Taptica shares initially reacted well to news that it is to merge with RhythmOne in an all-share deal and then buy back $15m of its stock. Having been chased down to a low of 137p the stock put on a 100p gain, but has subsequently drifted down again, suggesting investor confidence in the story is still flaky.
The rationale for the acquisition looks sensible. It will provide a substantial uplift in scale and mean that Taptica will have an end-to-end platform that covers both supply and demand side video advertising. There should also be cross-selling opportunities as well as cost synergies from combining tech infrastructure, consolidating staff and suppliers.
The deal takes Taptica further into video advertising following its early acquisition of Tremor, which is likely to continue growing as internet-connected TV usage increases. Taptica had already migrated its capabilities from desktop PCs to mobile; so connected TV is another rising trend that needs covering.
One concern is that RhythmOne had a much less impressive cash generation record than Taptica, though this was forecast to improve. Early eps forecasts for the 2020 year range from 47c to 79c depending on synergy assumptions and treatment of amortisation. That gives a p/e range of 5.2 to 3.1 and a net cash forecast range of $178m to $202m.
Market cap: £129m
Share price: 187.5p
Current recommendation: Buy
(Above data as at 22 February 2019.)