Media matters, by Leslie Copeland

A sceptical market is undervaluing a trio of media companies that have executed ambitious acquisition programmes over the last few years.

Buy-and-build strategies are beloved of entrepreneurs, especially in media. By acquiring good companies at (ideally) good prices, they are using the stock market effectively – issuing shares and raising cash to acquire assets and thus building their businesses faster than they could organically or privately.

The market, you would think, would embrace such concerns. For a start, and rather cynically, the takeover activity the entrepreneur is engaging in is generating fees for all the professionals. Moreover, acquisitions (again, in an ideal world) not only enhance a business’ growth prospects but usually diversify risk, reel in more talent and improve liquidity.

However, certain media businesses that seem to have executed pitch-perfect buy-and-build strategies are not being lauded for their efforts. The market, it seems, is either unconvinced that the management of some companies have bought at the right price or reckons they will not be able to extract full profits from their deals. Even those who haven’t succumbed to adopting the worse case scenarios are nevertheless waiting in the wings to see how the investment cards will fall. This presents opportunities for braver souls.

Buy Media Square…

A perfect example is Media Square, run by chief executive Jeremy Middleton. In just over two years, it has pursued an extensive acquisition programme, which has enabled it to build a substantial business. At the last set of interims, it posted revenues improved 250 per cent to £37.4 million, strong cash-flow of £4 million, a 160 per cent conversion of operating profits into cash and underlying pre-tax profit improvement of £3.6 million.
 
It followed this up with the £55 million (plus costs and working capital) purchase of The Marketing Services Group from Huntsworth, raising £30 million in cash at 25p to partly pay for the deal. It supplemented the rest via newly negotiated debt facilities.

However, the shares have slumped to a mere 18.75p, giving the now vastly enlarged group a market cap of £61 million. With Middleton’s executive team bolstered by the combative (but largely successful) Kelvin MacKenzie, it is difficult for all but the most committed doomsayers to justify the falls. I’m a buyer.

…and then Cello

It’s a similar tale over at marketing business Cello, run by chief executive Kevin Steeds. It listed in November 2004 and has more than doubled in size following an array of acquisitions and canny purchases.

At the interim stage to June it made profits of £1.32 million on sales of £20.9 million and since then it has acquired five businesses for an initial consideration of £22.9 million.
Steeds’ most recent trading statement was positive – saying results for the year would meet expectations – yet the shares have come back from a year high of 138p to 114p, valuing this group at £36.82 million. That is too cheap.

Huveaux – £1bn business soon?

Certain experts in the market reckon an even bigger bargain is going begging at Huveaux. It’s one of Dresdner Kleinwort’s stocks of the year and favoured by Charles Stanley.

With the incredibly experienced John van Kuffeler in the hot-seat, Huveaux has completed nine acquisitions over the past four years for over £50 million.

It now runs five different divisions in the publishing/online trading world, with leading positions in the political field in the UK (it owns Dod’s Parliamentary publications) and a similar position in France (where it is the leading political biographical reference book outfit). Following the purchase of EPIC last year it is the UK’s preeminent online training venture, while niche trading strongholds have been built in employee training and the school education market.

Van Huffler says ‘we have a good track record of making and imbedding good purchases – we buy and leap, as you should,’ and draws attention to ‘our ability to ride out the media cycle with the sheer breadth of books, magazines, courses, events and services now on offer’.

For the year to December the optimistic analysts in the market hope he will secure sales of £43.53 million and profits of £7 million, all of which could deliver earnings of 3.7p. With net debt sitting at only £8 million, the market cap of £65million and forward p/e of 12.4 are undemanding. Buy.