Developments with HT&E
Emeco has been the stand out performer of the equity portfolios over the last year, and has garnered a large amount of attention. This week, we draw attention to your investment in Here, There & Everywhere, HT&E. HT&E is a leading media and entertainment business listed on the ASX delivering high quality metropolitan media assets across radio, outdoor and digital. We do so to highlight that there are other investments, besides Emeco, in your portfolio that have been performing well.
What has happened?
HT&E has agreed to sell its outdoor advertising business, Adshel, to ASX-listed outdoor media company oOh!media for $570m cash (subject to ACCC approval). The comes after a bidding tussle between APN and oOh!media for the business.
Source: IRESS, First Samuel
A view on value
We view the $570m cash offer as good, and fair (but not exceptional) value. The basis of this is:
- it has been fairly hotly contested over the last month including bids from APN and going back to April when an initial $470m bid was made by oOh!media (rejected by HT&E at the time). Open contests are more likely to result in fair price discovery.
- HT&E used to own 50% of Adshel in a joint venture, paying $268m in Oct-16 to acquire the remaining 50%, i.e. a valuation of $536m less than two years ago, and
- the price paid is 12.6x pro-forma EBITDA (pro-forma excludes the Yarra Trains contract, which Adshel no longer has). This is a reasonable metric.
Each client portfolio is managed separately – however, most clients made an initial investment in HT&E in Feb-17, followed by 5 “top-up” purchases through to Jan-18. The average share price paid was $2.28 per share.
If the total of those purchases was $100 (in the same proportion and dates as most clients), the investment would be worth $115.98 (using a HT&E post-announcement share price of $2.64). This compares to $106.55 (using the XAO post announcement value of 6306.4) if the same amount of money, on the same dates, was invested in the market (XAO). Thus clients have achieved a comfortable outperformance, vs the market, over the time they have owned HT&E (albeit the gain is unrealised because clients still hold the shares).
It is also noted that 11 cents per share of dividends have been paid through the ownership period, over and above the capital gains achieved above.
How will the windfall be returned to shareholders?
HT&E will, assuming the deal proceeds, receive $570m in cash for the Adshel business. They have advised they plan to use the proceeds as follows:
- A special dividend of $220m. This will be fully franked. This equates to dividend of circa 71 cents per share (based on the shares on issue as of today), plus circa 30.5 cents of franking credits.
This cash return is a good way of returning proceeds of this takeover to us, and the good is compounded as it provides a way to return to shareholders excess franking credits the company holds. Because your investments are individually held (not a fund, or corporate or retail super, or the like), you get a big additional tax benefit from these franking credits.
- An on-market share buy-back of $55m. This benefits shareholders by reducing the number of trading shares on issue, thus increasing the proportion of earnings each share gets i.e. increasing EPS and DPS. This will, over time, provide upward pressure on the share price.
- Pay down debt (low-interest payments in the future, necessary as it will be a smaller company, and also means a greater proportion of the radio business earnings will be returned to shareholders). Drawn debt at 31-May-18 was ~$195m.
- Retain the remainder, ~$100m, as cash for future investments.
What is remaining?
HT&E retains its metropolitan radio business, along with its digital radio initiatives (including iHeartRadio).
Its radio business includes the Australian Radio Network, whose stations broadcast across six metropolitan markets to over 4.5 million people each week, across three core brands; The KIIS Network, The Pure Gold Network, and The Edge. It is Australia’s number 1 rated radio network. They are good cash generating assets.
At a HT&E share price of $2.64, the radio business and exiting corporate costs (which should be scaled down post a split i.e. this multiple is conservative) is a very reasonable EV/EBITDA valuation of 6.2x.
We have no crystal ball. However, given the eased media ownership laws, we would not be surprised if these assets become the subject of their own corporate action at some point in the future.