The hidden e-treasure

With so many online businesses owned by ‘old media’ companies, it is hard to detect their effect on the market, but that is changing. By David Forster

These are giddy days in media, although such a statement seems very much at odds with what is happening to the quoted media sector.

In February the IBIS index of fully listed media shares fell 0.9%, and is now down 0.7% on a year-to-date basis, whereas the AIM index of smaller media companies rose 4.6%, up 4.2% on a year-to-date basis. This is the second successive year where the trend of smaller media companies outperforming larger companies is apparent.

However, even this picture of smaller companies outperforming larger ones is just part of the story, as it relates only to the value of listed media companies, and provides no insight into what is happening in the private arena. In previous articles we have noted that the quoted UK media sector has no meaningful exposure to online media companies, unlike the US, where there are several companies, ranging from Google at one end of the spectrum to the likes of Monster Worldwide and CNET. The market capitalisations of these companies are $100bn (&£58bn), $6bn (&£3.4bn) and $2bn (&£1.1bn) respectively.

This means that an analysis of the different sub-sectors of the US media industry incorporates both established media and new media, whereas an analysis of the UK media industry is heavily biased towards reflecting the fortunes of “old” media.

Consequently, when analysing the US market we can observe the transfer of value from old to new, whereas in the UK we largely see a one-way street and are likely to conclude that the media industry is an underperforming one – which is borne out in terms of relative performance to the overall stock market.

Of course, there is no UK equivalent of Google but, notwithstanding, there are many UK companies that are benefiting from the structural changes confronting significant elements of the overall media industry. However, there are a number of reasons why their presence is hard to detect.

First, many of them are buried by the legacy assets of their parent companies, in so far as many large established media companies are the owners of some of the fastest-growing online and other digital assets. In these circumstances, it is often the case that growth in the digital/online businesses is being matched or exceeded by the decline of the traditional media property. Examples include television and radio, where growth in the audience to new channels is being offset by the decline in previously dominant channels; and in classified advertising too, where the migration from print to online is in full flow.

Second, there is a relative size issue in so far as the revenues and profits of “old” media still substantially outweigh that of “new”. For the time, being the dog is still wagging the tail, although in some areas, it is clear that in due course the tail will become the dog.

Third, many of the fastest-growing new media companies operate in the private arena, although there are signs that this may be evolving. For most stock market commentators the “dot-com bubble” has been consigned to the annals of investment infamy alongside the South Sea bubble and the great tulip craze. Interestingly, I recently heard someone say: “You know all that stuff we were saying back in 2000⦠well actually a lot of it is turning out to be spot on, we just got our timing wrong.”

Indeed, putting to one side the “minor” issue that valuations got ridiculously over-extended, there is little question that many of the key visions that drove the dot-com phenomenon are now visible reality and that fortunes are being made by those who kept faith and continued to develop their new media presences.

Until now, the way these fortunes have been realised has been through trade sales to larger public companies – recent cases in point being the sale of Friends Reunited to ITV and Primelocation to Daily Mail & General Trust. However, there are signs that the stock market is prepared to open its doors to new media once again, which implies that institutional investors have moved on substantially from their recent stance of not wanting anything that smacked of dot-com darkening their portfolios. The principal difference this time around is that, rather than being asked to invest in blue-sky business plans, there is some substance to the candidates for consideration.

Last week’s initial public market offering of Rightmove, the online property portal, is a case in point. In 2005 the company had revenues of about &£18m and operating profits of &£8.7m. A small percentage of the company was made available to institutional investors; namely 22.7 million shares at a price of 335p, or &£76m of stock. The initial public offering was more than 35 times oversubscribed, implying there was potential demand of over &£2.6bn for the &£76m of stock. With the shares going to a premium since the start of dealing, at the time of writing, Rightmove has a market capitalisation of over &£500m, which equates to a giddy 58 times last year’s operating profit.

It seems doubtful whether the established shareholders of Rightmove, including directors and employees, think of the UK media industry as being depressed. However, as shareholders in what until recently was a small private media company, their story was hidden from public view.

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.

Methodology

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.

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