Facebook Could Pay Roughly $6 Billion To Acquire Yelp

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Why we think Facebook could acquire Yelp

• Yelp could extend Facebook’s advertising reach across online advertising (core Facebook) and commerce (Instagram) to more local buyer-seller situations.
• Additionally, Yelp can also help Facebook enter the lucrative food discovery and delivery markets, something that the likes of Uber, Amazon etc have been actively pursuing.
• While the benefits of cross selling using Facebook’s platform would primarily accrue to Yelp (due to Facebook being an order of magnitude larger than Yelp), we think Facebook is also likely to benefit.

A Quick Look at Key Operating Metrics For Yelp vs. Facebook

As of 2018, the following is how Yelp’s Key Metrics compared with Facebook:

• User base: 33 million* for Yelp vs 2.25 billion for Facebook
• Average Revenue per Users (ARPU): $28.6 for Yelp vs $24.8 for Facebook
• Revenues: $943 million for Yelp vs $55.8 billion for Facebook
• Adj EBITDA: $183 million for Yelp vs $34 billion for Facebook
• EBITDA/user: $5.5 for Yelp vs $15.1 for Facebook

*Note: In its SEC filings, Yelp discloses that “App users generate a substantial majority of activity on Yelp,” which is why we use the number of disclosed App users to determine the ARPU. While Yelp generates a small portion of its revenues from unregistered users accessing its webpage through mobiles or desktops, we believe that a combined figure for total users (adjusted for duplication) is not representative of revenue-driving active users, and will dilute the ARPU figure considerably. 

What Factors Will Unlock Value for Investors?

If Facebook acquires Yelp, we expect synergies to materialize from:

• Yelp’s access to a larger user base: Considering that 1/3 of the planet is on Facebook, there is little reason to believe Yelp’s users are not already on Facebook. Thus, the uptick in user base will be more meaningful for Yelp’s business.
• ARPU improvements: Given Yelp’s expected ARPU of $26.5, coming on board to Facebook could help Yelp also increase its core business ARPU to Facebook’s expected ARPU of $30.6.
• EBITDA synergies: Considering Facebook’s expected EBITDA/user is almost 3x that of Yelp’s, we expect Yelp to experience a significant uptick in EBITDA.

How Much Value Can Potentially Be Unlocked?

• User additions: Even if 1% of Facebook’s users were to opt for Yelp services, Yelp’s total user base would increase from the estimated 47 million to 72 million.
• On Facebook’s platform, Yelp users are likely to deliver a higher ARPU (at Facebook’s level), leading to an implied revenue of $2.2 billion for Yelp in 2020.
• On an overall unit economic basis also, a Facebook acquisition should help Yelp by way of sprucing up the EBITDA / user to that of Facebook’s level. We estimate this could lead to additional EBITDA of $1.1 billion for Yelp.
• We believe that both Yelp and Facebook can be fairly valued using an EV/EBITDA multiple of ~11x. Applying this figure to the incremental EBITDA implies up to $12 billion in total value that can be unlocked by an acquisition.
• Since Yelp’s contribution to the synergy generation is much lower than that of Facebook, we estimate that Yelp could be awarded 20% of the synergy benefit. This would translate into a premium of $2.5 billion for the company at acquisition.
• We estimate Yelp’s valuation to be $3.3 billion (~35% ahead of the current market price).
• Taken together with the calculated acquisition premium of $2.5 billion, this works out to a $5.8 billion acquisition price for Yelp