Nielsen (NLSN) had some welcome news for investors as it sold the Global Connect business in a multi-billion deal to Advent. The company will sell nearly half the business in terms of sales, yet the margin differential makes that just a smaller portion of the EBITDA generation is leaving the door with this deal.

Looking at this deal it reveals that Nielsen is receiving a very modest multiple and Nielsen would probably have been better off if it could restructure the business itself, or perhaps if it had pursued a spin-off.

While deal proceeds will reduce leverage by approximately a third, post-deal leverage remains relatively high around 4 times. While pro-forma earnings numbers look reasonable, the reality is that Nielsen has lots to prove after a few very dismal years.

Deal Terms

Nielsen has reached a deal with Advent International to sell its Global Connect business in a $2.7 billion deal as the deal furthermore includes some warrants to be received by the company which are exercisable under certain conditions.

CEO David Kenny claims that the deal will deliver value sooner, as it provides both certainty and is set to close quicker than the planned spin-off. Proceeds will be used for debt reduction, thereby providing some relief here, and perhaps some money will be earmarked to expand the media marketplace activities.

Note that the separation or this business was announced back in November 2019 and was set to be completed in the second half of this year, although this original timeline was delayed to some extent of course due to Covid-19.

The deal is quite transformative as many people know Nielsen from this business, being the standard in retail measurement. Rapid changes in the marketplace make measuring and insights provided by firms like Nielsen both in retail and media harder to do, amidst the prolific rise of alternative channels in which the company has fewer measurement capabilities.

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If we look at the 2019 performance, it was revealed that Global Connect reported a 2.6% fall in sales to $3.06 billion, although constant currency growth came in at 0.7%. The unit reported EBITDA margins of 13.8%, or $422 million last year. Based on the reported deal tag, and not accounting for any value to the warrants being granted, valuations do not look compelling at 0.9 times sales and 6.4 times EBITDA, as investors have hardly reacted to the deal in terms of share price reaction.

The Impact

As known, Nielsen reports its sales across two activities which includes the divested Global Connect business and Nielsen Global Media which reported a 1.9% increase in sales to $3.44 billion in 2019, with adjusted sales growth even coming in at 2.6%.

The unit is far more profitable, however, with $1.48 billion in adjusted EBITDA, for margins equal to 43% of sales. The earnings numbers were quite complicated in 2019. The overall company reported total revenues of $6.50 billion on which it reported a GAAP loss of $415 million, or about $1.17 per share. The company reported adjusted profits of $1.80 per share with the majority of the gap explained by impairment and goodwill charges.

The total D&A component of $756 million in 2019 was not split out across both segments last year. If we assume that 47% of the D&A expense (similar to the revenue contribution of the segment) is incurred by Global Connect, that segment would be responsible for $355 million in D&A, suggesting the business contributed just $67 million in operating earnings. Of course, the $2.7 billion cash component would reduce debt in such a way that leverage ratios would fall and earnings could see a boost. After all, pegging interest costs around 4%, more than $100 million in interest expenses could be forfeited with debt reduction, more than offsetting the modest earnings contribution from Global Connect.

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What is left to do is to look at the remaining business. The Media segment generated $1.48 billion in adjusted EBITDA and based on the same logic as above, would have $400 million in D&A expenses.

By the end of the third quarter, net debt stood at $7.76 billion, as this could fall towards $5.1 billion if we account for the last divestment. Management guides that net leverage will come in around 4 times, suggesting some EBITDA pressure on the business, as is evident in the results so far this year.

The 358 million shares of Nielsen represent an equity value of $5.0 billion at $14 per share, as a similar net debt load makes for an enterprise value of $10.1 billion after the deal. With the Media business essentially generating $3.4 billion in sales last year the company trades around 3 times sales, and around 7 times EBITDA for 2019.

Assuming $1.08 billion in operating earnings for 2019 (although of course the business has seen some pressure on the business this year) we can construct a P&L. Interest expenses on $5 billion in remaining net debt might run around $250 million a year. Following a 20% tax rate, earnings come in around $665 million, or at $1.85 per share. Of course this is before some deleverage on the business this year and the impact of corporate cost allocations.

What Now?

After shares peaked at $50 in 2016, shares have seen a secular decline, now trading at just $14 per share. Contrary to many stocks, Nielsen’s shares have hardly recovered from the Covid-19 lows around $11-12 per share, and hardly have seen a recovery from there.

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Quite frankly I do not think that the latest deal with Advent is a game changer here as the remaining core business of Nielsen will remain a one-trick pony as this media business is not insulated either. While this certainly was a very strong business with very impressive margins, the question is what the real prospects are for the business. After all, the future can be debated as many companies require great insight into emerging media channels such as youtube.com, streaming assets and social media, among others, areas which are not Nielsen’s strength.

Here and now I see that Nielsen has done a big deal, and while it is transformative to some extent, I am not seeing a big impact on the bottom line. This deal does not alter my cautious to neutral stance here despite the dismal trading action. While pro-forma multiples are very modest, I am afraid of continued corporate cost allocation, proceeds leakage and expensive debt, but moreover the future of this business.

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