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.
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