Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Nielsen (NLSN) rose 4.4% on Tuesday. The global information and measurement company agreed to acquire its smaller competitor Arbitron (ARB). Shares of Arbitron rose 23.6% in a reaction to the deal, still trading 2.0% below the $48 offer.

The Deal

Nielsen announced that it will acquire Arbitron, in a deal valuing the firm at $1.28 billion. Nielsen has signed a definitive agreement to acquire the international media and marketing research firm for $48 per share in cash. The deal represents a 26% premium compared to Monday's closing price.

CEO David Calhoun commented on the deal, "US consumers spend almost 2 hours a day with radio. It is and will continue to be a vibrant and important advertising medium. Arbitron will help Nielsen better solve for unmeasured areas of media consumption, including streaming audio and out-of-home. The high level of engagement with radio and TV among rapidly growing multicultural audiences makes this central to Nielsen's priorities."

For its full year of 2011, Arbitron generated revenues of $422.3 million. The company net earned $53.3 million for that year.

The $1.28 billion deal values operating assets of the firm around $1.25 billion given Arbitron's roughly $37 million in cash and equivalents. The deal values the firm at 3.0 times annual revenues and roughly 23-24 times annual earnings.

As a result of the deal, Nielsen expects to increase earnings by $0.13 per share in the first year after closing the deal. The transaction is expected to be accretive by $0.19 per share in the year thereafter. Nielsen expects to achieve cost synergies of $20 million as a result of the deal.

Nielsen has already received a financing commitment for the transaction. The deal has been approved by the boards of both companies, and is subject to customary closing conditions, including a regulatory review.

Valuation

Nielsen ended its third quarter with $325 million in cash and equivalents. The company operates with $6.7 billion in short and long term debt, for a net debt position of roughly $6.4 billion.

For the first nine months of 2012, Nielsen generated revenues of $4.15 billion. The company reported a net profit of $234 million, or $0.64 per diluted share. The company is on track to generate full year revenues of $5.5 billion, on which the company could earn $300-$320 million.

The market currently values Nielsen at roughly $11.2 billion. This values the firm at 2.7 times annual revenues and roughly 36 times annual earnings.

Given the sizable net debt position, Nielsen does not pay a dividend at the moment.

Some Historical Perspective

Year to date, shares of Nielsen are trading roughly unchanged, trading with gains of some 4%. Shares started the year around $30 per share, falling to lows of $25 in July. Shares recovered, currently exchanging hands at $31 per share.

Between 2008 and 2012, Nielsen has increased annual revenues by some 15% from $4.8 billion in 2008 to an estimated $5.5 billion this year. The company reported large losses in recent years, being owned by private equity firms. The company continues to improve profitability as it repaid some of its debt.

Investment Thesis

Shares of Nielsen went public in January of 2011. At the time, shares of the company were offered at $23 per share, in the $1.75 billion public offering. Dutch-based publisher VNU acquired Nielsen in 1999. That company was acquired in 2006 by a consortium of private equity firms including KKR (KKR), Blackstone Group LP (BX) and the Carlyle Group (CG), among others. They offered shares of Nielsen again five years later.

The deal seems rather favorable. The acquisition of Arbitron will boost annual revenues by some 8%, and profits by an even greater percentage.

The deal values Arbitron at 3.0 times 2011s annual revenues, which is in line with the company's own valuation of 2.7 times 2012s annual revenues.

The transaction values Arbitron at 23-24 times annual earnings which looks favorable to Nielsen's own valuation of 36 times earnings. Nielsen's earnings are depressed as a result of high interest payments given the sizable debt position with which the company operates. These multiples exclude the beneficial impact of estimated annual cost synergies of $20 million.

Nielsen made an excellent deal at a fair price. Yet I remain on the sidelines. The company is still dragging along a sizable net debt position which is an inheritance of being owned by the private-equity consortium in recent years.

Big data is a big theme in the future as companies learn to use their data to better serve their customers. Marketing and industry research offered by Nielsen will remain important. I remain on the sidelines given the overall high valuation of the firm, the high debt load and lack of dividends.

Source: Nielsen Makes An Excellent Acqusition By Acquiring Arbitron