Video advertising groups Taptica (TAP) and RhythmOne (RTHM) have confirmed that they are in advanced talks about a possible all-share merger, which would give the former a majority stake.
However, investors' reaction to the deal – which was first reported by Sky News – was mixed. While Taptica’s shares soared by nearly a fifth, RhythmOne's shares plunged by more than a tenth – ostensibly because the deal terms, if approved, are slightly – and perhaps counterintuitively – one-sided.
Taptica’s investors would hold 50.1 per cent of the enlarged group’s share capital – leaving 49.9 per cent to RhythmOne, despite the fact that prior to this announcement, Taptica was actually smaller than its partner by market capitalisation, at £116m versus £148m.
Taptica argues that a combination of the two businesses would “create one of the leading video advertising companies in the US, delivering significant economies of scale, product offering, revenue synergies and supply chains” and enable them to compete in an “industry where scale of offering is key”.
Broker Panmure Gordon says that while “the initial deal terms look to favour TAP over RTHM, we see a strong strategic rationale for the deal”. It estimates cost synergies of around $80m-$110m, compared with current combined cash profits of around $100m.
We downgraded our buy tip on Taptica in April 2018, noting that the company appeared to have suffered from negative sentiment tied to the Facebook (US:FB) data scandal – even while Taptica said the press coverage around Facebook did not affect its business model.
Further pressure was heaped on the shares by the news in December that chief executive Hagai Tal had resigned – having been found liable for certain statements made in relation to the sale of Plimus Inc, a company of which he was both chief executive and a shareholder when it was sold in August 2011. The plaintiffs in the case are, we were told, “entitled to restitution for breaches of certain representations and warranties”. The case in question had been disclosed within Taptica’s admission document when it joined the Aim as ‘Marimedia’ in 2014.
