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APN News and Media Limited rockets up 4% on demerger talk: Should you buy?

What: Shares in APN News and Media Limited (ASX: APN) rocketed up 4.05% on Tuesday, closing at $0.77 after the company announced it was considering spinning off its APN New Zealand division as a separate listing, among other options. APN has radio, print and digital businesses in NZ with such leading brands as The New Zealand Herald, Newstalk ZB, ZM and GrabOne.

The NZ business interacts with 2.1 million people weekly through the various media outlets. In the first half of FY 2014, it had revenue of $135.6 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $22.7 million. It contributed 32% of total group EBITDA.

So what: After hitting a bottom in June 2013, the stock has risen 250% from $0.22 to $0.77 – a killing for any investor from such an unlikely source! The company is realigning its business, similar to Fairfax Media Limited (ASX: FXJ). The traditional print media leaders are making the change over to digital, interweaving it into the print media to maximise advertising exposure to viewers.

Even if a spin-off occurs, APN can keep a sizeable stake in the new listing for influence and continued coordination of business between Australia and New Zealand. The New Zealand business has been estimated to be worth around $500 – $540 million. It is believed to have a stronger valuation within the NZ market than in Australia. The flagship newspaper The New Zealand Herald and The Radio Network are market leaders there.

Now what: What is also interesting is that Australian media laws may change in the short term. The proposed changes would allow companies to increase their ownership of TV, radio and print businesses in major advertising regions.

If this takes place, there could be a quick consolidation in the industry as larger media companies like Fairfax Media, News Corp (ASX: NWS) and Nine Entertainment Co Holdings Ltd (ASX: NEC) may move to increase their business footprints. I would watch APN’s spin-off plans closely. What may be an attractive spin-off prospect may also turn into a potential takeover of APN or the proposed demerged company.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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