photon pitches to murdoch

THE One.Tel decision may be an unwanted distraction for Lachlan Murdoch but the News Corporation director continues to get on with the business of kicking the tyres of Australian media companies.

One outfit that is believed to have given a presentation to Mr Murdoch in recent weeks is Photon Group, the $311 million market services company controlled by executive chairman Tim Hughes and media stalwart Reg Grundy.

Mr Murdoch set up a private investment business, Illyria, in 2005 shortly after standing down from executive duties at News Corp, publisher of The Australian.

He has since made several forays into the media sector, making an ill-fated $3.3 billion bid for James Packer's Consolidated Media Holdings early last year and taking a 9 per cent stake in Paul Ramsay's Prime Media Group in April.

Sources described Mr Murdoch's talks with Photon as informal and general and said it was too early to tell if they would develop into any type of investment by Illyria. It is worth noting that media reports have linked Mr Murdoch to other media industry purchases and not all eventuate. Spokesmen for Photon and Mr Murdoch's office declined comment.

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Nevertheless, news of the discussions come at a critical juncture for Photon, which has emerged from the downturn in solid shape -- net bank debt should fall from $260.8m to $186m in the 2010 fiscal year after a $115m rights issue in August -- and a number of strategic options to consider.

These include whether or not to revive plans to spin off the company's internet and e-commerce division, a list of potential acquisitions in Australian and the US as well as the resolution of its takeover of listed internet business Dark Blue Sea.

Since floating in 2004, Photon has attracted two main criticisms; it has relied too heavily on a growth-by-acquisition strategy and its vast collection of internet, communications, field marketing, advertising and consumer research companies are not always a sensible or profitable fit.

Mr Hughes, who returned this weekend from Europe, is a keen deal-maker.

Photon was founded in 2000 with three companies. This number had grown to 13 by the time of listing, and the group is now made up of 49 independent companies.

However, he made a point of putting his chequebook away after spending $36.7m on London-based media strategy company Naked Communications.

This decision was partly driven by the fact the financial crisis meant the investors were very reluctant to allow any company to take on additional debt for acquisitions, particularly when UBS analyst Lauren Moran also points out Photon faces $116m in future earnout liabilities over the next three years, $68m of which falls due in the 2010 financial year.

Photon believes the capital raising means that earnouts will be covered by existing debt facilities. The group also argues that last year gave Photon the chance to prove to the market that its model could generate organic growth through the rough patches of the economic cycle.

Mr Hughes argues that Photon's five divisions -- field marketing, internet and e-commerce, advertising, specialised communications and strategic intelligence -- are well placed to take advantage of the advertising shift from mass media such as newspapers and television to direct-to-consumer channels. Now that the funding environment has eased expect more bolt-on acquisitions that fill gaps in the portfolio.

Mr Hughes's northern hemisphere trip took in the company's existing operations -- 35 per cent of underlying earnings comes from Britain, North America and Europe -- and is believed to have examined several new opportunities.

During a year when many global marketing services firms struggled, Photon's net profit was virtually flat at $21.4m for the 12 months to June 30 while like-for-like revenue growth was up 7 per cent and underlying earnings 8 per cent stronger.

Photon's various groups specialise in areas such as internet, mobile and point-of-sale marketing, and the idea that clients of one business may turn to others for different services.

Just as importantly, the field marketing unit (whose companies include Ausrep and Club Sales), and internet and e-commerce (whose companies include C4 and The Found Agency) have turned out to be counter-cyclical. The two divisions accounted for 56 per cent of total underlying earnings in 2008-09.

Nevertheless, Photon and local rival STW Communications Group continue to be discounted by the market, trading at high single digit price/earnings multiples that are often half that of traditional media companies such as Fairfax Media Group or Ten Network Holdings.

This has led to speculation that a $120m-plus spin-off of the internet and e-commerce units may be back on the agenda given it would realise more value for investors as a separate entity.

It seems likely it is this part of the business that pricked Mr Murdoch's curiosity.

Photon tested the waters with a beauty parade of investment banks in the first half of this year but settled on the capital raising at a weighted average issue price of $1.57 a share instead.

Mr Hughes and Mr Grundy, who have a long association, took up their rights and kept their combined stake at 33 per cent. The shares are up 11 per cent on the average issue price but Mr Hughes will no doubt be looking to generate a more positive reaction in the second half of the fiscal year.



http://www.theaustralian.com.au/business/media/photon-pitches-for-murdoch-backing/story-e6frg996-1225801828509