The media sector was in the headlines on Wednesday as event specialist Informa (LSE: INF) proposed a combination with sector peer UBM (LSE: UBM). The potential bid sent the latter’s share price around 15% higher after the two companies announced that a deal between them could offer significant synergies in a changing marketplace.
However, does the deal fully value the growth potential of UBM? And could an enlarged group really perform better than the two companies remaining as separate entities?
Value for money?
The deal would see shareholders in UBM receive 1.083 Informa shares plus 163p in cash for each of their shares in the company. This seems to be a fair deal, since it values UBM at around a 30% premium to its closing price on 15 January. With the company forecast to post a rise in its bottom line of 9% in the next financial year, it puts it on a price-to-earnings (P/E) ratio of around 18. This suggests that its shareholders are receiving a good price for their investment.
Clearly, the company has a strong position in the business-to-business (B2B) events sector. However, with its bottom line due to fall by 1% in 2018, its shares could have found it difficult to gain traction in the short term. Therefore, a bid approach from Informa could be the best solution for investors in UBM.
Growth potential
The logic for the merger is, of course, centred on synergies. Since the two companies operate in the same sector, there is scope for them to rationalise should they merge. This could not only provide a short-term boost to profitability, but may also provide the new business with a competitive advantage versus rivals. In an industry where there is currently a transition towards operating scale and specialisation, the enlarged business could capitalise on the full growth opportunities which are available.
However, a bigger business can mean less flexibility and a slower response to change. Therefore, the combination of the two companies may not prove to be a major catalyst for profit growth in the medium term. But it should provide greater consistency when it comes to areas such as sales and cash flow growth, while also providing improved diversification in case one region of the world experiences economic woes. This could help to reduce overall risk and improve the combined entity’s overall risk/reward ratio.
The right time to buy?
Clearly, the merger is not yet a done deal. There could be some uncertainty ahead for both stocks in the short run, and this could create volatility in their share prices. As such, within a media sector where there seem to be a number of stocks with low valuations that could benefit from improving global economic growth, there may prove to be better opportunities elsewhere to generate high returns in the medium term.