The television sector boasts the best-performing media shares, but despite private equity interest, long-term forecasts remain mixed. By David Forster
Television was the place to be in March, with the pay-TV sub-sector up 15.6% on the month, boosted by the consummation of the NTL/Telewest merger, while free-to-air TV rose 11.7%, spurred by Greg Dyke’s private equity backed bid for ITV. The fact that merger and acquisition (M&A) activity is proving to be the media sector’s primary share price performance driver says much about the current mixed perception of industry prospects.
On the one hand there is a school of thought that sees the structural change imposed by the migration to digital technologies and business models as profoundly negative to the long-term earnings prospects for many established media companies. On the other, there is a view that we are in a transitional period and that within the foreseeable future a new order of strong, vibrant companies with solid growth prospects will emerge.
Furthermore, it appears that there is another, albeit related, dynamic at work – namely, the varying timing perspectives of public versus private equity funds. Most public institutional funds are closely monitored and judged by quarterly and, in some cases, monthly performance statistics. Private equity funds, by their nature, are typically judged by their returns over three to five years, being the typical holding period of an individual investment.
When an industry sector is in a clearly established growth mode, both public and private investors are likely to be attracted – the key factor being the different perceptions of growth and valuation. However, when growth is absent or limited by cyclical or structural factors, a different debate arises.
Because much of the judgement of public institutional funds is based on short-term performance, it is difficult for fund managers to justify buying shares in companies they expect to produce near-term flat or negative growth. Confronted by a suggestion that they should buy shares in company X, because it represents “jolly good long-term value, even if it is going to grow below the market average for the next two years” most fund managers are likely to respond: “Give me a call in two years’ time.”
The exception to this rule tends to be managers of “super” funds; those that are so big that they have to move before anyone else because the sheer impact of their buying or selling is such that they cannot attempt to finesse their timing. Fidelity’s significant stake in ITV has been the subject of much publicity, but the accumulation of the stake began when the components of ITV, Granada and Carlton, were very much out of favour.
Private equity’s ability to look through short-term earnings trends gives it in an inherent ability to take a longer-term perspective. That is not to say that private equity firms have infinite patience with underperforming assets, but provided they have a clear vision of where a company can get to on a three- to five-year time horizon, they are less likely to be obsessed with short-term performance compared to a public equity fund manager with an eye to quarterly performance statistics.
Although the Greg Dyke/Apax Partners bid for ITV lapsed with more of a whimper than a bang, there was no suggestion that the consortium perceived a renaissance in ITV’s performance to be imminent. Similarly, the private equity interest in the aborted auction of Daily Mail & General Trust’s Northcliffe Newspapers was not based on a short-term view of that media sub-sector’s prospects. However, in both cases a significant factor will have been the more aggressive financial structures, in terms of debt/leverage, that private investors are prepared to accommodate.
Notwithstanding, the fact that both Dyke/Apax and the private equity suitors for Northcliffe walked away shows that valuation discipline is being maintained. Or put another way, private equity is clearly seeing value in current media sector valuations but it is not so gung-ho about prospects that it is prepared to pay a significant premium to current valuations.
While the recent bid for ITV has probably put a floor under the company’s valuation for the time being, there is no evidence yet of the bottom being reached with regard to the radio/outdoor sub-sector, which is now down 23.3% in the year to date. Maiden Group holds the dubious distinction of being the worst-performing media share so far, down 78.3%, although the company has now been put out of its misery by Titan Outdoor of the US. GCap Media has fallen a further 21.3% so far this year, with the latest trading update and failed sale of a portfolio of local stations providing little basis to think that the company’s travails are behind it.
Although the performance of radio/outdoor has remained dire, it is noticeable that most other media sub-sectors are starting to make some headway in what is generally a buoyant stock market environment.
The overall FTSE media sector is up 5.5% this year, with the marketing services and pay-TV sub-sectors up 11.6% and 13.4% respectively. While it is probably too early to call a turn in the sector’s sustained period of underperformance, it is clear that private equity has the sector firmly in its sights.
Think not only ITV and Northcliffe, but also the 3i bid for Chorion, the Veronis Suhler Stevenson offer for Hemscott and the private equity consortium bid for the major European publisher, VNU, while the auction for EMAP France will undoubtedly receive private equity interest alongside trade.
Market turning points are usually only apparent after the event, but there are definite signs that media’s worst days of stock market underperformance are coming to an end.
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.