In an effort to understand why SWM will deliver multi-bagger share market returns within the next 18 months (By September 2025) let’s take a look at the Prime Media acquisition.
Most observers and shareholders still don’t fully appreciate just how good of a deal maker SWM has become after James Warburton and Jeff Howard joined the company and why compared to other media entities they continue to massively outperform on acquisitions like Prime Media. The reality is that the majority of M&A is value destroying rather than value accretive to shareholders. The ASX is littered with examples of hubristic deal making that only ends up costing shareholders their hard-earned capital. According to an examination of 1000 of the largest M&A deals over the past 50 years by Aoris Investment Management 60% of M&A deals failed to create shareholder value. https://www.copyright link/chanticleer/why-most-m-and-a-deals-fail-20210721-p58bpf
The Prime Media (PRT) acquisition was a deal that James Warburton and Jeff Howard patiently waited over 2 years to execute in order to ensure that it would be heavily accretive for shareholders. The backstory to the acquisition was written up by Zoe Samios in the SMH for anyone who is interested. disallowed/business/companies/behind-the-two-year-battle-of-the-billionaires-for-prime-media-20211104-p59653.html
The PRT deal was entered into on 1 November 2021 for a total cash consideration of $131.88m. At the time SWM already had a 14.9% stake which they acquired during a prior all script takeover offer for PRT in 2019 which failed.
The Independent Expert Report by Lonergan Edwards & Associates gives a good summation of the Prime deal.https://hotcopper.com.au/threads/ann-notice-of-extraordinary-general-meeting-proxy-form.6436103/?post_id=57744317
Basically at the time of acquisition PRT was generating approx. $25m in EBITDA. Despite the headline figure of $131.88m for the acquisition SWM actually achieved a much better net price for a number of reasons including- As part of the transaction SWM acquired the cash held in various PRT subsidiaries amounting to approximately $30m.
- SWM received the special dividend and capital returns for its 14.9% holding in PRT leaving it with a net outflow of $85.6m which included all incurred transaction costs.(page 14 2022 Annual Report) https://sevenwestmedia.com.au/assets/Uploads/2022-Annual-Report-26-October-2022-Website-Version.pdf)
- SWM was then able to sell the PRT Sydney offices in Pyrmont during 2023 for approx. $5.6m noting that it still retains the ACT property which is valued at approx. $6.3m
- One of the most substantial assets that SWM acquired that is often overlooked is PRTs beneficial net working capital position of approx. $15.2m ( Page 19 of Lonergan Edwards & Associates Independent Expert Report https://hotcopper.com.au/threads/ann-notice-of-extraordinary-general-meeting-proxy-form.6436103/?post_id=57744317 ) . PRT as of 30 Jun 2021 had Debtors and prepayments of $35.6m with Creditors, accruals, deferred income and provisions of $20.4m. Even if we adjust this down to $12.4m to account for the approx. $2.8m in prepayments received by PRT this still leaves a significant net financial benefit that accrued to SWM shareholders upon acquisition.
- Upon the PRT acquisition being integrated with SWM they did not have suffer any unexpected increase in Trade receivable credit losses from the PRT business and hence SWM was able to benefit from this $12.4m.
These above transaction benefits then left SWM with a total net outflow for its acquisition of PRT of approx. $67.6m.
So what did SWM get for its net outflow of $67.6m for the Prime Acquisition noting that this currently costs approx. 6.6% per annum in interest costs to finance with its current debt facilities?SWM acquired PRT when it was earning approx. $25m EBITDA according to the Lonergan EdwardsIndependent Expert Report. SWM then immediately set about delivering significant cost and revenue synergies. - Within the first 12-18 months they added cost synergy benefits of $11m+ per annum (which was above their targeted $5m-$10m of cost synergies per year). This brought the EBITDA up to $36m.
- They also then gained the benefit of revenue synergies by promoting 7plus during regional broadcasts. Prior to the acquisition Prime had no economic incentive to support the uptake of 7plus and therefore since acquiring Prime in January 2022 Regional Users of 7plus increased 60% and Regional Minutes on 7plus increased 100% in the eight months to August 2022. This regional 7plus consumption has only continued to grow since then largely thanks to the ratings dominance of Prime in regional areas. Ad rates on 7Plus are currently 3x higher than that of Regional Linear Tv and therefore this revenue synergyhas undoubtedly delivered an additional $7m+ in revenue for SWM https://sevenwestmedia.com.au/assets/pdfs/2341059.pdf
- SWM set about driving an increase in premium integrated revenue at Prime which historically represented 30% of ad sales at Seven and minimal amounts at Prime. Higher ad rates were achieved due to this synergy between Prime and Seven. https://sevenwestmedia.com.au/assets/pdfs/2341059.pdf
- As a result of the acquisition SWM was able to sell ads to media buyers through a single platform which gave access to audiences in both regional and metro tv markets. This was a significant reason why the regional TV business at ASX:SXL lost even more market share during this period because not only was Channel 10 suffering in the ratings but it also took much more time and effort for media buyers to purchase regional audiences through SXL than it did to buy metro and regional ads with SWM. https://announcements.asx.com.au/asxpdf/20211231/pdf/454nwfgyhl6dyh.pdf
Collectively this brings the acquired EBITDA of the Prime business (including all revenue and cost synergies achieved so far) up to a figure of approximately $43M to 47.5M EBITDA (let’s just say $45m EBITDA for the sake of simplicity).
From this $45m of EBITDA we can then minus the EBITDA that SWMs 14.9% holding in PRT would have otherwise earned them even if the acquisition hadn’t taken place ($25m EBITDA X 14.9% = $3.7m Approx)
Outcome of Prime AcquisitionSWM is now left with an acquisition that produces in excess of $41.3m of EBITDA for a total cash outlay of approx. $67.6m and an annual interest cost of approx. $4.5m.This is to say nothing of the massive strategic benefits that have been achieved by SWM gathering greater scale in the media business …
No matter how you look at it that is one ridiculously attractive M&A deal that has actually delivered real value accretion to SWM shareholders. Spheria Asset Management agreed with this finding in its January 2022 Monthly Report when they also noted the value accretive nature of the deal that SWM managed to achieve. "
The acquisition of Prime Media (PRT- SWM’s regional TV affiliate) provides the company national reach and the ability to enhance its streaming service in regional markets. Putting aside the strategic benefits, SWM has paid an extraordinarily low multiple for PRT inclusive of cost synergies such that payback will be only 2-3 years … ‘ https://announcements.asx.com.au/asxpdf/20220216/pdf/4561bd11dqk627.pdf
As evidenced by the Prime acquisition, SWM since James Warburton and Jeff Howard joined the company has changed from a deal underperformer into an intelligent capital allocator. Ultimately intelligent capital allocation is one of the most important things a company must demonstrate and to be able to buy into a company that has demonstrated this skill whilst it is trading for cents on the dollar makes for a truly wonderful investment.
(20min delay)
