If the private equity consortium pursuing Dutch publisher VNU succeeds in winning over shareholders it is likely to have to pay a hefty price. Some analysts say the consortium may have to pay between €30 and €31 a share, which equates to a price-earning ratio of 19 to 20 times 2006 earnings, while others have calculated the price at around 13 times EBITDA.
Meanwhile, a team of CVC and Candover were among the favourites to walk away with Daily Mail and General Trust’s (DMGT) regional newspaper chain until the company halted the process in mid-February.
Part of the attraction of media companies, says Advent International principal Tim Franks, is their scarcity: “There’s usually only a certain number of TV channels, newspapers, radio stations and so on in a particular geography and because they’re relatively scarce there’s often a lot of competition and that pushes up prices.”
Crevan O’Grady, head of media at 3i, points to other factors that account for high valuations. He notes media assets have tended to fetch a premium, perhaps 25% above stock market valuations, because of the characteristics of many media companies. “There’s usually a relatively low level of capital required, as there’s no machinery, factories or research and development costs, and media is cash generative, both in absolute terms and in converting cash to profit. Frequently also, media firms are quite robust and predictable.”
There is also the factor of which sub-sectors of media are regarded as most attractive at any one time. In the case of VNU, the business is split between a larger database/market research arm and a smaller magazines division; it is the market research activity that is stimulating demand.
One adviser says a key attraction of the VNU market research business is that it is about collecting information once and selling many times. “As long as you have contracts in place with end users it can make a lot of money, but the issue seems to be that the cost of production is higher than it needs to be and that the business could be managed more aggressively.”
Richard Madden, a director at Close Brothers Corporate Finance, acknowledges that the potential price for VNU appears to be high, but notes that so were the headline prices for many of the European directories deals, for German publisher Bertelsmann Springer and, last year, for content company HIT Entertainment. “Ultimately, however, private equity has consistently achieved strong returns on media assets because of their defensible market positions and strong cash generation,” he says.
It is also worth remembering the price publicised in the press is not always what is actually paid. “A lot depends on how the private equity house structures the deal and I’m not necessarily talking about using loads of debt but rather how the shareholding is structured in a way that gives the investors certain returns over time,” notes one advisor.
Close Brothers’ Madden notes that through the 1990s and into the millennium many corporates were streamlining their portfolios and divesting assets that were not regarded as part of the core business and which often, therefore, had not been particularly well managed. He cites private equity investments such as those in regional newspaper groups like Regional Independent Media, Midland Independent and Newsquest. “Private equity houses replaced a relatively low-key management style with a more aggressive approach, which focused on cash generation and enabled the businesses to sustain higher leverage.”
It is likely that this kind of approach would have been adopted by whoever had acquired the DMGT newspapers, or indeed any assets that are divested after the current strategy re-thinks at Guardian Media Group or Norway’s Orcla media group. “I can imagine financial investors in the DMGT company incentivising management to improve margins and giving them money to invest and rationalise, then selling the company in three or four regional parcels,” says 3i’s O’Grady.
It is the constantly changing media landscape that throws up such assets, says Tim Franks. In the case of DMGT, for instance, it looks like a strategic change on the part of the holding company, which perhaps is seeking to put its capital into the fast-growing Internet ads market rather than the more stable and less high growth regional press.
An important issue when looking at private equity investments in media is what the competition is like. For instance, up until the last couple of years there was relatively little trade buyer appetite and that allowed buyout houses to hold down prices. An example would be Advent International’s investment in Dutch radio station Radio 538 in 2003, which it took from number two to number one in its market and then sold last year to a privately-owned Dutch group.
Tim Franks acknowledges part of the reason for the success of the deal was that in 2003 trade buyers interested in that kind of asset were few and far between. “I don’t recall much competition from trade buyers, as at that time they mostly didn’t have the resources to compete for significant media assets like that,” he says.
Although there is more competition from trade buyers these days, private equity investors remain bullish on the sector, not least because of the rapid changes brought about by technology. The strategies of media companies are constantly changing, with current trends such as the expanding forms of distribution through mobile TV, Internet-based platforms and so on, says Tim Franks, adding that these changes will continue to create opportunities from both an acquisition standpoint as well as divestment.
3i’s O’Grady agrees, arguing that it is the newcomers like Google, Yahoo and Friends Reunited that have innovated, rather than the traditional media companies. “A lot of the traditional media groups have not done that well and so will probably continue to divest, which should mean continued opportunities for private equity.”