APN, NZME likely to be more attractive takeover targets after demerger – Deloitte

APN News & Media [ASX: APN] and its NZME unit in New Zealand would become more attractive takeover targets after demerging and the split wouldn't result in markedly weaker balance sheets, an independent evaluation by Deloitte says.

APN is proposing a demerger via an issue of shares on the basis of one NZME share for each APN share held. APN would also undertake a one-for-seven share consolidation and raise about A$180 million via a fully underwritten one-for-three renounceable entitlement offer. Shareholders will vote on the plans at a meeting on June 16.

Deloitte says the advantages of a demerger would outweigh the disadvantages. APN would be free to pursue growth in its Australian radio and outdoor assets, while NZME would focus on its integrated radio, print media and digital operations. A demerger was independent of APN's talks about a merger of NZME with Fairfax Media's New Zealand operations, which was separately announced.

Over time, the shareholding base of APN and NZME would change to reflect the different risk profiles of the two businesses, and they would attract a different range of potential acquirers, Deloitte says.

"Following the proposed demerger, potential acquirers of APN News & Media would be bidding for a more focused Australian media company, rather than a cross-jurisdictional entity," Deloitte says. "As such, under the current structure, any takeover offer for APN News & Media may incorporate a discount to allow for the subsequent divestment of the NZME business."

APN is likely to be part of "significant consolidation" in the Australian media market expected to follow the proposed easing of media ownership law that would abolish the so-called 'two out of three rule', which prohibits ownership of more than two of a commercial television licence, radio licence or newspaper in the same market, and the '75% audience reach rule', which prevents a national TV network from reaching more than 75% of the population.

Deloitte says while the bill was introduced in March, the looming federal election means it is unlikely any significant media reforms would be enacted in 2016.

Likewise, a standalone NZME "will be significantly more attractive and accessible to potential acquirers along with having the increased potential to participate in a merger like the potential Fairfax NZ merger." 

However, there was a risk that existing shareholders would seek to reweight their holdings away from NZME, putting downward pressure on its NZX-listed shares, Deloitte says.

If the demerger doesn't proceed , APN's existing board and management would continue to oversee media assets in two different jurisdictions "with limited operational connectivity," Deloitte says.

"Due to the outlook for radio and outdoor segments in Australia and the growth opportunities afforded", the New Zealand operations "are likely to receive a secondary focus" from a capital deployment perspective.

Pro-forma financial statements show NZME had operating revenue of $433 million in 2015, and earnings before interest, tax, depreciation and amortisation of $67.5 million, generating net profit before one-off costs of $27.5 million. It would have debt facilities after demerging of $160 million, with $109 million drawn down, and a net debt-to-ebitda ratio of 1.5 times, higher than for many comparable media related companies in the ANZ region, but below that of a demerged APN, which has the capacity to support a higher level of gearing.

Both demerged entities generated significant revenue, were profitable and had assets exceeding liabilities on a proforma basis, a debt position commensurate with their profitability and growth prospects, and "significant headroom" in their debt facilities which meant the proposed demerger "is unlikely to prejudice the ability of the company to pay its creditors," Deloitte says.

APN abandoned plans for an initial public offering of its NZME division in February and its shares had been halted for yesterday's announcements. The shares last traded at 63Ac on the ASX and have dropped 30% in the past 12 months. Fairfax shares rose 4.6% to 85.75Ac on the ASX.

NZME's assets include the flagship New Zealand Herald newspaper and Newstalk ZB, the country's No. 1 radio station. Of NZME's 2015 revenue, 68% came from publishing and 28% from its radio assets. The GrabOne daily deals website generated about 4% of sales.

NZME also merged its three businesses into one, with a common newsroom and combined commercial teams and shifted its headquarters, achieving cost savings of A$20 million. The business was reorganised into content 'verticals' - news, sport, and entertainment.

(BusinessDesk)