A proposed merger between United Business Media and Informa has been greeted as a credible combination of two complementary business media groups, timed to take advantage of private equity buyers’ new found financial limitations.
By striking now, analysts say, UBM hopes to create a FTSE 100 company through exploiting a perceived inability of financial sponsors to make multi-billion pound bids over the heads of companies constrained by a higher cost of capital.
Investor reaction, however, shows the deal may test the extent to which private equity buyers are really on the back foot.
Shares in UBM reacted well, rising 2 per cent or 12½p to 618p. Informa’s shares shot up 13.3 per cent or 51¼p to 437½p as investors bet the nil-premium proposal may flush out a private equity offer.
Providence Equity Partners, an unsuccessful bidder for Emap’s trade shows and trade magazines this year, is known to be examining Informa, although it has
not yet made an offer.
Cinven and Candover, the private equity groups that bought the Springer scientific publishing business in 2003, are also considering whether to renew their approach to Informa, although almost certainly without the 630p-a-share price tag offered last year.
An alternative may be for Cinven and Candover to sell to or partner with another financial group, allowing them to combine Springer and Informa under private ownership.
Analysts believe Apax Partners, which bought Emap’s business-to-business assets and also owns Incisive Media, could be tempted by Informa. But industry executives say its inability to combine the two businesses it already owns, because of the terms of their debt, makes this look less likely.
In the absence of synergies from a Springer-Informa style combination, unaligned bankers question what a private equity buyer could bring that UBM cannot.
Cost synergies between the two are not expected to be large. Patrick Yau, the former Ingenious Securities analyst who floated the idea of a UBM-Informa merger last month, estimates they would amount to £21.2m, or about 1 per cent of combined revenues.
But a financial buyer may not have its usual capacity to beat such synergies by imposing higher debt levels on the business.
Informa’s net debt already amounted to 4.3 times earnings before interest, tax, depreciation and amortisation at the end of 2007, Collins Stewart noted, and it is not clear how easily a bidder could renegotiate the loans.
Informa’s debt – accumulated as it bought Taylor & Francis, IIR and Datamonitor – has weighed on its shares, which had fallen 32 per cent in the year before jumping back.
UBM, by contrast, has faced criticism for being undergeared, with net debt of 0.8 times earnings before interest, tax, depreciation and amortisation at the end of 2007. Combining the two would address both companies’ balance sheet concerns, leaving an investment-grade group.
Both companies would also find cross-selling opportunities and would benefit from combining UBM’s strength in Asia with Informa’s Gulf presence.
UBM holds another card. Informa’s expansion was steered by Peter Rigby and David Gilbertson, its chairman and chief executive. Mr Gilbertson’s defection in March to run Emap broke up the partnership, but the gap could be filled by David Levin, his opposite number at UBM.
Although billed as a merger of equals, Informa is the bigger business by sales, profit and enterprise value. On the basis of operating profits, Informa shareholders could lay claim to 60 per cent of the merged company.
There are reasons for structuring the deal as an acquisition by UBM, however, ranging from UBM’s higher price-earnings ratio to the fact that UBM is negotiating to move its tax residence to Ireland.
Such issues are likely to leave UBM and Informa negotiating for weeks, giving shareholders and potential bidders plenty of time to consider whether a counter-strike is feasible.
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