Consolidation Outdoors

This story features OOH!MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: OML

APN Outdoor ((APO)) and oOh!media ((OML)) have proposed a merger which, if successful, would produce a substantial, diversified outdoor media grouping.

-Key issue centres on competition concerns and ACCC definition of market
-Exposes APO to retail renewal risk and advertising brought in-house
-Highly profitable contracts could face margin pressure
 

By Eva Brocklehurst

A merger is being proposed between Australia's two major proponents in outdoor media, oOh!media ((OML)) and APN Outdoor ((APO)) in an all-scrip transaction. The newly formed group would be a leading, diversified outdoor and online media business, with considerable leverage to the growing out-of-home segment and audience awareness generated from such advertising channels.

Under the terms of the deal, OML shareholders will receive 0.83 APO shares for every OML share held. This, based on the prior closing price for APO, values OML at $4.48 a share. The companies are signalling synergy targets of at least $20m to be achieved within two years of the merger implementation. APO shareholders are forecast to hold 55% of the merged entity.

The merged group is expected to generate 2016 pro forma earnings of $171m. Assets are spread across both regional and metro locations, and would include 8,985 digital screens and 63,200 static screens.

oOh!media has upgraded 2016 guidance to $72-74m from $68-72m, which includes partial contributions from the ECN, Junkee and Cactus acquisitions. A final dividend of up to $0.10 per share has been guided for 2016, slightly above the stated 40-60% pay-out ratio, based on company estimates. Morgan Stanley notes the deal exposes APO to retail renewal risk, with Scentre Group ((SCG)) being an example where retail advertising has been brought in-house.

OML also has lower growth/margin business within its portfolio, such as offices and InLink. Moreover, the broker points out that this merger is an incremental negative for APO's AdShel as it creates a stronger competitor in contract negotiations. Still, the broker is generally positive about the deal, as it provides a stronger market position for APO, which has reiterated earnings guidance at the top end of it $84-86m range.

Credit Suisse has no complaint about the logic of the merger, as both companies have leading market positions in key outdoor verticals and are well managed. Yet, while APO is the clear winner from a diversification standpoint, the subsequent rally in its share price captures the bulk of the earnings accretion. The broker also believes it underplays any possibility of issues from the competition regulator, the Australian Competition and Consumer Commission (ACCC).

While the sector continues to enjoy tail winds, Credit Suisse suspects issues around the proposed merger will dominate sentiment in the near term and, therefore, downgrades both to Neutral from Outperform.

The benefits of the merger capture obvious cost synergies, revenue cross selling opportunities and create a more rational bidding environment for lease space. The latter is most significant, Credit Suisse believes, given market concerns around the sustainability of longer-term margins against heightened activity in contract renewals.

The broker is aware that the combined group would have an estimated 60% of Australian market share and over 70% share of roadside billboards and acknowledges both companies have undertaken extensive due diligence on the prospects of regulatory approval. Still, regulatory approval cannot be taken for granted and this will ultimately come down to the regulators definition of "market", and the role of landlords add an extra layer of complexity in the broker's opinion.

UBS agrees key considerations for the ACCC will be its definition of market and its application of the "competition" test. The decision may also have implications for future traditional media consolidation. If the ACCC were to take a more narrow view and define market as national out-of-home advertising, analysis of market concentration both pre-and post a merger could be more negative, given the broker estimates the pair's combined share of the Australian outdoor media market is 50-60%.

Valuation upside for APO now hinges on delivering revenue/operating expenditure synergies above the $20m guidance, offset by a discount to the probability of the deal completing. The broker also remains wary of the impact of higher rents, it landlords push for a greater share of revenue from digitally upgraded assets. Ord Minnett does not consider the regulator will be a major hurdle to the transaction but acknowledges a risk that some of the more highly profitable contracts could face margin pressure if change-of-control provisions are enacted.

The overlap between the businesses is minimal, in the broker's opinion, and then only in airports and outdoor billboards, while the transaction will likely improve market structure and create the only competitor in the out-of-home advertising market with substantial share in all sub-segments of the industry. The broker downgrades oOh!media to Accumulate from Buy on valuation grounds following the share price movement.

Morgans believes investors that are prepared to wear the regulatory risk should buy APO prior to the decision by the ACCC. Pending the outcome, the broker maintains a Hold rating but expects the share price to gravitate upwards in the event of ACCC approval.

FNArena's database shows a $6.18 consensus target for APO, suggesting 2.6% upside to the last share price. Targets range from $5.66 (Morgans) to $7.00 (Morgan Stanley). There are three Buy ratings and two Hold. There are one Buy (Ord Minnett) and one Hold (Credit Suisse) for OML on the database.
 

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