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German commercial broadcaster ProSiebenSat.1’s decision to raise more than €500 million in fresh capital has not been well received by the market. The decision, combined with poor growth in advertising revenues, prompted equity analysts to question the rationale behind the decision. “We think there was more to this decision than meets the eye,” said a report from Berenberg Bank.
“We assume there is another M&A transaction in the offing,” suggests Berenberg. “Rather than simply wanting to improve debt headroom (an odd decision if this is all that was intended, given that the share price has not been this low for some time), we therefore think that the proceeds of this equity issuance may well be intended for a larger M&A deal.”
One potential M&A target for Pro7 is the troubled Unister on-line travel business.
However, Berenberg remains concerned. “In recent months, investors have fallen out of love with Pro7/Sat.1, which was a market darling for several years. The equity story has changed from a company that was investing in digital assets “for free” (using free advertising inventory) to one where cold, hard cash is being spent, in this case, cash raised when the shares are towards the lows of the last 18 months. That obviously increases the risk profile of the group – it now needs to deliver incremental returns on larger deals, rather than generate upside on “free” assets. Meanwhile, write-offs on a number of “free” assets suggest that this was not a home run strategy anyway. We lower our price target to €36.7 to reflect a slightly higher cost of capital post-equity issuance. Although the stock has come down a long way, we think the stock is fairly valued, and maintain our ‘Hold’ recommendation.”