August 04, 2005

Analysis: PRN Sale to Thomson and Digital Signage Market

From: Dynamic Digital Signage and Interactive Kiosks Journal -- in case you haven't heard by now, digital signage behemoth PRN (the firm responsible for the Wal-Mart in-store television network) is being acquired by media conglomerate Thomson Worldwide to the tune of around $285M.

Throw that in with Mercury Online's recent sale to 3M and the successful IPO of Focus Media, and I think July 2005 may have been the most eventful month ever for the dynamic digital signage industry, at least in terms of M&A and the capital markets. But even more interesting than the news of the acquisition itself are the insights that we can gain by looking at the two companies and the possible drivers behind the deal.

First off, $285 million is a lot of money. On first glance, it might not seem like that much for a company that's doing $100M in sales, which PRN is. And it's not really that much for a rapidly growing company, which PRN is. And it's not particularly much for the largest profitable company in a burgeoning industry, which again, PRN is. So what's the story? Where did the Thomson execs come up with this number, and what made PRN say yes?

Well, part of the story is that while PRN's revenues have been big, their margins (historically) weren't. In fact, if you look back at my May 2004 analysis of PRN's S-1 filings, they only made about 8% net margins on their $112M of revenue in 2003, which translates to around $10M in net income. So at roughly 29x earnings, the $285M number seems pretty respectable (for reference, stocks in the S&P 500 historically trade at around 13-14x earnings, though in the last fifteen years or so that number has averaged closer to 22-23x).

Another thing to note is that while PRN has run perhaps the most highly visible experiment in digital retailing, it isn't really a technology company. It's a content creation and marketing company. In fact, PRN uses a combination of off-the-shelf and custom applications to run its digital sign network, and has switched technologies at least once (that I know of) during the course of its deployments. They spend the most money and employ the most people in their ad sales and content production departments, which have to re-sell space and re-create content month after month. In light of that, it's pretty amazing that they were able to get as much as they were for the company, since firms who derive a significant portion of revenues from creative services and other consulting activitiestypically don't fetch large earnings multiples.

Next, note this paragraph taken from their 2004 S-1:

We are highly dependent on our relationship with Wal-Mart Stores, Inc., our largest retailer relationship, and we expect our reliance on this relationship to continue for the foreseeable future. Our dependence on Wal-Mart consists of two principal elements: (1) revenues earned under contracts entered into directly with Wal-Mart for media management services, advertising airtime and creative services and (2) revenues earned under contracts with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores. Revenues from contracts entered into directly with Wal-Mart accounted for 35% of our total revenues for the year ended December 31, 2003 and 37% of our total revenues for the three months ended March 31, 2004. Revenues from contracts entered into with third-party advertisers purchasing airtime or creative services for the PRN Network in Wal-Mart stores accounted for an additional 54% of our total revenues for the year ended December 31, 2003 and 50% of our total revenues for the three months ended March 31, 2004.

So in 2003, 89% of PRN's revenue came from Wal-Mart related activities, with that number probably reduced slightly in 2004. I know that PRN has signed deals with a number of supermarket chains in the past 12 months, but in reality, the Wal-Mart deal will continue to represent a very sizable chunk of PRN's revenues for the foreseeable future. Again, in light of that, it's amazing that they were able to sell for as much cash as they did.

Now, as for why they would want to sell right now, that's perhaps the most interesting question. I'd like to posit one theory myself, and I'd love to hear any thoughts that you might have. My theory goes something like this: we know that PRN has been looking to retrofit the Wal-Mart network with new technologies, like plasma screens with content targeted to each area within the store (rather than the current one-channel-fits-all approach). Let's assume that they can purchase plasma or LCD screens for $1,000 (and let's be honest: if you're purchasing 60,000 of them, you're going to find some economies of scale). Additionally, let's conservatively estimate that installing the screens, retrofitting the cabling to handle VGA signals, and installing new head-end equipment to play the higher definition content and/or additional channels also works out to $1,000 per screen. Now let's assume that they install 20 plasmas or LCDs per store, and there are around 3,000 Wal-Marts. That comes out to $40,000 per store, or a total of $120,000,000. That is a lot of cash to lay out for network upgrades that will provide unknown benefits and uncertain incremental revenue. But if Wal-Mart demands it, and they still drive somewhere in the range of 75-80% of PRN's revenues, then PRN is suddenly very motivated to find a way to deliver. I doubt very much that a bank would lend PRN that much money for what can only be described as a risky business maneuver, so now PRN needs to look for more creative sources of funding. In comes Thomson with a large amount of cash, and the rest, as they say, is history.


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Posted by keefner at August 4, 2005 11:27 PM