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Should investors buy into the Nine Entertainment float?

With today’s release of Nine Entertainment’s prospectus for an initial public offering (IPO) of shares – you can get a copy here — the next few weeks will be filled with a flood of information and analysis as investors work through the accounts and offer details line-by-line.

For retail investors the offer is due to open on the 12th of November and to close on the 29th of November; with a final price yet to be determined, the actual cost to purchase stock won’t be known until the 5th of December.

For now, investors are being told that the indicative price range for the 125 million new shares to be issues is between $2.05 and $2.35 per share, which equates to a market capitalisation of between $1.9 billion and $2.2 billion.

With many IPOs expected to list in the upcoming months, it is important for investors to keep a level head and as always focus on the underlying value of the company. The IPO process generally creates much buzz and excitement and often headline-grabbing announcements, particularly whenever a company lists (begins trading) at a premium to the IPO price. While the enticement of a ‘stag’ profit is of course alluring, investors should remember that firstly there is no guarantee of a ‘stag’ profit and secondly, ultimately it is the underlying earnings of a business that determines value.

With a view to determining value, investors considering buying into the Nine IPO should take the time to review other similar media companies, in particular the most recent results and outlook statement from Seven West Media (ASX: SWM), Southern Cross Media (ASX: SXL) and Ten Network (ASX: TEN).

Not only will these peers provide a barometer for analysing the prospectus and specifically, the forecasts provided by Nine’s management for the 2014 financial year, but investors can also consider the relative value they would receive from buying into the Nine IPO compared with an on-market purchase of one of the peer companies.

Foolish takeaway

As Warren Buffett reminds investors, price is what you pay, value is what you get. These are important words to keep in mind when faced with a situation where knowledgeable and informed insiders are selling to outsiders.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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