Shares in UBM (LSE: UBM), the events-led marketing services and communications company, were down 1.7% in early trading today as management presented the company’s new “Events First” strategy.
As its name implies, the strategy aims to capitalise on the strength of the company’s Events business, which accounted for 73% of profits in 2013. Due to the fragmentary nature of the Events market, UBM has assigned between £25m and £50m per year to grow their portfolio through acquisitions.
This is not an alien strategy to UBM, who has recently completed many bolt-on buys. Today UBM reported that all regulatory requirements for the acquisition of Advanstar had been met, which will add a further 54 trade shows and 100 conferences to an already impressive portfolio.
Earlier this year the company purchased Seatrade Communications, a global shipping news publisher that holds a number of cruise and general shipping events, and Catersource, granting them ownership of the leading US catering trade show.
Acquisitions have been a successful source of growth for UBM, but it is comforting that management are willing to show intent by budgeting in advance. Acquisitions often destroy shareholder value, with management paying over the odds in a heedless attempt at empire building, but the strict guidelines in place for “Events First”, allay most of my fears.
The requirement for an acquisition to provide a “return on investment greater than UBM’s weighted average cost of capital in the first full year of ownership”, coupled with the predictable earnings events generate, should protect the company from serious downside.
Management are also seeking organic growth by focusing on their top 100 shows by revenue. These higher margin shows accounted for 96% of Events EBITA last year, with the final 4% being generated from more than three hundred other shows. UBM believe they can grow these top performers through the sharing of operational best practice across the company and further collaboration between marketing and customer relationship management.
UBM hopes that Investments in data acquisition and analysis will also help them provide better services to customers, while the on-going alignment of the ‘Other Market Services’ business segment with the Events segment will also aid the effectiveness of existing shows. The company plans to exit any ‘Other Marketing Services’ area that provides no synergy to the core business.
The aforementioned strategy is expected to cost around £30m between 2015 and 2017 and is expected to provide savings beginning in 2016. An annual saving of £10m is expected once these programs are complete.
Management said that group revenue growth in 2015 will reflect the change of strategy, implying lower revenue in the short term. Margins should remain stable before the additional implementation cost, with upside expected in the medium term. The strategy has had no impact on the progressive dividend policy, with the board targeting two times adjusted earnings coverage.
I think management’s awareness of their market and focus on growing already successful shows is the correct long-term approach to creating shareholder value, but whether or not UBM is a buy is up to you.
