This article first appeared in The Edge Malaysia Weekly on October 23, 2017 - October 29, 2017

FALLING advertising expenditure and digital disruption have firmly put conventional TV and print businesses out of flavour with investors. But Media Prima Bhd, a conglomerate that draws the bulk of its revenue from the said segments, has seen a substantial rebound in its share price over the past month — up almost 25% to close at 85.5 sen last Thursday.

The rally comes despite widespread “sell” and “hold” calls by analysts after the company announced a substantial loss of RM132.9 million in its second quarter ended June 30. According to Bloomberg, the average 12-month target price by analysts was only 74 sen.

While Media Prima’s immediate earnings outlook may not justify the recent interest in the counter, perhaps a merger and acquisition exercise may.

Look past the loss-making operations and corporate raiders may see a company plump for asset-stripping. At 85.5 sen a share, Media Prima is trading at only 0.76 times net total assets. It is worth noting that the company owns several parcels of prime land that have not been revalued and are begging for redevelopment.

Coupled with aggressive downsizing of its loss-making businesses, there certainly could be a case to acquire Media Prima.

Of course, given the strategic importance Media Prima holds, such an exercise would be fraught with challenges. Recall that the company is partially controlled by Umno, which is led by Prime Minister Datuk Seri Najib Razak.

Interestingly, there has been one party that has actively acquired Media Prima’s shares — Morgan Stanley, on behalf of Mitsubishi UFJ Financial Group.

Since emerging as a substantial shareholder in Media Prima in early April, Mitsubishi UFJ has increased its holding to 8.93% as at Oct 17. Against Media Prima’s market capitalisation of RM948.4 million, Mitsubishi UFJ’s stake is worth RM84.7 million.

That is no small sum to invest in a loss-making company.

Media Prima has become the second largest holding of the Japanese investment fund in Malaysia, only behind CIMB Group Holdings Bhd where Mitsubishi UFJ has a 4.56% stake worth RM2.54 billion, based on Bloomberg data. In fact, with the exception of CIMB, Mitsubishi UFJ does not hold more than 0.02% in any one company and invests no more than RM5 million in each.

The Japanese fund’s peculiar buying activity — picking up several hundred thousand Media Prima shares each day since April — has certainly piqued the curiosity of investors.

And that raises the question: What value do the Japanese see?

The value proposition

Despite the headwinds Media Prima has been battling against, the group has a relatively healthy balance sheet.

It is not cash-rich but it is relatively light on debt. The only borrowing it has is a five-year RM300 million medium-term note. Interestingly, the debt expires on Dec 28. Based on Media Prima’s 2QFY2017 accounts (ended June 30), the group had RM286.9 million in cash.

However, about RM105 million would have been used for the acquisition of Rev Asia Bhd and Youth Asia Sdn Bhd, which was concluded on Aug 1. This leaves the company with a net debt of RM118.14 million or a net gearing of 9.5%.

Against this backdrop, Media Prima has 56 acres of land, valued at RM230 million in its books, including buildings (see table on page 61). Naturally, its most attractive parcel is occupied by The New Straits Times Press (M) Bhd’s headquarters in Jalan Riong, Bangsar. The 3.5-acre of freehold land is worth only RM46.84 million, or RM308.69 psf, in Media Prima’s books.

Despite the weak property market, property consultants say the land could easily fetch RM600 psf, though it would be on the low end. Realistically, the tract could fetch as much as RM800 psf or even up to RM1,000 psf if the purchaser is confident of securing a higher plot ratio.

Recall that “Property Rationalisation” is one of the cornerstones of Media Prima’s cost optimisation plan and involves identifying and monetising non-productive properties.

Two land parcels clearly fit this bill — the group’s printing plants in Senai, Johor and Ajil, Terengganu.

There has been market speculation that the group is looking for potential buyers for the land, but channel checks reveal that the properties are not officially on the market.

Based on its book value, Media Prima has a net total asset of RM1.12 per share. Stripping out intangible assets of RM431.55 million, it has net tangible assets of 75 sen a share.

Against this backdrop, it is not all doom and gloom for the country’s largest media group. Print and TV may have performed abysmally, but the group’s home shopping and out-of-home (OOH) advertising segments have been doing rather well.

Home shopping revenue more than doubled to RM59.7 million in the first half of this year. The venture, which targets Malay housewives aged 27 to 50, is still loss-making. However, it is expected to break even by late next year.

OOH revenue, which refers to advertising outdoors and in malls, grew 9% y-o-y to RM90.28 million. This is one of the group’s more promising segments with a profit after tax (PAT) margin of 17% and a PAT of RM14 million in the first half.

Another selling point of any merger exercise would be cost-cutting. No acquirer likes to talk about it, but trimming headcount is one way to create quick value.

The last time Media Prima had sizeable layoffs was in 2014 when it shed 10% of its headcount via a mutual separation scheme. But since then, its revenue has fallen about 19% (1HFY2014 versus 1HFY2017).

Media Prima had about 4,150 employees as at end-2016, of which 23% were non-permanent, notes Kenanga Research in a report.

It is worth noting that the group this year undertook an Early Retirement Scheme targeting senior staff.  A broader reduction in workforce is still anticipated.

Lastly, the group is in the middle of what analysts have described as a kitchen-sinking year. Recall the RM142.43 million writedown on the group’s 21.4% associate — Malaysian Newsprint Industries Sdn Bhd, which is undergoing a voluntary winding-up.

This has substantially depressed Media Prima’s valuations, making it more lucrative for acquisition.

Who and when?

The most obvious suitors for Media Prima are those with potential synergistic benefits. This narrows it down to telecommunications companies and broadcasters.

Maxis Bhd, DiGi.Com Bhd, Axiata Group Bhd, Telekom Malaysia Bhd, Time dotCom Bhd and Astro Malaysia Holdings Bhd are the most likely candidates.

Of the above, Maxis and DiGi are seen as unlikely due to their major shareholders. Media Prima is seen as a company that needs to stay within the control of the government.

More likely candidates would be Axiata and Telekom. Axiata is 36.6% controlled by Khazanah Nasional Bhd while Telekom is 26.21% controlled by Khazanah. (Note: Khazanah has a 20.69% stake in Astro.)

Either Axiata or Telekom would have huge synergy with Media Prima. Such a merger would allow Media Prima to leverage the telecommunications infrastructure to distribute its TV and radio content.

Both companies have capex-intensive businesses, carry a lot of borrowings and are in net debt. However, both also have a lot of cash — Axiata and Telekom have RM7.37 billion and RM1.55 billion respectively. In contrast, Media Prima’s market capitalisation is less than RM1 billion.

That said, investors hoping for a payday on an M&A exercise should be cognisant of the fact that the acquirer could opt for the share-swap route.

Against this backdrop, however, it is unlikely that any M&A will take place before the 14th general election. The last thing the government would want is a complex merger exercise distracting the country’s largest news agency in the run-up to the polls.

Thus, there could be a similar shake-up around the corner post-election, not unlike the massive job cuts of 2014, post-GE13. Only this time, it may involve an acquiring company.

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