Safer in private hands

Recent weeks have featured a strong stock market recovery on both sides of the Atlantic, although the media sector has continued to struggle to make meaningful headway. Larger FTSE media shares rose 2.6% on average in September, while AIM listed shares fell 1.9%, with the two indices up 0.2% and down 12.9% respectively in the year to date.

However, the IBIS sub-sector indices highlight yet again that a broad synopsis of media fails to do justice to the industry’s dynamism. In the year to date, the two best-performing sub-sectors, pay-TV and professional information, are up by a respectable 9.9% and 6.9% respectively. The two worst performers, free-to-air TV and radio/outdoor are down 17.0% and 28.1%, making a 38% differential between the best- and worst-performing sub-sectors.

A key driver of the performance of the professional information sub-sector has been corporate activity. As recently as July, the overall sub-sector was down on a year-to-date basis, but two deals in particular have led institutions to reconsider their valuation of the sector.

Hard to Argue With
First was the proposed all-paper merger of Metal Bulletin with Wilmington, which led to Euromoney gate-crashing the party with a 221m cash offer for the former. Euromoney’s offer represented a 34% premium to the value that Metal Bulletin was trading at ahead of the merger announcement. There is nothing quite like a hard cash offer to focus the mind.

However, just in case institutions were unaware that there are some who think shares in this sub-sector are undervalued, and are prepared to back their judgement with cash, there came the news that private equity company Apax was launching a recommended offer for Incisive Media. The offer values Incisive at approximately 200m and contains a full cash alternative to existing shareholders.

Possibly the most interesting aspect of the Apax offer is the position being taken by Incisive’s management. Apax had previously backed Greg Dyke’s proposal to take ITV private, which was fiercely resisted by ITV’s incumbent management and board. However, in this instance the management of the target company are fully supportive of the Apax proposal from the outset, which is effectively a private equity-backed management buy-out. The rationale for Incisive management’s decision to move from public to private status makes interesting reading, as it clearly indicates their belief that public markets are not working.

The following is an extract from the offer document/ “Since its creation in July 2000, Incisive Media has developed its business into a leading business-to-busines information provider operating primarily in the UK. Incisive Media’s growth has been driven both organically and through value-enhancing acquisitions. Over the last year, Incisive Media’s share price has underperformed the market.

“In order to deliver value to shareholders, the board of Incisive Media has considered a number of potential strategic options, including mergers and transformational acquisitions. However, Incisive’s ability to be a leader of the consolidation in the business-to-business information sector has been hindered by, inter alia, funding constraints in the public markets. The advertising and event-driven business model of Incisive has limited its ability to raise significant levels of debt finance as a listed company, and equity-financed transactions have been difficult to justify given valuation ratings within the sector.”

This is a clear message that those responsible for managing portfolios of shares in publicly quoted companies should seriously consider. A key reason for going public is to have access to capital – this is especially important if the company sees acquisitions as an important part of its future growth strategy.

However, despite a good track-record of delivering results and executing its strategy, Incisive found itself in a position where the value being placed on its shares meant that it was not attractive for it to issue more shares, either to the vendors of companies it was seeking to acquire or to institutions in return for cash to finance deals.

Unrequited Love
Furthermore, the conservative attitude of many institutions to corporate debt levels means that Incisive’s ability to debt finance deals was also constrained. Management was becoming frustrated in its ability to continue to pursue its strategy, even though it could point to a successful historic track-record of delivering value – a classic case of “we’ve delivered our side of the bargain”.

Taken at face value, Apax’s rationale for its support of Incisive is a sad indictment of the present perception of the role of public fund managers. It says: “Apax believes that Incisive Media’s next growth phase will come from investing to expand the existing portfolio of brands, and further develop its events and online activities. Apax and the management team will continue to pursue further opportunities for investment to create additional value through acquisitions and new product development.

“Given the medium-term investment horizon required [for] this strategy, Apax believes that the next stage of Incisive’s development will be best achieved under private ownership.”

There are significant costs associated with being a public company – not just the increasing amounts of bureaucracy, such as the requirement to provide regular detailed public reports on performance and compensation, which private competitors do not have to reveal. If it has come to the point where investment capital is more readily available in private than public markets, it is not hard to predict that others will be considering following Incisive’s lead.

David Forster,
director of IBIS Capital.
david.forster@ibiscapital.co.uk

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. 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).

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 included are listed overseas or have split listings.

Indices are based on the market capitalisation of each constituent company but, in common with other recognised stock market indices, they make a number of adjustments.