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BNP Paribas reckons that StarHub‘s acquisition of a 9.05% stake in Catalist-listed mm2 Asia should strengthen the formers original content production capabilities.
On Tuesday, StarHub announced the stake acquisition for $18 million. This will be undertaken via a share placement by mm2 Asia of 44 million new shares. The acquisition is targeted for completion in May 2016. The broker estimates that the acquisition implies c20x EV/EBITDA based on mm2 Asia’s EBITDA in the FY ended March 2015.
mm2 Asia is a producer and distributor of TV and online content, as well as film. In the FY ended March 2015, content production accounted for 62% of mm2 Asia’s revenues of $24 million, while distribution and others accounted for 31% and 7% respectively. Based on mm2 Asia’s FY15 net income of $5 million, BNP Paribas expects the acquisition will be earnings-accretive for StarHub, though marginally.
The mm2 Asia deal may be viewed as a defensive strategy for StarHub’s pay-TV business against increasing substitution risks from alternative content sources, BNP Paribas says, since mm2 Asia’s distribution network provides opportunities for further content monetisation. It is, however, a departure from StarHub’s historical strategic focus on partnerships, rather than M&A.
Furthermore, the acquisition price “does not seem particularly demanding given StarHub’s FY16E $205 million balance sheet cash”, the broker says.
BNP Paribas maintains its “hold” recommendation on StarHub. “We are fundamentally cautious on StarHub given the muted growth outlook and increasing substitution risks for its pay-TV business. That said, we view the FYI GE dividend as sustainable and the corresponding 6% dividend yield as attractive,” it says.
This article first appeared in The Edge Singapore Market Report.
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