After weeks of speculation of a possible takeover, management at beleaguered Australian media company Ten Networks (TEN) made it official when they announced the hiring of Citibank as a strategic advisor.  The share price had already moved upward on the possibility of a deal with a Fairfax Media/Discovery joint venture.  Then there was talk Foxtel was interested and now it is US based media goliath Time Warner supposedly making an offer of $0.25 per share.  However, that offer goes back to when the shares were trading between $0.18 and $0.20.  As of the close of trading on 13 November the share price stood at $0.27.

The deal is far from done but at this point it does appear that investors who took a position in Ten in the company’s dark days will be rewarded.  This is not the first time risk tolerant investors have benefited from merger and acquisition activity in the media sector.  In 2012 shares of subscription television provider Austar United Communications (AUN) were trading around $1.18 and then catapulted to $1.52 on the news of a Foxtel merger, priced at $1.52 per share.   The share price increased 54% from the time speculation about the move first arose in early 2011.

The digital age has wreaked havoc on a variety of industrial sectors, but few can match the turmoil seen in the media sector.  A few decades ago choices were limited to a few broadcast channels available on fixed location televisions and radios.  Today both the quantity of the content and the devices for receiving content has exploded.  Advertisers now have multiple sources to promote their products.  Media companies struggle to keep up with technologies advancing at breakneck speed.  Mergers and acquisitions are becoming commonplace.

Are there other attractive takeover targets to consider?   The following table looks at some of the key measures.  We selected four ASX media stocks with primary operations in broadcasting, similar to Ten Network; and one whose business is primarily print and online.

Company

(CODE)

Market Cap

EV

(Enterprise Value)

Share Price

(52 Week % Change)

EV/Sales

EV/EBITDA

Book Value per Share

2 Year Earnings Growth Forecast

Dividend Yield

Nine Entertainment

(NEC)

$1.96b

$2.36b

$2.08

+5%

1.53

8.14

$1.94

4.8%

3.2%

(unfranked)

Fairfax Media

(FXJ)

$1.86b

$1.84b

$0.79

+30%

0.99

6.82

$0.85

-7.2%

5.1%

Seven West Media

(SWM)

$1.7b

$2.9b

$1.70

-25%

1.58

6.71

$2.65

-4.7%

6.4%

Southern Cross

(SXL)

$705.2m

$1.3b

$1.00

-40%

2.04

7.26

$1.72

-9%

6.9%

Prime

(PRT)

$315m

$425.6m

$0.86

-18%

1.65

6.84

$0.44

7.5%

8.2%

 

In the M & A process the acquiring company buys not only what the target company owns, but also what they owe.  Market Capitalisation is in essence little more than what investors think a company is worth.  Enterprise value is the preferred measure for takeover prospects as it includes all forms of debt and cash on hand of the target company.  This measure starts with Market Cap, adding preferred stock and whatever minority interests the target holds along with debt, and then subtracts all forms of cash.

Enterprise Value or EV is used to construct revenue and earnings ratios (EV/Sales and EV/EBITDA) with lower ratios in comparison to other companies in the sector being preferred. Using EBITDA (earnings before interest, taxes, depreciation, and amortisation) allows a more accurate measure of cash flow the takeover candidate generates from operations. In theory an acquiring company looks at measures like these to determine a fair price or perhaps even a bargain.  However, many acquisitions come at premium prices as acquiring companies take non-financial considerations, such as brand strength and strategic location, into account.  For that reason, we used Book Value per Share, which includes non-tangible assets such as goodwill, instead of Tangible Book Value per Share, in our table.  Note that Ten Network provides a case in point here, as apparently Time Warner is willing to acquire a company with an EV/EBITDA ratio of -9.80!

A quick scan of the table points to Seven West Media (SWM) and Southern Cross Media Group (SXL) as good starting points for further research as both have an enterprise value more than one and a half times market cap.  In addition, the share price of both is well below the Book Value per Share.

Seven West has the lowest EV/Sales and EV/EBITDA ratios as well, so let us start there.  This company operates in free-to-air television and radio broadcasting as well as online (Yahoo 7) and print, including newspapers and magazines.  In the absence of subscription revenue, SWM suffers from the exodus of advertisers to other media formats.  Seven West shocked the market with a profit warning back in April and did so again on 12 November.  

The April figures were harsh, with the revenue forecast shrinking from around $518 million to between $460 and $470 million.  The share price dropped about 22%.  The more recent downgrade of a 10% profit drop resulted in a share price decline of 2%.  The company has brand recognition in its FTA outlets, a leading Internet platform in Yahoo 7, and strong brands with the West Australian newspaper and Pacific Magazines.  Seven West’s current P/E is 8.59 with a Forward P/E of 8.47.

Southern Cross Media Group (SXL) may be one of several beneficiaries of possible changes in regulations regarding media ownership.  The company operates in both FTA television and radio along with about 80 websites.   Like Seven West, Southern Cross relies primarily on advertising revenue and also like Seven West, the company announced a 10% profit downgrade back in May and a 7-8% revenue drop announced in October.  Advertising revenue is declining and the company is losing market share.  The switch to subscription television and the rise of streaming media and mobile devices is not a recent phenomenon.  Both Seven West and Southern Cross have had a rough go over the last five years.  Here is a price movement chart comparing the two.

Despite the abysmal share price performance, analysts currently have a consensus Overweight rating on Seven West (9 at Buy, 2 at Overweight, 1 at Hold, and 1 at Sell); and a Hold rating on Southern Cross (4 at Buy, 1 at Overweight, 5 at Hold, and 3 at Sell).

Prime Media Group (PRT) operates FTA television and online media platforms in regional Australia and New Zealand.  The company may be small in stature, but shareholders have seen average annualised rates of total shareholder return of 10.2% over five years and 17% over three years.  Prime Media Group has a respectable two year earnings growth forecast of 7.2% and its healthy dividend is forecasted to grow 5.2% over the next two years.  The company has a P/E of 9.42 and a Forward P/E of 8.47.  The analyst consensus rating is Overweight, with 5 at Buy, 1 at Hold, and 1 at Sell.  Prime is affiliated with Seven West and is another bright takeover prospect should the government change regulations on media ownership.  Here is a five year price movement chart for PRT.

The remaining two companies, Nine Entertainment Co Holdings (NEC) and Fairfax Media (FXJ) are more likely to be the acquirers rather than the acquired.  There has already been talk of a merger between Nine and Southern Cross Media Group.  Nine is a diversified media and entertainment company that went public on the ASX less than one year ago on 3 December 2012.  The company operates the Nine Network and also operates Mi9, an online media company; a ticketing service and entertainment venues; and an investment group, Nine Ventures.   

Nine reported FY 2014 Full Year Results that beat its Prospectus forecast.  Revenues increased 5.5% and net profit after tax (NPAT) rose 5.8%.  Here is a price movement chart for Nine since it began trading on the ASX.

Analysts are bullish on this stock, with 2 Strong Buys and 10 Buy recommendations.

Fairfax Media (FXJ) is primarily a print and online media company but the company does operate in broadcast radio and has more cash on hand than debt.  Fairfax operates many of Australia’s most well know newspapers, including the Sydney Morning Herald, The Age, and The Australian Financial Review, but has not been spared from the decline in advertising revenue plaguing more traditional media operators.  Fairfax had been rumoured to have been in talks with Ten Network and the Fairfax CEO on 6 November strongly advocated changing media regulatory requirements. 

The company’s Full Year 2014 Results released on 14 August showed a 3% decline in revenues with a swing from a prior year loss to a substantial profit, due, however, largely to asset sales.  The encouraging thing about the report was the reduction of debt by $222 million and the move to a positive cash position.  The CEO stated the company would use the strengthened balance sheet to invest in new business opportunities.  The share price got a boost before dropping back to pre-announcement levels and the falling further.  Here is the chart.

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