On 16 August Future announced it intends to buy magazine owner Dennis for around £300m in cash. The deal will be funded by existing debt facilities.
Dennis brands include MoneyWeek and The Week. In the financial year to 30 December 2020, Dennis revenues rose 12% to £104.8m, with underlying cash profits (EBITDA) of £20.0m. Over half of revenues come from the US. Future expects the deal to create cost savings of £5m a year by 2023. The group also said it expects to "rapidly" reduce net debt to under 1.5 times EBITDA following the completion of the deal.
The purchase is expected to complete later this year.
Future is a media company covering everything from print and digital magazines, to events, ecommerce, and digital advertising.
The magazine business, which includes the likes of Marie Claire, Country Life and TechRadar, as well as print advertising, licensing and publishing services, has been hammered by the pandemic. The division makes up around 54% of group revenue, and sales fell 29% last year. But we're not convinced by the long-term picture. Specialist magazines have been losing popularity for a while. Going digital is obviously more defensive than the print versions, but even then, social media's the new newsroom. Bloggers and influencers are the new special-interest experts.
On the plus side, the ecommerce and digital advertising businesses saw huge growth during the pandemic. Both stand to benefit from the long-term shift to online shopping and digital advertising too. Operating margins in excess of 30%, gives Future plenty of room to breathe, and are a function of the group's tech platform which is enjoying the benefits of scale. As the group matures, margins should, in theory, come for the ride.
The group's growth strategy relies heavily on acquisitions to keep revenue and profit moving. Organic revenue growth of 6% last year is notable - and reached an even more impressive 21% at the half year - but that's a far cry from the acquisition supported top-line. We tend to prefer companies that focus on organic growth, rather than those that keep their engine hot by buying up everyone else's fuel.
The £629.2m acquisition of GoCo is Future's attempt to branch into offering services, not just content. Deals of this size, with a company so unfamiliar to the current set up, come with a high risk of getting things wrong. We can't knock the early progress, though.
The plan to acquire Dennis does have merit. The group's subscription-based revenues tend to be more reliable, and it also offers a chance to build out the important North American market. But Future's price to earnings ratio is considerably higher than the long-run average. It has to keep delivering, or the market reaction could be severe. That's why acquisitions are likely to remain a key focus, and we can't rule out the group asking shareholders for more money in the future.
Ultimately, Future has its fingers in a lot of pies, and there are some genuine growth opportunities ahead. But we'd like hardened proof it can generate sustained levels of organic growth, and make a success of GoCo, before turning more positive - especially considering the valuation.
Future key facts
- Price/earnings ratio: 27.9
- Five year average Price/earnings ratio: 19.2
- Prospective dividend yield (next 12 months): 0.1%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results (21 July 2021)
Future has continued to perform well in the second half to date. The Media division is enjoying "robust" digital advertising revenue and growing ecommerce product affiliate revenue. The Magazines division is performing in line with expectations.
The GoCo integration is on track to achieve £15m of synergies and the business is trading in line with expectations.
The group's performance so far means management thinks full year results will be "materially ahead of current market expectations".
Media (67% of group revenue) saw revenue rise 30% on an organic basis, to £182.6m. This was boosted by digital advertising growth of 26%, while eCommerce revenues were up 56%. This was partially offset by declines in Events because of the pandemic. Both the UK and the US saw growth in this division, with UK Media revenue more than doubling to £75.3m, and the US rose 34.8% to £107.3m, on a reported basis.
The Magazine business continues to be affected by the pandemic, and revenue fell 15% on an organic basis. Including acquisitions and changes in exchange rates, Magazine revenue more than tripled to £90.0m.
On a geographical level, the group's biggest market, the UK, saw organic revenue rise 5%, this was behind the 31% growth in the US. The UK's more exposed to event and magazine revenues, which have been impacted by the pandemic. Underlying adjusted operating profit, which ignores the fees and restructuring costs relating to the GoCo acquisition, rose to £19.3m from £1.6m in the UK. In the US the increase was 82.5% to £69.9m.
Group underlying operating margins rose 5 percentage points to 33%, reflecting a more lucrative mix of revenue and the positive effects of scale.
The £557.2m acquisition of GoCo completed in February, 75% of which was paid for by issuing new shares. Integration has begun, and Future expects the deal to generate £15m of annual cost savings.
The group recorded underlying free cash flow of £93.9m, and net debt increased from £62.1m in September 2020 to £241.3m, as Future took on more debt to pay for GoCo.
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