Today, Trinity Mirror (LSE: TNI) has announced its proposed acquisition of all of the shares in Local World Holdings Limited not already owned by the company for a total consideration of £187.4m.
The deal will transform Trinity Mirror into the UK’s largest regional news publisher, giving the group the size and scale needed to navigate a falling demand for printed newspapers.
What’s more, the Local World acquisition will boost Trinity’s digital reach, accelerating the group’s digital transformation. The enlarged Trinity-Local World group will have a network of publishing websites delivering 120m monthly unique browsers and 790m monthly page views. In comparison, MailOnline, the world’s biggest English-language newsbrand recorded a 199m monthly unique browsers at the end of last year.
So this deal has helped Trinity build a pretty hefty digital empire.
To fund the deal, Trinity is using £67.3m of existing cash resources and raising just over £40m by issuing new shares. Further, the company has entered into a new £80m five-year debt facility with its lenders.
A good deal
More often than not, companies seeking growth at any cost overpay for acquisitions — but it doesn’t look as if Trinity is overpaying of Local World. Indeed, Local World generated revenue and adjusted operating profit of £221m and £39m respectively in 2014.
Trinity owned 20% of Local World before today’s announcement and today’s deal values Local World at £220m. On that basis, Trinity is paying just under one times sales for Local World, or 5.6 times adjusted profit.
If you factor in expected cost synergies of £10m to £12m, which are expected for the second full year of ownership, the figures suggest that Trinity has acquired Local World at a very attractive valuation.
Time to buy?
So does Trinity’s deal to buy Local World make the company an attractive investment? Well, Trinity’s local newspaper business has been struggling with declining revenue for years now, and the declines are showing no concrete signs of slowing.
During the second quarter, underlying revenue declined 10% year-on-year. The third quarter saw a similar decline of 7%.
With this being the case, Trinity’s fortunes depend on the success of the company’s digital strategy. To further this strategy the company recent hired Steve Hatch as a non-executive director. Mr Hatch is the regional director of Facebook UK & Ireland and before joining Facebook he worked at some the UK’s top advertising agencies, including WPP.
Mr Hatch’s appointment combined with the higher digital audience figures acquired as part of the Local World deal shows that Trinity is going all out on its digital strategy.
Up to you
There’s no doubt that Trinity is undergoing a tremendous transformation, and the company’s valuation reflects that.
Trinity currently trades at a forward P/E of 5.1, and City analysts expect the company’s earnings per share to decline at a rate of around 1% per annum for the next three years. Revenues are set to fall by 15% over the same period.
And with this being the case, only you can decide if Trinity is suitable for your portfolio and fits your risk tolerances.
