Southern Cross Media: Takeover Bid Is Opportunistic

No-moat-rated Southern Cross Media’s SXL nonbinding indicative proposal from ARN Media is too cheap. While the proposal represents a 29% premium compared with the price prior to the approach on Oct. 17, 2023, it is 45% below our unchanged fair value estimate of AUD 1.70 per share. We think the takeover bid is opportunistic, capitalizing on weakness in both regional TV and digital audio segments.

Under the indicative proposal, Southern Cross shareholders would receive 0.753 ARN shares and AUD 29.6 cents cash per Southern Cross share. Based on the closing price of ARN shares on Oct. 17, 2023, this implies a total value of AUD 0.94 per share. The board is considering the proposal.

The proposal is also highly conditional, not least of all requiring approval from the competition and media regulators. Prior to announcing the proposal, ARN acquired a 14.8% stake in Southern Cross. We previously noted it is prohibited from going above the 15% shareholding limit due to regulations against a company controlling more than two commercial radio licenses in individual markets. ARN and Southern Cross each operate two commercial radio licenses in all capital cities.

Shares remain undervalued. While television and radio ratings are notoriously volatile, they can recover as abruptly as they deteriorate, with material earnings leverage to both the upside and the downside. However, Southern Cross Media’s regional radio operation is a relatively stable business, given the stickiness of local advertisers. Despite near-term headwinds, we expect the radio unit to generate steady earnings and underpin Southern Cross’ dividends as the market leader in the space.