Media industry consolidation makes sense but there are challenges with broadcaster ARN Media’s proposal to takeover competitor SCA, according to market analysts.
Investment bank Morgan Stanley has been under-impressed with radio for some time.
“Essentially as we have a more bearish view than consensus on the outlook for revenue, earnings and asset values of FM radio assets, and that continues to be our base case,” analysts write in a note to clients.
ARN and private equity firm Anchorage Capital Partners, made a complicated offer, in October last year, which valued SCA at $330 million, made up in part cash and part shares.
SCA shareholders would get 0.753 ARN shares and 29.6 cents cash per SCA share. ARN has since increased the ARN exchange ratio to up to 0.870 ARN shares per SCA share, subject to the satisfactory completion of outstanding due diligence.
Under the proposal, the assets and liabilities of ARN and SCA would be allocated between ARN NewCo and a privately held vehicle by the private equity firm.
“We believe further media industry consolidation makes sense,” say the Morgan Stanley analysts. “But there are several challenges with the ARN deal.”
It is necessarily complex, to avoid a breach of media ownership laws.
Not all key details are public yet, making the deal difficult to analyse.
And the offer is mainly shares (25% cash, 75% shares) so SCA shareholders still end up owning a FM radio company.
“Fundamentally we see a lot of merit in putting 2x FM radio groups together,” say the analysts.
“But a central problem is the media rules, which prevent the maximum cost-out potential.”
SCA’s LiSTNR could be the key in ARN's takeover.
“If the proposal goes ahead, we expect ARN would close its iHeart app ... and shift all the talent + all content (podcasts) + all cross promotion of both radio groups into LiSTNR as a single audio streaming platform.
“That we believe would make both strategic and financial sense.”
iHeart Australia is a licensed entity, and not home grown like LiSTNR.
Morgan Stanley says LiSTNR is becoming a valuable asset but is still in start-up mode and not meaningfully profitable yet.
“It is not clear yet that LiSTNR can grow revenues (and EBITDA) sufficiently fast to offset the decline in traditional linear radio (and TV) businesses.”
LiSTNR generated $21 million of revenue in the 2023 financial year, representing 4% of total revenue of $506 million.
However, the analysts believe LiSTNR is developing into an important piece of the Australian radio and media industry ownership puzzle.
Traditional radio listenership is falling and its audience is ageing, driving structural decline.
“As the aggregate time spent-with-radio falls, this inevitably means radio's share of total advertising budgets in Australia will also fall,” the analyst say
Streaming audio platforms have grown over the last decade in Australia and continue to grow strongly, both in terms of users-subscribers and time-spent.
Industry analysts at Telsyte estimated there were 16.6 million streaming music subscriptions in Australia. The top services are Spotify, YouTube and Apple Music.
Global players dominate the digital streaming market but LiSTNR is the largest local competitor with about 2 million registered users.
The Morgan Stanley analysts see LiSTNR as a rare opportunity for a local radio company to compete.
“In our view, it has strategic value, particularly because it could scale-up. We have a positive fundamental view of LiSTNR, as a product and as an advertising platform," the analysts say.
“Whenever we talk to industry contacts/advertisers we consistently hear positive feedback, we feel it will continue to see growing advertiser demand and strong growth in advertising revenues.”
The analysts we believe LiSTNR could grow users and revenue even faster if owned by a larger media group.
“Scale matters in a digital world,” they say.
“If there were multiple radio (or wider media) groups promoting LiSTNR this should boost registered users, not just because of brand awareness, but because of the benefit of having more proprietary digital content, which could assist making LiSTNR a larger player in the digital advertising market, better able to compete against the global competitors.
“An enlarged LiSTNR, with more ad inventory to sell, would likely be better positioned to build an even more sophisticated range of ad products and ad tech stack and with the benefit of more first party data.
“Where we could be wrong? Perhaps the Australian audio market evolves differently to the US, if the local AM-FM stations work collaboratively and are able to broaden their digital offerings to capture more listeners to their live streams + catch-ups + podcasts, etc, and if they are more successful marketing to audiences under 65, and particularly the 18-29 years demo. It's possible, but we think relatively unlikely.”
Morgan Stanley values LiSNTR to $105 million.
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