expanding its margin thereof from 9% in Q2 2023 to 12% in Q3 2023. Throw in positive operating and investing cash flows and the company looks just fine.
For about 1x annualized revenues, MoneyLion appears to be in the bargain bin. Perhaps some SPACs are really priced to move these days. Expect more take-privates in 2024.
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