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APN Outdoor – Breaking Out

There must have been countless songs invoking the ‘neon lights’ of a city, but the lyrics are probably a tad more romantic than the grimy business of outdoor advertising.

But outdoor advertising is seeking a new digital future to liven up the static billboards with which we are all so familiar; mainly because there are thousands upon thousands of them blighting the landscape.

APN Outdoor is a fascinating story of tarting up the previously tarnished and unwanted poor cousin of the company’s namesake parent, APN News & Media.

Former chief executive Brendan Hopkins described the outdoor business as “wealthy for four years and bust for two”.

Winding the dial back

As with most of the traditional media companies, APN has watched its valuation crumble as the internet has sucked the life out of print advertising.

Cast your mind back to 2006 when APN was considered the unsexy appendage of the mainstream media industry. And yet, it was riding the population boom of South East Queensland and proving that diversified media businesses could be highly profitable even without a crown jewel masthead newspaper, apart from the New Zealand Herald.

APN’s best asset was its regional newspaper business that just happened to be in the centre of the migration scramble into Queensland as mining jobs fuelled the growth of the region.

APN also had a lucrative joint venture radio business with its US partner, Clear Channel Communications with some excellent brands and stations across Australia and New Zealand.

After the media ownership rules changed in October 2006, APN’s major shareholder INM waded in with a $3.8 billion offer (including about $1 billion of debt) to take out the minorities, mostly institutional shareholders, Perpetual in particular. The offer was rebuked even after a small increase to $6.10 per share. D’oh!

Eight years of water under the bridge, INM has disappeared from the register due to its own misfortune (luck of the Irish) and APN has struggled to stay afloat in the digital dash for the internet.

Outdoor cast off

In January this year, the company jettisoned the remaining 50% of its outdoor business for $69 million to Quadrant Private Equity after it had sold the first half for $190 million in 2012.

Quadrant hasn’t wasted any time putting the business back into the market.

This week’s IPO of APN Outdoor at $2.55 per share has seen the company successfully list and now boasts a market capitalisation of about $445 million.

Quadrant has retained a 20% stake.

APN Outdoor’s appeal as an investment lies mainly with its plans to digitalise a good number of its static billboards thus transforming the revenue multiple of each billboard. It’s a sensible strategy but will take time to execute.

APN tires of NZ?

Having sorted out the Outdoor business, APN is now pondering if it should also flog its New Zealand business, recently renamed “NZME.” Apparently, the dot represents the ‘digital’ side of the business). In case you’re wondering, it stands for NZ Media and Entertainment dot.

Doing a little bit of surgery to APN’s group figures suggests that NZME (I’ll dispense with the dot for practical purposes) could be worth roughly A$400 million for its publishing and radio assets.

If APN sold the whole thing, that would go a long way to extinguishing its group net debt balance of $480 million as at 30 June 2014.

The kiwi institutions will lap it up as it is effectively a throwback to the Wilson & Horton days before APN hoovered it up. There seems to be no reason for Australians to own it.

Assuming the kiwis provide sufficient support to get NZME away, APN will be trim and taut with only its regional newspaper and Australian radio businesses still on the books.

The new APN

APN’s big coup in radio late last year was to recruit star breakfast duo, Kyle and Jackie O, from Southern Cross Austereo’s 2DAY FM with immediate results in audience ratings this year. The controversial pair brought their chunky 10.5% market share to their new home of KIIS 1065 (ARN’s station) and left 2DAY with a miniscule 3.5% share. It has been a virtual reversal of fortune between the two stations.

But APN also bought out its US radio partner giving it full access to the cash flow from the radio business.

It’s less clear how robust the regional newspaper business is now, but it is probably still struggling as the cyclical downturn in advertising persists; never mind the impact of the internet.

It’s clear that the radio businesses (Australia and NZ) are stronger than the print businesses.

In Australia, ARN (Australian Radio Network) has approximately 25% share of revenue and is delivering operating earnings margins of 35%. That is exemplary compared to the print margin around 10% so there should be no surprise where APN is concentrating its cost cutting effort.

Radio market changes?

The Australian radio market is at an interesting point with corporate action aplenty.

John Singleton’s Macquarie Radio Network is playing a long and cantankerous game to relieve Fairfax Media of its ill-fated $350 million radio acquisition from 2007. The only radio station really paying its way is Melbourne’s 3AW while the vaunted 2UE in Sydney is probably losing money. This clutch of metropolitan radio stations is probably only worth $100 million today.

Mr Singleton has apologised to Fairfax Media chairman Roger Corbett for calling him a competent beetroot can salesman, among other more colourful descriptions. If the Fairfax Board can swallow its pride for a moment, it should take whatever cheque it can extract from Mr Singleton’s group and make a swift charge for the exit having proven conclusively that it knows nothing about running a radio business.

Elsewhere, Lachlan Murdoch has played a patient game in turning DMG Radio Australia into a good business. But this could also be up for grabs depending on how the ownership tussle of Network Ten finishes up. Murdoch is Ten’s chairman and owns 8.9%.

Southern Cross remains the biggest commercial radio business in the country but has been forced to shuffle its deck following the departure of Kyle and Jackie O. They have snapped up Hamish and Andy to prop up the afternoon show on 2DAY with the lure of some equity in the deal. Southern Cross probably would have preferred them in the crucial (and most valuable) breakfast slot but better to have them in the afternoon than not at all.

The Australian radio market has mostly avoided the carnage of the internet advertising swoop which has impacted print media the hardest and perhaps some television advertising as well. Radio has held a steady 8.5% of the Australian advertising market spend for the best part of a decade or more.

Post all this activity, APN might resemble a decent small cap stock once again, subject to any further sizeable impairment of its balance sheet intangibles.

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