ARN Media’s market raid on competitor SCA is at first glance a perplexing move.
This must be more than a farewell accolade to SCA’s Grant Blackley who is stepping down as CEO to be replaced by COO John Kelly from July.
Radio broadcaster ARN announced Tuesday last week it had acquired an interest of 14.8% in the rival and owner of Triple M for $38.3 million.
Investment bank Jefferies reportedly made the buy at $1.08 a share, a more than 40% premium on the then share price.
The key question is: Why buy into your competitor and where is the upside?
ARN can’t make a takeover bid, and can’t under media laws (Broadcasting Services Act) own more than 15% of SCA, without selling its own commercial radio licences.
The company itself described the acquisition as a “strategic equity investment” in a sector that it knows well and sees the position in SCA as representing “attractive value”.
However, on paper at least, ARN’s investment has lost value. The latest share price trade was at 86 cents, a long fall from $1.08.
Perhaps it’s waiting for someone else to come along and make an offer. That’s a long shot.
Media analyst Steve Allen, director of strategy and research at Pearman, says the premium paid does not make sense.
“The ARN buy is now under water,” he says. “Does not seem to me that in the short to medium term ARN can recoup outlay.
“ARN must have some respect for Grant Blackley.
”However, why buy if there is more downside? Radio, like nearly all media, is in for a downturn next 12 - 24 months. Sure, it’s a bit more resilient than most, but not great upside.”
The only answer appears to be that ARN, cashed up, is making an investment and will, perhaps, in the future sell at a profit.
ARN has form for this. In 2021, it sold a 4.2% share in Ooh!Media for $49 million, pocketing a $31 million profit.
But we all may be overthinking the buy, according to Brian Han, director at Morningstar.
“It could just be an opportunistic value play – it has excess capital, it has form picking up cheap stakes and flipping for a quick profit (oOh!media),” he says.
“For SCA, a takeover offer is very unlikely, simply because the law will not permit it.
“Maybe ARN has some inkling about what the Labor government thinks of the current archaic rules against radio consolidation, but I doubt that too.
“Still, hopefully ARN’s interest puts a floor on SCA’s struggling stock price.”
SCA’s shares are down on the one year high of $1.245.
But there is value there. Han, in a note to clients last month, put SCA’s fair value estimate per share at $1.80.
SCA’s Grant Blackley is stepping down after eight years and Han says the CEO must be commended.
“The group's financial performance has been bumpy during that time,” Han says.
“However, he inherited a group with a crippling debt load and a radio business that had just lost a major ratings and revenue driver (Kyle and Jackie O breakfast show).
“Blackley overcame these obstacles, while overseeing unprecedented structural changes in the media industry, the painful switchover of a major regional TV affiliation partner and the foray into digital audio, not to mention navigating the debilitating challenges of COVID-19.
“Despite all these headwinds, it is a credit to Blackley's leadership that the group's culture appears to have improved under his watch, albeit it is not something we can point to in our equity analyst spreadsheet.”
Metropolitan commercial radio networks registered a 5% increase to $701.402 million in advertising revenue last year, with radio holding a 74% share of total daily commercial audio listening, according to industry body Commercial Radio & Audio (CRA).
In the half year to December, SCA’s group revenue came in flat at $260.1 million. Net profit after income tax fell 6.1% to $14.6 million.
In February, ARN reported radio revenue up 53% to $344.9 million in the year to December but profit suffered due to a non-cash impairment following a downturn in economic conditions.
But in a trading update last month, radio revenue was down 5% in the four months to April, partly due to shrinking government ad spend and uncertainty impacting advertising sentiment.
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