New company to enter Budapest Stock Exchange via Est Media

Est Media drew attention to itself in the last few months by growing into a company worth billions of forints, practically without any activity, income or profit. The share price was propelled by market speculation that a large investor will buy itself into the company and fill it up with content.

Well, the rumoured buy-in has become reality today. Est Media announced that it is buying Delta Systems, a subsidiary of Delta Group. The transaction will be financed in part by borrowed money and in part by issuing new shares

which will make Delta Systems the largest owner in Est Media. In fact, it will become its sole owner, with a 100% shareholding.

This is a HUF 28.6 billion transaction HUF 2.3 bn of which will be paid by Est Media in cash, the source of which is a long-term shareholder loan. The remaining sum will be financed by Est Media by shares. It will have a private capital increase by the issue of 125 million shares, at HUF 210 apiece, which is a lot higher than Est Media’s current share price on the Budapest Stock Exchange (BSE).

How did Est Media get to this point?

The company had previously owned an extensive media portfolio and it briefly had a controlling stake in festival organiser giant Sziget. After the 2008 economic and financial crisis, it started to accumulate losses and debt, and eventually it was forced to divest its assets, including its shareholding in Sziget. It finally filed for bankruptcy protection. After bankruptcy proceedings that lasted years it struck a deal with its creditors that have forgone 97.45% of their claims, and in exchange for the remaining debt they received new Est Media shares via a capital increase.

Over the last few years, Est Media majority owner Csaba Balázs attempted to involve a large investor and fill the company with actual content. In October 2018, he seemed to have succeeded. Former Hollywood producer Andy Vajna has indirectly acquired a 5.2% stake in Est Media. Speculation ensued and there was talk of Vajna contributed part of his media portfolio to the listed company, but he passed away in January and this ship sailed.

Growth story

There is growth in the company. Management expects Delta Systems to report HUF 16 bn revenue for the financial year ended on 30 June, which would correspond to a 66% year-on-year increase. Due to a switchover to a new financial year, FY 2018/2019 can be compared only to the financial year that ended on 31 December 2017. The company has been showing dynamic growth for years. 2015 was exceptional when - as a result of the absorption of major EU funds at the end of the year - the company sold IT equipment and services to the tune of billions of forints in several large projects.

The company has been profitable for years, although its margins are not robust. Its operating margin has been hovering between 0.4% and 2.9% since 2010. After-tax profit has also been positive in each year since 2010.

Valuation

The value of the transaction is HUF 28.6 billion, which gives us a 1.78x P/S ratio, calculating with the sales revenue of the completed financial year. Local listed IT service company 4iG is traded at a higher valuation, calculating with the company’s 2018 sales. We must highlight, though, that 4iG is buying T-Systems that realised revenues of nearly HUF 114 billion last year. In view of the most recent estimates, we can bet 4iG revenues are likely to rise dynamically in the next few years. The acquisition of Delta Systems is cheaper than the average P/S ratio of the 20 largest IT service companies of the region.

Acquisition or going public?

This acquisition is financed mostly via shares, but let us remind you that the transaction is extremely similar to how Wallis “went public" via Altera, as Delta Systems is “moving in" a practically hollow listed company. Stock exchange listing is a long and costly process, so it makes sense to take over an already listed company and move your (different) activities there. Another advantage of such a deal is that rumours and speculation about the arrival of a new large investor has propelled Est Media into the centre of attention in the last few months. As it is now watched closely by small investors, it is unlikely to have problems with liquidity.

Cover photo by Budapest Stock Exchange

• Tags:
• acquisition,
• stock exchange,
• bse,
• market,
• equity,
• delta systems,
• Est Media