Trinity Mirror (LSE: TNI) has surged around 7% higher today after it released news of a long-flagged proposed acquisition.
It plans to purchase Northern & Shell’s publishing assets for a total purchase price of £126.7m. This is made up of an initial cash consideration of £47.7m, deferred cash consideration of £59m payable between 2020 and 2023, and the balance of £20m to be made through the issue to the seller of 25.8m new ordinary shares.
In addition to the total consideration, Trinity Mirror will make a one-off cash payment of £41.2m to the Northern & Shell Pension Schemes. A recovery plan through to 2027 has also been agreed, with total payments of £29.2m.
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Purchase rationale
Trinity Mirror believes that the purchase of the assets, which include the Daily Express and Star, will improve its print and digital editorial propositions. This will be done through a fall in duplication, as well as through the sharing of content. It is also hoped that the combination will provide advertisers with a large, high quality audience which includes a combined digital audience of 234m monthly unique browsers.
There are also expected to be annualised cost synergies of £20m by 2020, with a significant amount of them set to be achieved in 2019. The deal is due to be materially earnings enhancing in the first full year of ownership, while a more robust revenue mix could allow higher cash flows to be generated over the medium term.
The acquisition is also expected to create a more resilient entity. Circulation revenue is forecast to represent nearly half of the enlarged company’s revenue, which places less reliance on print advertising. This seems to be a positive outcome, since the opportunity for growth in digital advertising may prove to be greater than for print advertising in future years.
Investment potential
Alongside its announcement of the acquisition, Trinity Mirror also released a trading update on Friday. It showed that the company is on track to deliver performance in 2018 that is in line with expectations. It also expects to report adjusted results for 2017 which are marginally ahead of consensus forecasts.
The company has, of course, endured a rather mixed recent period. Like many publishing groups, it has found the transition towards a more online-focused business model to be challenging. As such, its financial performance has come under pressure at times in recent years. So too has its share price. It is down 42% in the last five years and has been on a downward trend in recent months.
Due to its disappointing share price performance, the company now trades on a price-to-earnings (P/E) ratio of just 2. This suggests that it offers a wide margin of safety and could deliver improving share price performance in future. While today’s acquisition may not be a game-changer for the stock, it could prove to be a positive catalyst on its overall performance in the long run.
