OREANDA-NEWS. April 15, 2010. Digital Sky Technologies (DST) issued a press release stating that Tencent, a large Chinese internet company, is to acquire a 10.26% economic interest (0.51% voting) in DST for USD 300mn., reported the press-centre of VTB Capital.

We highlight that the Internet valuation implied in the announced deal bodes well for RBC (12-month Target Price of USD 2.6) the only public Russian internet stock exposed to the unfolding Russian internet boom. RBC accounts for 23% of banner ads, or 9% of the total Russian internet ad market. Its stock performance in 2H08-2009 was pressured by the need to resolve debt problems; last week the company came up with a timetable for debt restructuring and the risks of the reorganisation being delayed are on the downside, in our view.

DST’s key assets include: 53% in Russia’s largest communication portal Mail.ru (11% of the Russian internet ad market); minority stakes in Russia’s leading social networks Vkontakte.ru and Odnoklassniki.ru, as well as 5% in social network Facebook with a monthly audience of 340mn (DST paid USD 300mn for 3.5% in 2009).

Based on the acquisition price announced, Tencent values DST at USD 2.9bn. Excluding our estimated valuation of the minority stakes in the two Russian social networks and Facebook, the transaction implies a value of USD 1.3-1.7bn for 100% in Mail.ru. Odnoklassniki and Vkontakte have monthly audiences of 15.2mn and 18.4mn (based on TNS-Russia estimates for 12-54 year olds).

Based on our estimates, Mail.ru generated some USD 77mn in revenues in 2009 with EBITDA approaching USD 38mn (vs. USD 75mn in revenues and USD 41mn in EBITDA in 2008). Thus, the acquisition terms imply at least 64x 2009 EBITDA or 78x 2009 net income of Mail.ru. To recap, DST acquired the remaining 15% in Mail.ru (to get control) in May 2008 for USD 300mn, which implied valuation for Mail.ru of USD 2bn at that time.