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FTSE 350: More M&A for media stocks?

From TV assets to events, consolidation was a key feature of 2018; will 2019 follow suit?
January 24, 2019

The ‘M’ in M&A might have stood for ‘Media’ in 2018. Indeed, acquisitions constituted a key strategy for some of the largest global players in this sector. In the US, against a backdrop of intense competition from streaming giants Netflix (US:NFLX) and Amazon (US:AMZN), Walt Disney (US:DIS) won the bidding war for the media assets of 21st Century Fox. Meanwhile, Comcast (US:CMCSA) eventually snapped up Sky for £30bn – hence the latter’s absence from this year’s FTSE 350 review.

Looking ahead, we still believe that Entertainment One (ETO) could attract takeover offers. When we tipped the company, we thought Netflix might be a potential buyer. Thus, it was encouraging to learn last September that Netflix had commissioned a third series of EOne’s programme Designated Survivor. Adding to its hypothetical appeal, EOne’s content library was valued at $2bn (£1.6bn) as at 31 March 2018, up significantly from $1.7bn.

That said, consumers’ shift towards subscription-based viewing is accelerating the decline of the home entertainment market. EOne had to book a £57m one-off charge, largely against certain film distribution assets, during the half-year to September. It is currently transitioning its film distribution activities towards production.

ITV (ITV) has also grown its production wing, enhancing its ability to make its own content. ITV Studios enjoyed a 10 per cent rise in revenues over the nine months to September, with "good growth" expected over the full year. But the group did cite "some softening" in fourth-quarter net advertising sales.

Elsewhere in the sprawling media sector, and back on the M&A trail, events and specialist publishing group Informa (INFO) completed its acquisition of UBM for a whopping £3.9bn last June. True, this raised mid-year net debt to 3.1 times Ebitda, and entails considerable integration costs. But the deal could be transformative, and a reassuring 10-month update to October revealed in line trading. Moreover, events are arguably less vulnerable to disruption by tech conglomerates than other media sub-sectors.

Which takes us on to WPP (WPP): a marketing group that has struggled, like others, with the reshaping of the digital advertising industry. Still, we’ve seen signs of positive change. While new chief executive Mark Read cut full-year guidance in October, he subsequently launched a three-year "strategy for growth" in December. But there’s a price. 2019 will be a "year of investment". And we know that previously announced account losses will engender a headwind – particularly in the first half.

 

NamePrice (p)Market cap (£m)12-month change (%)Trailing PEForward PEDividend Yield (%)Last IC View
Ascential3851,543.151.5824.920.41.48Hold, 459p, 23 Jul 2018
Auto Trader445.34,175.4325.4422.6201.37Sell, 457p, 08 Nov 2018
Entertainment One 368.41,707.6815.4915.113.50.38Buy, 377p, 21 Nov 2018
Euromoney Institutional Investor12501,364.86.8416.415.92.56Hold, 1,246p, 22 Nov 2018
Informa653.68,181.75-7.291412.73.19Buy, 732.8p, 25 Oct 2018
ITV129.15,196.8-21.928.59.26.1Buy, 147p, 07 Nov 2018
Moneysupermarket.com 289.11,550.5-15.6216.915.63.65Buy, 331p, 19 Jul 2018
Pearson9077,084.3832.4114.315.21.93Hold, 912p, 16 Jan 2019
Relx1646.532,387.290.419.618.12.44Buy, 1,515p, 25 Oct 2018
Rightmove466.754,1662.3426.223.91.31Hold, 4,906p, 27 Jul 2018
WPP863.410,894.59-36.6888.36.95Buy, 888.5p,12 Dec 2018