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What you need to know about the Seven West Media share price surge

The Seven West Media Ltd (ASX: SVW) share price is surging higher again as its new chief executive James Warburton is wasting no time to put his stamp on the future shape of the company.

The Seven West share price rallied 10.4% to 42 cents during lunch time trade as the media group announced the sale of its magazines business this morning.

The divestment comes hot off the back of Friday’s announcement that the group was acquiring Prime Media Group Limited (ASX: PRT) and selling its Redwave radio division to Southern Cross Media Group Ltd (ASX: SXL) for $28 million.

An extra $70m to play with

Seven West said it would sell its Pacific Magazines business to Bauer Media for $40 million in cash. This represents a respectable 4.9 times enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/EBITDA ) multiple based on the 2019 financial year.

Seven West will also receive $6.6 million in advertising credits to use on Bauer Media’s publications over three years. Both parties have entered into agreements that include the ongoing production of Better Homes and Gardens television programme and sharing lifestyle content under a long-term agreement.

The proceeds from the sale of Pacific Magazines will be used to further pay down debt and improve the group’s balance sheet.

JP Morgan estimated that the deal to sell Rewave and merge with Prime Media will lower Seven West’s leverage to 1.7 times by the end of the current financial year compared with 2.3 times in FY19.

“The deal [to buy Prime] is expected to be immediately accretive and we estimate 13% earnings accretion in FY20,” said the broker.

“We view the deals as a positive for the company as it helps reduce net leverage while expanding its audience reach to 90% of Australians and leveraging its core TV content assets.”

Expect more M&A in the sector

The nearly $70 million in cash from the sale of Redwave and Pacific Magazines also gives management a war chest to hunt for more acquisitions as the industry consolidates in the face of the disruption caused by the internet.

JP Morgan has an “overweight” (equivalent to “buy”) recommendation on the stock with a target price of 65 cents a share, although the valuation doesn’t account for the Pacific Magazines transaction.

Seven West isn’t the only media company that’s active in mergers and acquisitions (M&As). Nine Entertainment Co Holdings Ltd (ASX: NEC) bought Fairfax Media in a $4 billion deal last year to create the country’s biggest media organisation.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia has recommended Nine Entertainment Co. Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.