Mediaset SpA And KKR & Co. Inc. Might Partner To Acquire ProSiebenSat.1 Media SE

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Summary

ProSiebenSat.1 Media SE (OTCPK:PBSFF) (OTCPK:PBSFY) has a new major shareholder. That may be a sign of interesting changes to come. KKR & Co. Inc. (NYSE:KKR) controls 5.21 percent of the company (3.21 percent direct ownership + 2 percent control via derivatives). That makes it the third largest shareholder. Mediaset SpA (OTC:MDIEF) (OTCPK:MDIUY), the Italian media and entertainment group founded by the country's former prime minister, Silvio Berlusconi, has been increasing its position steadily and now owns 24.2 percent. Czech Media Invest ("CMI") owns another 10 percent. CMI intends to play an active role according to its majority owner Daniel Kretinsky.

While KKR claims that the investment is of purely financial nature, I believe that it might be the first sign of an upcoming acquisition and privatization of ProSiebenSat.1. In order to do that, KKR could partner with one (or both) of the company's biggest shareholders. The privatization of Axel Springer SE (OTC:AXELF) may serve as a blueprint. Below, I will explain that thesis in more detail.

Focus On Entertainment

ProSiebenSat.1 intends to refocus on the entertainment business. It does not only include a number of free- and pay-TV channels in the DACH region. The group also produces content. As of March 31st, the group estimated the value of its rights portfolio at around €1.2 billion. Furthermore, ProSiebenSat.1 has set up the new streaming platform Joyn. The company partners with Discovery Inc. (NASDAQ:DISCA) (NASDAQ:DISCB) (NASDAQ:DISCK) for this purpose. Joyn has grown to more than 6 million users (albeit the majority are probably users of the free basis version) in less than a year which is not bad given the size of the DACH market. All in all, ProSiebenSat.1's entertainment business is increasingly vertically integrated.

However, the group's second pillar does not really fit into that picture. Therefore, it might indeed make sense to separate the two businesses. Majority owned subsidiary NuCom which bundles a portfolio of various e-commerce and online dating investments might be spun off or sold. General Atlantic owns 28.4 percent of NuCom. But that would not be an obstacle I believe. After all, it is its business model to exit its investments at a certain point. General Atlantic would certainly make its cut. NuCom was valued with an enterprise value of €1.8 billion in early 2018. If sold today, it is surely worth considerably more, as it has been growing steadily and maintained profitability. The company is growing both organically and through acquisitions. For example, ProSiebenSat.1 and General Atlantic have reached an agreement to purchase The Meet Group Inc. (NASDAQ:MEET) for about $500 million. Meet will be integrated into NuCom's online dating business. The transaction is expected to be completed in the second half of the year. Q1 revenue grew 15 percent to €228 million. Profitability, however, took a hit in the first quarter (adjusted EBITDA -21 percent) due to the coronavirus impact on some of the businesses, especially Silvertours GmbH which operates a car rental portal.

A Media Merger In The Making?

ProSiebenSat.1's entertainment business is very similar to that of its largest shareholder, Mediaset. But in terms of geography the two companies operate in different markets. ProSiebenSat.1 is present in the German speaking markets, while Mediaset operates primarily in Southern Europe. A combination of the respective portfolios might therefore create a European entertainment champion. There would probably not be too many synergies between the respective TV business, but arguably, a combined group might be better positioned in terms of content creation. For instance, show concepts could be developed jointly. So, arguably, there is a case to be made for a merger. The departure of ProSiebenSat.1's former CEO, Max Conze, might also be beneficial to a potential deal. The new CEO, Rainer Beaujean, has been making cautious statements so far, but he did not rule out any option.

About a year ago, I believed a takeover of ProSiebenSat.1 by Mediaset to be highly unlikely. However, two factors have emerged that change the situation materially. First, the stock has lost another third of its value since. Needless to say that this alone makes any deal somewhat more affordable. The second factor is the emergence of a potential partner. KKR and Mediaset might acquire ProSiebenSat.1 together. In recent years, KKR has made a number of media acquisitions in Germany which it bundled under the roof of its subsidiary Leonine Holding GmbH. Furthermore, KKR-fueled Axel Springer seems to be interested in eBay Inc.'s (NASDAQ:EBAY) Classifieds Group. So KKR clearly seems interested in aggressive expansion in the broader media sector.

ProSiebenSat.1 might be especially interesting in that regard. The entertainment business is a good fit with the Leonine assets. Even more so if it was combined with Mediaset. NuCom might in turn be an interesting addition to Axel Springer's online assets. Therefore, I think that ProSiebenSat.1 might be split in two. Mediaset and KKR might acquire the company together. KKR would keep NuCom, which it would subsequently merge with Axel Springer. Mediaset in turn would have control of the entertainment activities. This could be realized by a spin-off of NuCom to the shareholders and a subsequent transaction of Mediaset's NuCom stake in exchange for KKR's ProSiebenSat.1 shares.

So for two of the three largest shareholders, a privatization and merger of ProSiebenSat.1 activities with their own would clearly make sense. The third one is something of a wildcard, however. While it is unclear what exactly CMI plans with its investment, I believe that it might be interesting from its point of view to exchange its 10 percent in ProSiebenSat.1 for a stake in Axel Springer (an investment in a combined ProSieben/Mediaset group would be less fitting to its portfolio in my opinion). Alternatively, it might also just sell its stake to KKR/Mediaset. Arguably, CMI would be in an advantageous position to negotiate an attractive price.

Conclusion

I believe that the privatization of ProSiebenSat.1 is a possibility. There are different scenarios which might be interesting for the company's largest shareholders. For individual investors that would be an opportunity to snap up a premium on the share price.

However, there are also considerable risks. Without a buyout, I see limited upside potential at the moment. The TV business is still declining in both revenue (Q1: -3 percent) and profitability (FY2019: adjusted EBITDA -17.6 percent; Q1: -20.8 percent). Also, ProSiebenSat.1 is arguably too small in size to compete with the likes of Netflix Inc. (NASDAQ:NFLX), Amazon's (NASDAQ:AMZN) Prime Video or The Walt Disney Company's (NYSE:DIS) Disney+ service. After all, all those competitors are present in the DACH region as well.

On top of that, there would also be the risk of further hits to the share price in the current overall climate (keep in mind that the March low was almost 50 percent below the current price). If there are plans for a takeover, the potential suitor would certainly use such a situation in order to increase their positions on the cheap. In that case, even a considerable premium might still be below what the stock trades for at the moment.

For all those reasons, I believe that - although a buyout is a distinct possibility in my opinion - an investment in ProSiebenSat.1 is rather risky. I would only recommend it for those who can tolerate a high risk and are looking for a rather short time horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: All research contained in this article was done with the utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his or her own due diligence and research.

Kindly note that this article was written on May 24th. There may be more recent developments by the time of publication.