Media businesses go in cycles. After a string of good years the acquisition market becomes frothy. Prices push high. And lenders and buyers do foolish transactions. Insider thinks the out of home market is becoming overheated and this is a bad thing. Here’s why.
New Entrants. Insider is receiving a stream of calls of outsiders (hedge funds, former real estate investors, family funds and individuals) wanting to enter the outdoor business. In the short term, more potential buyers mean higher prices. But it can also lead to an overvalued market because the newbie overpays.
Sellers are asking inflated prices. In the past year, Insider has encountered sellers who want to sell a 50% occupied plant on a multiple which assumes 100% occupancy. Insider has also encountered sellers asking 8-9 times gross revenue. You heard right. 8-9 times gross revenue. Not 8-9 times cashflow. 8-9 times gross revenue equates to 15-20 times cashflow! The norm in the business is 5-6 times gross revenue or 8-10 times cashflow.
Recession. When I encounter a media investor or lender who is doing crazy transactions I ask them how long they’ve always entered the business and after the last recession. Experienced outdoor companies rarely overpay because they remember what happens in a recession. We had recessions in 2001 and 2009. We’ll have another recession in the next five years. It’s the nature of business cycles. If you want to purchase a company for 8-9 times gross revenue or 15-20 times cashflow ask yourself what you will do if we have a recession and industry revenues decline by 19% as was the case in the 2009.
When might you want to take a chance at buying a company for 10-20 times cashflow? If you’ve identified a plant which has less than 50% occupancy and you can improve the plant to 80% occupancy with a sales push. There are two problems with this approach. (1) It is harder to increase sales than you think. (2) In today’s market many sellers are asking 5-6 times revenue multiple assuming that they are at 100% occupancy when they’re only at 50% occupancy.