Cashing up at Next Media
26 October 2012
On 15-Oct-2012, Next Media Ltd (Next, 0282) signed two memoranda of understanding for the possible sales of its Taiwan print and TV businesses, including Taiwan Apple Daily and Taiwan Next Magazine, to Jeffrey Koo Jr. The print business goes for NT$16,500m (HK$4,243m) and the TV business for NT$1,500m (about HK$398m), for a total of NT$17,500m (HK$4,641m).
At 31-Mar-2012, Next had net borrowings of HK$288m, so the influx of cash would change this to a surplus of about $4.35bn, plus or minus any cash flow since the year end. There will also be some transaction costs, probably not material. We are assuming that the subsidiaries are sold with no net cash or debt inside them.
There are about 2,412m shares in issue. At 30-Sep-2012 there were 48.684m share options outstanding, little changed from the year-end of 31-Mar-2012 when there were 45.864m with an average subscription price of $1.067. There were also "invitations" over 33.504m shares under the 2007 "share subscription and financing plan", which is in essence a share option scheme with a 3-year loan if the shares are subscribed. All except 1m of the subscription invitations lapses on 7-Nov-2012, and as the current market price is below the $2.12 subscription price, we can ignore those. The remaining 1m have a $2.49 subscription price and lapse on 24-Feb-2013.
So if all options are exercised, they will bring in about $52m, increasing net cash to about $4.40bn, and increasing outstanding shares to 2,461m. That's net cash of $1.79 per share.
Next has no need for that cash. The remaining business is the profitable HK media business, including the original Apple Daily and Next Magazine, and it also has substantial fixed assets in HK, including its print works in Tseung Kwan O, against which a reasonable level of debt can be maintained.
In 2011, Jimmy Lai Chee Ying, Chairman and 74.05% shareholder of Next, injected US$100m (HK$776m) in return for 70% of the animation business, which had net liabilities and was loss-making. He is also known to have lost about HK$1bn on the failed AdMart online supermarket business 12 years ago, and to have been a generous financial supporter of the pan-democrat parties in HK. All of these factors suggest that he has decided to refocus on the core HK business, and like all his fellow shareholders, he would be keen to recover his share of the proceeds from the Taiwan sale.
If the Taiwan sale completes, then at yesterday's close of $1.56, Next is trading at a discount to its estimated net cash. We expect all or most of that cash to be distributed as a special dividend, so investors are in essence getting the HK business for free. There are of course downside risks:
- the deal might not complete; we regard that as unlikely, perhaps a 20% chance of not completing. The deal seems reasonably priced, and Mr Koo is getting a trophy asset - the most widely-read newspaper in Taiwan. Even if he were to back out, a valuation has been established and others would likely be interested;
- Mr Lai might decide to trap the cash inside Next and blow it all on a new loss-making project - such as getting involved in the highly competitive battle for broadcast TV in HK at a time when most of us are spending much less time watching it and more time on the internet and video-on-demand. However, we think Mr Lai has probably learned a lesson from the Taiwan TV market and will stay away from HK TV, unlike fellow entrepreneur Ricky Wong Wai Kay at City Telecom (H.K.) Ltd (1137). Mr Lai is also more sensitive to public opinion - he doesn't want a bad reputation for failing to return capital to shareholders rather than drag them along into a new business. That is one reason why Mr Lai injected cash through the animation acquisition, rather than force a fund-raising on shareholders to finance the Taiwan TV losses.
If Mr Lai has any interest in pursuing new businesses, then he should do that with his own money from the dividend. His 74% share of a $4.4bn dividend would leave him with $3.25bn to play with. The MoUs call for definitive contracts on 17-Nov-2012 and a completion by 17-Dec-2012. It should be a merry Christmas for Mr Lai and his fellow shareholders.
Disclosure: Webb-site editor David Webb is a shareholder of Next.
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