The completion of equity offerings this week for Media Nation and Media Partners International (MPI) has attracted widespread criticism after the two deals were restructured and priced at the bottom end of their respective indicative ranges. Not helped by the trading pattern of Clear Media, which listed on the main board of the Hong Kong Stock Exchange at the end of last year, both companies found themselves battling each other as well as a falling stock market to secure a pricing advantage with investors.
Observers sum up the problem as too much paper from companies in a brand-new sector with broadly overlapping businesses that hide some crucial differences. The confusion this caused has also been compounded by the use of a unfamiliar valuation methodology for Asian investors and one that has been structured in slightly different ways by the three lead managers in question, Goldman Sachs, Deutsche Bank and BNP Paribas Peregrine.
On a p/e basis, all three companies have been priced at significant premiums to the H share and Red chip sectors, which are currently trading at respective averages of 7.8 times 2002 earnings and 9.7 times. By contrast, Clear Media has been trading on a 2002 p/e multiple of about 35 times.
The reason for this is that none of the three companies report high earnings and global leader Clear Channel of the US, has yet to record a net profit although it has a market cap of about $25 billion. As one banker jokes, "There's more 'E' in the names of these companies than there is on their balance sheets."
For Asian accounts and particularly retail investors, who compare stocks on a p/e basis, this poses something of a problem. "Having been burnt by the likes of Beijing Enterprises during the red chip bubble of 1997, Asian investors are very wary of companies which don't appear to have much money in the kitty," one banker explains. "They don't understand the concept of pricing high growth companies likes these on a free cash flow basis."
A second adds, "You have to compare these companies on an EV/EBITDA basis and look at their cash flows. The reason for the small net profitability is because all the cash gets churned into the next project to keep up with the market's underlying growth rate. Because these companies are all awarded fixed licenses, it's easy for them to calculate their return on investment and apply the funds elsewhere."
According to the figures supplied by one of the leads, Media Nation priced last Friday on an EV/EBITDA basis of 9 times 2002 earnings, while MPI priced yesterday (Thursday) at 7.5 times and Clear Media is trading at about 13.5 times. This compares to a global average of about 18 times.
However, these figures are distorted by the way that they have been calculated. Because China does not permit foreign entities to own more than 80% of a company in the advertising sector, Goldman and Deutsche calculated the economic value of Clear Media and Media Nation on a proportional basis, using 80% of earnings as the base rate. BNPPP, by contrast, calculated MPI's enterprise value on a whole company basis, with associated joint-ventures also thrown into the mix, although only on a proportional basis (80%).
The net result has been that Media Nation's Hong Kong retail offering closed only 0.2 times subscribed, with the unwanted shares transferred to the placement tranche, which closed 1.5 times oversubscribed on a blended basis.
Media Nation sold a total of 171.386 million new shares after plans were scrapped to sell 99.58 million old shares on behalf of some of the company's venture capital partners, Warburg Pincus and PAMA. The company raised HK$445.6 million ($57.1 million) after pricing the offering at HK$2.60 per share. This represented a 28.3% stake in the company.
The stock closed down 12% during first day trading on the Growth Enterprise Market yesterday, at HK$2.30 per share.
MPI priced a 213.8 million share offering at HK$1.10 a share yesterday, raising HK$235.18 million ($30.2 million). Also a GEM listing, the deal had originally been marketed at HK$1.35 to HK$1.72 per share.
The major shareholder is Morningside Cyberventures, a private investment company held by the family of Hang Lung Development Chairman Ronnie Chan. His brother, Gerald, runs the company which has advertising rights on Mainland bus fleets and three metro lines, equating to 31,000 advertising spaces in ten cities in the PRC and 18,3000 spaces in Hong Kong. For the first six months of 2001, some 65% of revenue was derived from the PRC and 34.1% from Hong Kong.
Media Nation has exclusive advertising rights to five out of seven metro lines in Beijing and Shanghai, as well as exclusive advertising rights to displays on more than 17,000 buses in 17 major cities in the PRC and 4,795 buses operated by two of the three largest bus operators in Hong Kong.
Media Nation CEO Kam Ling says that investors may have been overly cautious about the kind of competition the sector will face as China opens up. "Once we win the license for a project like the Beijing Metro, we're locked in for up to 17 years and are therefore well protected," he explains. "The three companies which have just listed account for less than 15% of the China market and given CAGR forecasts of 25% to 30%, every company will benefit."
Indeed, the annual growth rate of advertising expenditure including and excluding amounts spent through advertising agencies increased, on average, at 2.5 times and 2.1 times PRC GDP growth over the 10 years from 1990 to 2000.
Kam Ling believes that investors' lacklustre response is the result of poor education during the roadshow process. "The investment banks working for the three companies failed to provide investors with a good education about the nature of this business and the way it should be valued," he concludes.
Bankers argue that a better understanding will come over time. "These are global growth companies that institutional investors know how to value. They will take the lead and retail will follow," one banker concludes.
