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Why APN Outdoor Group Ltd (ASX:APO) is raising its Adshel offer

APN Outdoor Group Ltd (ASX: APO) improved its offer for Adshel, the outdoor advertising business of HT&E Ltd (ASX: HT1). After having submitted a $500 million proposal in May, APN is now ready to spend $540 million.

Transaction details

The bid comprises a scrip component of 54 million APN shares. Today, shares in APN are down 2% to $6.42, which would make that scrip consideration worth $347 million.

However, the company values the scrip at a more conservative $310 million, based on a 5-day average price of $5.73 calculated before APN’s 12% share price hike recorded on Thursday, when the stock soared on the news that APN itself had received a takeover offer from JCDecaux.

JCDecaux’s bid will probably be rejected. On Thursday, APN stated that the proposal represented a modest premium to its previous closing price.

The remaining $230 million cash consideration would be funded with new debt, lifting APN’s net debt/EBITDA ratio to 2.4x. Leverage would then decline to 2x by 31 December 2019 thanks to synergies.

The transaction is conditional on due diligence, APN shareholders’ vote, and approval from competition regulators in Australia and New Zealand.

Strategic rationale

Adshel’s FY18 pro forma EBITDA is estimated in the range of $48 million to $50 million, implying an EV/EBITDA multiple of around 11 without taking into account cost synergies, expected to be in excess of $15 million per annum. The acquisition would be high-single-digit EPS accretive for APN. One-off integration costs would amount to $12 million.

With the acquisition, APN would grow and diversify its out-of-home assets. The company sees a great opportunity in the out-of-home market, as the industry has growing audiences, but its share of total advertising spend in Australia remains inferior to international markets.

Furthermore, out-of-home advertising is transitioning from the traditional billboards to digital technology that can improve its outreach and allow more advanced data analytics, generating greater return on investment for advertisers. APN intends to accelerate this transition in Adshel, which is still at the initial stages of digitisation.

Foolish takeaway

It looks like the advertising industry is entering a phase of concentration, with multiple parties competing to make acquisitions that would increase scale and synergies. HT&E had also received an offer for Adshel from oOh!Media Ltd (ASX: OML), which now could make a counterproposal.

JCDecaux might increase its offer for APN, but has posed the condition that APN doesn’t proceed with the acquisition of Adshel. Given the complexity, I’ll be watching from the sidelines.

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