Lots of money to burn

The sun shone on AIM-listed shares again in August and companies used their strong valuations to raise money for acquisitions.

August saw the continuation of clearly established themes that have driven the performance of the UK media sector so far this year: namely, the outperformance of smaller companies versus large and continued high levels of corporate activity. After the first eight months of the year, fully listed media companies as a group are unchanged – they are significantly underperforming the broader market (the FT All Share) which is up 10.3 per cent. By comparison, AIM-listed media companies have made some meaningful headway – they rose 4.8 per cent in August and are up 11.7 per cent in the year to date.

The 78 media companies that make up the IBIS Capital Media Indices announced 20 acquisitions in August, a phenomenal rate of activity. Furthermore, this reflects only a proportion of the corporate activity that took place, as private companies, private equity investors and overseas companies are not taken into account. For example, Vincent Bolloré, a 22 per cent shareholder in France’s Havas, announced that he had acquired 6.03 per cent of Aegis, while Scotland’s privately owned DC Thomson took a 6.4 per cent stake in UBC Media.

What is driving this seemingly frenzied level of activity? First, the sheer number of deals taking place suggests that buyers are seeing value and have the means to pay. Corporate earnings have been robust for several years, which means that many companies’ balance sheets and cashflows are strong. With stock valuation at reasonable levels, companies are issuing new shares to fund their acquisitions. Second, the acquisition activity has focused on a limited number of media sub-sectors: marketing services (11 acquisitions in August), entertainment and content (4), consumer publishing (3) and professional publishing (2). Third, the average deal size is low – less than &£10m in 14 cases and less than &£100m for the balance. Finally, 17 of the 20 deals related to domestic UK businesses.

It is unwise to read too much into one month’s data, but many companies seem to be focusing on bolt-on and strategic infill-type acquisitions as opposed to the headline-grabbing deals of the AOL Time Warner period that led to the last crash in media shares. So even though media companies appear to have their buying boots back on, they still shy away from making the supposedly transformational, and often transatlantic, deals that were their undoing in the past.

More specifically, deals in marketing services are focusing on below-the-line areas, with a growing influence of digital evident here and in other sub-sectors. Aegis bought Glue London, a digital creative agency; Interactive Prospect Marketing acquired PPS, an online direct marketing company; and a sector newcomer (with a flotation on AIM) was Research Now, a provider of online fieldwork. In consumer publishing, Daily Mail & General Trust and Trinity Mirror continued to expand their online presence, acquiring three online recruitment agencies between them. In entertainment and content, Monstermob acquired a provider of value-added mobile content in the Chinese market, while Stream Group acquired Mobileworkflow. Huntsworth recovered the ground it lost last month and announced a further two acquisitions.

Tarsus, the business-to-business exhibitions, conference and publishing group enjoyed a good run in its share price in anticipation of strong interim results.

Aegis shares were buoyed by the announcement of Groupe Bolloré’s stake-building and an expectation that it will prove a prelude to further corporate activity, possibly involving a combination with Havas.

Sanctuary Group added weight to the adage that like buses, profit warnings rarely come singly, with a confirmation of a further deterioration in trading. By the end of August, the company’s shares had fallen 78 per cent in the year. YooMedia’s dramatic 88 per cent rise this month needs to be seen in context because the shares still ended down 45 per cent on the year to the end of August. However, the company will hope that the most extreme concerns about its financial condition have been allayed and that investors may have taken comfort from the announcement of progress on three product launches.

Mwobile phone entertainment group, Monstermob’s move into the Chinese market was well received. Its shares were up 93 per cent by the end of August, making it the best-performing media company on AIM in the year to date.

Thomson Intermedia’s &£13.1m purchase of John Billett’s BCMG consultancy also appears to have gone down well with investors.

Research Now made a strong debut on AIM. Its initial public offering was oversubscribed, with shares beginning to trade at a premium to their 130p placing price and rising to 159p by the month’s close.

Imagesound, a supplier of in-store music, saw its shares tumble after a warning that a shortfall in one-off sales would mean that profit expectations would not be met.

The IBIS Capital Media Indices

IBIS Capital is a corporate finance advisory and investment business focused on the media sector. The IBIS Capital Media Indices are a set of proprietary analytical tools developed to monitor the UK media industry from the perspective of the share price performance of publicly listed companies.

The indices group companies with similar business models into sub-indices. Over time, significant variations in sub-sectors’ performances can be seen. The indices also include a split between media companies fully listed on the London Stock Exchange and those listed on the Alternative Investment Market (AIM). The junior market, with its less stringent listing requirements, has been enjoying a relative boom in investor interest, and many media companies have listed on it. However, fashions change, and when the AIM does suffer a setback, its lack of liquidity relative to the LSE means it is likely to underperform the senior market. The IBIS indices will highlight the relative performance of the two markets and may give an early indication of a change of direction.

As well as being of interest to those concerned with the performance of the UK’s media industry and its sub-sectors, the indices are useful to directors considering a flotation of their own company, or for anyone else considering the purchase or sale of a media company or shares.

The indices monitor all UK media companies listed on the London Stock Exchange and on the AIM with a market capitalisation over &£10m. Some companies are included that are listed overseas or have split listings.

The indices are based on the market capitalisation of each constituent company but, in common with the practices of other recognised stock market indices, they make various adjustments.

Factors taken into consideration in the compilation of the indices include: changes in the share prices and number of issued shares of the constituent companies and the number of shares in free float. The effect of initial public offerings, bringing new companies into the indices, and of mergers and acquisitions, which may take companies out of the indices or create new companies, are also considered.

David Forster is a director of IBIS Capital. He was previously at Scroder Salomon Smith Barney, where he was responsible for global media equity research. david.forster@ibiscapital.co.uk


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