This article first appeared in The Edge Malaysia Weekly on May 15, 2017 - May 21, 2017

AS one of the largest media groups in the country, Media Prima Bhd is traditionally associated with the television and newspaper industries. What some did not realise, until recently, was that the group had a dedicated unit for the digital business called Media Prima Digital, whose latest move to acquire Rev Asia Bhd’s assets for a whopping RM105 million sends a clear message that it wants to be a serious player in the digital game.

The proposed acquisition of Rev Asia Holdings Sdn Bhd (RAH) will instantly extend Media Prima’s digital audience reach to 10.4 million — the highest among all Malaysian companies in the field and behind only Google’s 15.7 million and Facebook’s 14.1 million. Brand names in RAH’s stable include OHBULAN, SAYS.com, Viral Cham, Rojaklah, 8share, MyResipi and SirapLimau.

In an interview with The Edge, Media Prima Digital CEO Rafiq Razali reveals the reasons behind the acquisition and details the synergies as well as earnings potential.

“There are three main reasons why we believe this is a great acquisition. Firstly, the organisation is profitable and will be immediately earnings accretive to us. Also, we like their team and we can achieve great synergy with them as well as tap their expertise in sponsored content,” he says.

“Media Prima saw a good increase in digital advertising revenue between 2015 and 2016 because we moved into ‘audience sales’ instead of pure banners. This is as we developed our data ecosystem last year, and that has brought benefits to the group. RAH will benefit greatly from what we built last year. This acquisition will give us access to larger first-party data, so our data pool will be richer. We now have about 50% of the internet population in Malaysia, which means our yield on existing inventory will increase. Once we hit maximum synergy, which might take about two to three years, we project that this alone can provide an uplift of RM10 million per annum in revenue.”

Cross promotion between Media Prima’s current products and services and RAH’s assets is expected to deliver RM10 million to RM15 million incremental revenue, Rafiq adds.

“Media Prima currently makes most of its digital revenue from display and video business advertising. We want to move into the higher-margin, sponsored-content business. But, of course, there will be a gestation period and perhaps we might never realise its full potential,” he says.

“This acquisition accelerates the process by tapping RAH’s content expertise and we can now move into the sponsored-content business with our existing assets, such as our print titles, Studio 8 — which is our multi-channel network asset — and new portals that we may launch. We project that this can deliver RM8 million to RM10 million in revenue.”

When asked about the RM105 million price tag, Rafiq opines that it is fair. “We engaged Deloitte as a third party to help us formalise an independent valuation and also to perform due diligence. They used multiple methods to arrive at their recommended range of between RM100 million and RM118 million.

“Also, compared with past deals in the online space, the price is not high. For example, JobStreet was transacted at 9.9 times revenue and 21.8 times Ebitda (earnings before interest, tax, depreciation and amortisation) while REA Group’s acquisition of iproperty was done at 25 times revenue and 375 times Ebitda. Ours was done at 3.5 times revenue and 16.2 times Ebitda.”

In its financial year ended Dec 31, 2016 (FY2016), Rev Asia’s net profit more than doubled to RM5.9 million from RM2.2 million the year before, in line with a 31.8% improvement in revenue to RM23.5 million. In its filing with Bursa Malaysia, the listed parent company says the better performance was driven by its social media and online media business, which saw a combined revenue growth of 95%.

In FY2016, Media Prima Digital registered a segment profit of RM330,000 versus RM9.4 million in FY2015. Nevertheless, without its tax savings of RM10.8 million in FY2015, the digital business would have slipped into the red. This also means FY2016 was the first year the segment made a profit.

This year, says Rafiq, the digital business hopes to increase its profitability by riding its existing lab business and increase in digital advertising yield.

Public Investment Bank Research believes the RAH acquisition will be positive for Media Prima in the long term as it fits the group’s strategy to focus on expanding the digital content and digital media platforms in order to reduce its dependency on its traditional revenue base. “Nevertheless, we think weak adex (advertising expenditure) sentiment, high cost of new initiatives and long gestation phases will remain a key concern for Media Prima in the near term,” it says in a May 9 report.

The research house says the RM105 million price tag seems fair, considering the potential earnings generated by RAH and the opportunity to expand Media Prima’s digital business by leveraging the internet and social media.

AmResearch, meanwhile, views Media Prima’s efforts to wean itself off traditional advertising revenue positively. “The purchase of RAH will be funded through internally generated funds. Currently, Media Prima is in a net cash position of RM75 million. Pursuant to the purchase, Media Prima will record a net debt of RM30 million and net gearing ratio of 0.02 times, which is healthy. Management has said the purchase will not affect its ability to sustain dividend payments.”

Maybank Investment Bank Research says the acquisition’s valuation is fair but believes RAH will not accrete earnings immediately.

On potential cost savings from the proposed deal, Rafiq says the group projects up to RM1.5 million a year in operating expenditure, predominantly from systems and tools, and distribution. “Cost saving is not our primary objective. Our No 1 commitment is to grow the business together. We are willing to forsake cost saving if it is likely to impact the existing great culture of the team or synergy that would lead to revenue growth because those are our bigger priorities.”

He points out that when it comes to the digital game, it is all about the audience base. “We are acquiring a base that we don’t have now. The majority of our digital base is the mass market and above-35 segment. What RAH is offering is the 18 to 35 segment, which we sorely lack.”

At 32, Rafiq may be one of the youngest CEOs of a listed company’s unit but he is a veteran when it comes to the new digital world. Holding a Bachelor of Science degree in actuarial science, he cut his teeth on a number of tech-related businesses before starting at Media Prima. He joined Groupon Malaysia in 2011 and was its country general manager for Malaysia when he left to jointly set up KFit in 2015. KFit was a start-up that provided a mobile application for users to plan their wellness activities, such as gym and fitness studio membership and related activities. It rebranded itself as Fave in the second half of last year when it acquired Groupon Malaysia.

Rafiq left KFit to join Media Prima in April last year. The RAH acquisition is his first major deal at the company. Certainly, all eyes will be on him and his team to watch how they drive their business with this latest initiative in the ever-changing digital landscape.

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