Jagran Prakashan -Acquires Nai Dunia in an all-cash deal; Maintain BUY :Religare research

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Jagran Prakashan
Acquires Nai Dunia in an all-cash deal; Maintain BUY
JAGP, which owns India’s largest read daily Dainik Jagran, has acquired Nai Dunia
(ND) – the country’s ninth largest Hindi newspaper. This acquisition gives JAGP a
much-awaited entry into the underpenetrated and fast-growing markets of Madhya
Pradesh (MP) and Chhattisgarh (CG), and brings consolidation in the print media
industry. Financial highlights of the deal: (a) JAGP has valued ND at an enterprise
value of Rs 2.25bn (incl. ~Rs 250mn debt), or ~2x EV/sales; (b) JAGP is entitled to
tax benefits of ~Rs 800mn owing to ND’s accumulated losses of Rs 2bn-2.5bn.
While the valuation is on the higher side given ND’s negative EBITDA, we feel this
acquisition is a good strategic fit for JAGP on account of: (a) its geographical
expansion in Hindi-speaking states, (b) reduction in gestation period for expansion in
new territories and (c) cost and revenue synergies. Maintain BUY with TP of Rs 135.
v Underpenetrated MP and CG markets offer good growth: Literacy rates of MP
and CG are lower than the national average, and so is newspaper penetration, with
sole readership at a mere 15%. With rise in disposable incomes owing to increased
GDP growth rates (~6.5% for MP, 9.5% for CG), these markets offer good growth
potential.
v JAGP’s ongoing litigation in MP necessitates inorganic route: We note that
JAGP has wanted to enter MP and CG since 2005. However, it couldn’t use its
flagship brand Dainik Jagran due to family litigation and hence, had to either
introduce a new brand or acquire an established player like ND.
v ND – a good fit: Nai Dunia is published in the Hindi heartland states of MP and CG
with a circulation of 0.5mn copies and a readership base of ~2mn, which has more
than tripled over the last five years. While ND’s current readership share is 23%, its
advertisement market share is ~15%. Its FY11 revenues were at Rs 1bn (FY12E:
Rs 1.1bn) with 70‒75% generated from advertising (mostly local). The company
incurred an EBITDA loss of Rs 250mn in FY12.
v Turnaround to be quick, aided by synergies: On the revenue side, JAGP expects
to increase the contribution from national advertising to ND’s revenues from <25%
now to closer to its own 40% levels. On the cost side, JAGP will benefit from
reduced newsprint and manpower costs.
v Deal financial summary: The deal was closed for an all-cash consideration of
~Rs 2.25bn (including debt). However, JAGP stands to gain tax benefits to the tune
of Rs 0.8bn owing to ND’s accumulated losses. Post the deal, JAGP has Rs 1bn of
net cash on its books.
v Maintain BUY with a TP of Rs 135: We believe that this acquisition is another step
in the direction of consolidation in the print media space, wherein smaller regional
players will be acquired by larger national players like JAGP, owing to both revenue
and cost synergies. We continue to like the print media space because of: (a) healthy
ROEs (25% +), (b) good dividend payouts (45‒50%) and (c) attractive valuations
(currently 12.7x FY14E). Maintain BUY with a TP of Rs 135 (17x FY14E).