by Robert Macmillan, Chief Executive
I read with interest Jim Johnson’s take on the OUTFRONT Media sale of its Canadian business unit. Thriller —OOH …Here’s One Thing. Johnsen usually writes well thought out pieces, but on this one I was a little disappointed with the analysis. While it’ a great history lesson it does not really dig into the likely reasons OUTFRONT decided to sell, has inaccuracies that need correcting if the companies 2022, 10k is to be believed and what would potentially optimize the use of proceeds.
The facts:
+/- $300m purchase price
+/- $92m net revenue
+/- $20m cash flow
Approximately a 22% margin
OUTFRONT Canada operated across most of the country, a franchise, if you will. 7 cities in Ontario, 6 on the west coast and 3 on the east coast. The Canadian operations accounted for 5% of total company billboard revenue and 4% of total company transit revenues. This amounts to the Canada business accounting for 5% of OUTFRONT’S total revenue. This was derived from 4,729 billboard displays and 4,595 transit displays for a total of 9,325 displays (2022, 10k)
Of the $92m in total revenue $32.3m came from 268 digital billboards, each digital making an average of $120k in annual revenue and $2m came from 78 digital transit displays with each digital making an average of $25.6k in annual revenue. 346 total digital displays accounting for 35% of total Canadian revenue. Contrast this with the US business which makes $368.5m from 1,702 digital billboards or an average of $216,509 per display and $137.1m from 15,998 digital transit screens or $8,569 average per display and 30% of total revenues
If we assume margin is the same on the Canadian digital assets and static assets alike this means each digital display sold for $327,138 (note 1) and the static assets sold for $21,206 (note 2)
Total Canadian revenues:
2019 – $87.8m
2020 – $59.8
2021 – $78.3
2022 – $91.9 – high water mark
In 2021 and 2022 OUTFRONT operating expenses and SG&A costs were impacted negatively by increases in the cost base of the Canadian business. (source OUTFRONT 2022 10k)
Rationale for divesting the Canada business
- Simplifying the business – The sale of the standalone Canadian business should allow the management team to focus solely on the challenges they face in the US business which are many.
- It’s small, only 5% of total company revenues but likely was costly to administer. Tax, compliance, operations, entities, legal…. This all goes away
- Margin accretion – The US business has 30% margins (2022, 10k) and the Canadian business has 22% margin. Selling the lower margin business should result in slight margin increases in the remaining US business. Small margin increases on $1.7 billion in revenue have huge impacts on cash flow
- Deleveraging – If net cash proceeds from the sale is applied against its debt this will reduce OUTFRONT’s debt to cash flow ratio by about 0.5
- Cutting operating and SG&A overhead – The Canadian business was more expensive to run, by selling it the drag this unit was having on these two costs buckets will be removed
- No real synergies exist between Canadian OOH and US OOH. Having one does not help the other and visa versa.
- Redeployment of capex earmarked for the Canadian business to the US business. Higher revenues and margins in the US should equal better long term results and IRR from capital projects
- Revenue high water mark was reached in 2022 so potentially good timing?
In totality, I think this divestiture was a smart move and should aid management in executing in the US. The business faces huge challenges and convincing the market that there is an executable plan in place to start to turn the tide is no small challenge. The stock is down 42% over the last six months, 46% over the last year and 67% over the last 10 years. This during the best 13 years OOH has ever enjoyed, yes, even given the impact covid had. If this was a first step in simplifying the business, concentrating on margin not revenues then I salute management for taking that first step.
Final thoughts:
- I would love to know what the occupancy % and average rate was for billboards and transit – both static and digital – Did they leave Bell Media with a lot of upside and did this affect the multiple? If Bell was getting more results from their OOH inventory compared to OUTFRONT they would have been comfortable paying more safe in the knowledge the upside was there
- The vast differential in US transit per screen digital revenue and Canadian transit per screen digital revenue warrants further exploration. Turning OUTFRONT’s fortunes around is closely correlated to growing per screen unit economics on its US transit platforms
- Is more always better? It would appear the Canadian transit business focused on larger format digital and far fewer smaller screens resulting in far better unit revenues. Begs the question: do we over digitize small screens in US transit systems when the market is not there yet?
Begs the question: do we over digitize small screens in US transit systems when the market is not there yet?
Ok…really final thought
If it were me steering the OUTFRONT ship, I would invest the after tax and costs proceeds back into US assets. This could be done at lower multiples than the sale occurred at which would be long term value accretive. I would concentrate on acquisitions in what OUTFRONT captions “all other markets” i.e. everything outside of their 15 top markets. Why would I do this? Revenue growth and margin. The assets they would acquire in these markets will have significant digital, rate and occupancy upside (high likelihood of 50% to 100% revenue upside based on my experience with Trailhead Media) and much lower operating costs. This would help densify these non core markets and aid market coverage from an asset, sales and ops perspective. This means they could in effect trade a 22% margin, low growth business for a 40% plus margin, high growth business and that’s a trade I make all day.
Notes:
1. ($34.3m * 22% margin = $7,546,000 digital cash flow. multiply by 15 multiple = $113,190. divided by 346 digital displays = $327,138)
2. 9325 total displays – 346 digital = 8979 static displays. Static revenue $92m total – $34.3 digital = $57.7m. * 22% margin = 12,694,000 static cash flow multiply by 15 multiple 190,410,000 divided by 8979 static assets = $21,206)
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