Quick Pitch: oOh!media Limited (OML:AX)

Bidding war: 30% Upside (at A$1.32-A$1.35)

oOh!Media is the second-largest outdoor advertising company in Australia and New Zealand, with a network of over 30,000 locations. It has now become the target of a potential bidding war. On April 29, the company received a non-binding buyout offer from Pacific Equity Partners at A$1.40/share. This week, US-based infrastructure fund I Squared Capital stepped in with a competing A$1.45/share bid. OML rejected both proposals, but after talking to shareholders, it agreed to open its books for due diligence to see if the PE firms would bump their offers. On top of that, management noted talks are ongoing with several other interested parties. The ‘for sale’ sign and the potential bidding war signal in the language are quite evident:

oOh! is also engaging with certain other parties and may potentially receive change of control proposals from one or more of those parties and potentially other parties. oOh! is open to engaging with all parties to assess whether any proposal may emerge that is capable of being recommended by the Board.

The AFR reports that Blackstone, Bain Capital, and Oaktree have each completed “desktop due diligence” on OML and are weighing an offer. Apparently, PEP has also approached OML’s major shareholders, who confirmed they would be open to a sale. Meanwhile, Pacific Equity Partners (the first bidder) has been scooping up shares on the open market, and reported 5% ownership in OML earlier this month.

So there are obviously a lot of interesting dynamics going on here. OML trades at a 7%-10% spread to the latest offer, and there’s a decent chance we could see higher bids. The outdoor advertising sector is in the middle of a major global consolidation wave. Earlier this year, Clear Channel Outdoor agreed to a private equity buyout at $6.2bn valuation. Last month, reports emerged that I Squared and Blackstone, two of OML’s suitors, are also eyeing a €2.5bn takeover of German outdoor player Ströer. Locally, QMS Media, the third-largest player in Australia and New Zealand, was acquired earlier this year. Out-of-home advertising is clearly having a moment, and now it is OML’s turn.

The latest offers for OML seem pretty light. They value the company at just 6.4x adj. EBITDA, compared to 9.2x for its local peer QMS, 11.7x for Clear Channel Outdoor, and an implied 6.5x for Ströer. None of these are ideal comps. Ströer operates more like a media conglomerate and only around half of its revenues come from outdoors advertising. QMS is a much more digital screen heavy, higher margin operator, while Clear Channel Outdoor is a pure-play US player with substantial scale. QMS and CCO definitely deserve a higher multiple than OML, however, the valuation gap shouldn’t be this wide.

There is hardly any takeover premium embedded in the current offers. Just five months ago, OML was trading at similar levels and briefly peaked at A$1.80 in August last year. So it looks like the bidders are trying to opportunistically take advantage of volatility in the stock. The underlying business seems to be fine, with some temporary headwinds. Final offers in the A$1.60-A$1.80/share range would imply a 7x to 8x EBITDA multiple and a 20%-35% upside from current levels.

The key risk is that OML is already up a lot from its pre-announcement levels of around A$0.85/share, so if there’s no deal, the downside could be painful.

In a nutshell, this still looks like a pretty interesting setup with multiple credible suitors circling, two offers already on the table, due diligence underway, supportive industry dynamics, PEP accumulating stock around A$1.20/share, and major shareholders reportedly in favor of a sale.