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What does PRN's sale to Thomson mean for the digital signage industry?

Author: Bill Gerba on 2005-08-02 07:58:45

In case you haven't heard by now, digital signage behemoth PRN (the firm responsible for the Wal-Mart in-store television network) is being acquired by media conglomerate Thomson Worldwide to the tune of around $285M. Throw that in with Mercury Online's recent sale to 3M and the successful IPO of Focus Media, and I think July 2005 may have been the most eventful month ever for the dynamic digital signage industry, at least in terms of M&A and the capital markets. But even more interesting than the news of the acquisition itself are the insights that we can gain by looking at the two companies and the possible drivers behind the deal.

First off, $285 million is a lot of money. On first glance, it might not seem like that much for a company that's doing $100M in sales, which PRN is. And it's not really that much for a rapidly growing company, which PRN is. And it's not particularly much for the largest profitable company in a burgeoning industry, which again, PRN is. So what's the story? Where did the Thomson execs come up with this number, and what made PRN say yes?

Well, part of the story is that while PRN's revenues have been big, their margins (historically) weren't. In fact, if you look back at my May 2004 analysis of PRN's S-1 filings, they only made about 8% net margins on their $112M of revenue in 2003, which translates to around $10M in net income. So at roughly 29x earnings, the $285M number seems pretty respectable (for reference, stocks in the S&P 500 historically trade at around 13-14x earnings, though in the last fifteen years or so that number has averaged closer to 22-23x).

Another thing to note is that while PRN has run perhaps the most highly visible experiment in digital retailing, it isn't really a technology company. It's a content creation and marketing company. In fact, PRN uses a combination of off-the-shelf and custom applications to run its digital sign network, and has switched technologies at least once (that I know of) during the course of its deployments. They spend the most money and employ the most people in their ad sales and content production departments, which have to re-sell space and re-create content month after month. In light of that, it's pretty amazing that they were able to get as much as they were for the company, since firms who derive a significant portion of revenues from creative services and other consulting activitiestypically don't fetch large earnings multiples.

Next, note this paragraph taken from their 2004 S-1:

We are highly dependent on our relationship with Wal-Mart Stores, Inc., our largest retailer relationship, and we expect our reliance on this relationship to continue for the foreseeable future. Our dependence on Wal-Mart consists of two principal elements: (1) revenues earned under contracts entered into directly with Wal-Mart for media management services, advertising airtime and creative services and (2) revenues earned under contracts with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores. Revenues from contracts entered into directly with Wal-Mart accounted for 35% of our total revenues for the year ended December 31, 2003 and 37% of our total revenues for the three months ended March 31, 2004. Revenues from contracts entered into with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores accounted for an additional 54% of our total revenues for the year ended December 31, 2003 and 50% of our total revenues for the three months ended March 31, 2004.

So in 2003, 89% of PRN's revenue came from Wal-Mart related activities, with that number probably reduced slightly in 2004. I know that PRN has signed deals with a number of supermarket chains in the past 12 months, but in reality, the Wal-Mart deal will continue to represent a very sizable chunk of PRN's revenues for the foreseeable future. Again, in light of that, it's amazing that they were able to sell for as much cash as they did.

Now, as for why they would want to sell right now, that's perhaps the most interesting question. I'd like to posit one theory myself, and I'd love to hear any thoughts that you might have. My theory goes something like this: we know that PRN has been looking to retrofit the Wal-Mart network with new technologies, like plasma screens with content targeted to each area within the store (rather than the current one-channel-fits-all approach). Let's assume that they can purchase plasma or LCD screens for $1,000 (and let's be honest: if you're purchasing 60,000 of them, you're going to find some economies of scale). Additionally, let's conservatively estimate that installing the screens, retrofitting the cabling to handle VGA signals, and installing new head-end equipment to play the higher definition content and/or additional channels also works out to $1,000 per screen. Now let's assume that they install 20 plasmas or LCDs per store, and there are around 3,000 Wal-Marts. That comes out to $40,000 per store, or a total of $120,000,000. That is a lot of cash to lay out for network upgrades that will provide unknown benefits and uncertain incremental revenue. But if Wal-Mart demands it, and they still drive somewhere in the range of 75-80% of PRN's revenues, then PRN is suddenly very motivated to find a way to deliver. I doubt very much that a bank would lend PRN that much money for what can only be described as a risky business maneuver, so now PRN needs to look for more creative sources of funding. In comes Thomson with a large amount of cash, and the rest, as they say, is history.

I'll admit that this is pure speculation, but considering that the company seemed lukewarm about its IPO prospects, and hasn't completed the Wal-Mart upgrades that it was touting months ago, the pieces seem to fit together nicely. But regardless of what the cause was, the result is undeniable: Thomson, a multi-billion dollar media company, has entered the digital signage market. With their free cash, marketing muscle and market presence, they should be a very formidable player in the digital signage arena, and they join the ranks of 3M, Sony and Fujitsu as another big company in this small (but rapidly growing) space.

Will the wave of consolidation continue? I still think there are too many companies in this crowded market, and it's only a matter of time before some of them either get M&A'd or collapse altogether. While I wouldn't cry over a bunch of my competitors calling it quits, over the next year or two I expect to see more along the lines of the recent deals that have madeFocus Media, Mercury Online, and PRN the darlings of our once little-known industry.

Comments (4)

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2007-12-19Robert writes:
Do people really want to watch TV out of home. It's an attitudinal psychographic aspectof people, that we believe that they do not watch much tv out of home and as such vehicles which work more quickly and which reach out to grab the eye, represent superior and simpler vehicles,

People are enamoured with setting up the next media network. This is a major stretch for it is not going to happen..what we have left is a network ofpromotional shelf talkers for the business that wants to make moneyin-store. My network of 23,000 electronic signs in 5,400 supermarkets has never been beaten. Time to go round once again!


Robert Polansky
917-902-0049
2007-12-20Bill Gerba writes:
Hi Robert,

Not quite sure what angle you're going after here, and if anything I'd say that Thomson's involvement and the rapid growth of the industry indicates that people do believe in the medium.

The questions that remain (in my opinion) are a) how do we make digital signage efficient and desirable while remaining as unobtrusive and not-annoying as possible, and b) where do they perform best - there are going to be some jobs they simply don't work well for, but others where the excel. We need to find more of the latter.
2009-06-05Heather geronimi writes:
How about a back-to-back electronic image display system? They are not as bulky as putting two displays back to back so they won't be as intrusive, and they are easier to install than putting two back to back. Also, they can display the same thing on both sides, or different things at the same time. They provide a sleek, clean look because people don't have to look at the back of a display.
2012-12-08Ratib writes:
I think Thompson may also be looking at the development of more advanced displays such as 2 sided or even paper thin displays. Walmart may also been dissatisfied with the speed of their upgrades.

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