After the acquisition, both these subsidiaries will be wholly owned by DBCL.
DBCL will pay ~R35.6 crore for the 45% stake in IMCL and also get tax benefits of ~R12 crore (management estimates) on the accumulated losses (of ~R33.8 crore as per the FY12 annual report) implying a net purchase consideration of ~R23.5 crore. This values the digital business at ~R52.5 crore, that is, ~7x FY12 & 4x FY13E P/sales.
As per the FY12 annual report, IMCL had borrowings (debentures) of ~R35 crore on books the management notes that DBCL had issued compulsory convertible debentures which will be squared off with this transaction. We note this business had revenues of ~R7 crore in FY12 and the management guides to ~R13.5 crore in FY13E (1HFY13 revenues: ~R5.2 crore) with annual Ebitda loss of ~R6-7 crore. For comparison, the other listed internet stock, Info Edge, trades at ~9x FY12 & 7x FY13E EV/Sales.
The SMEL transaction is even smaller the company pays R2.4 crore for 43% stake, valuing the business at R5.5 crore (~1.9x / 1.7x FY12/13E EV/sales on our estimates). SMEL is profitable with Ebitda margins of 15% in FY12.
We believe the transactions are in line with the managements strategy to consolidate all media operations in DBCL. Overall, these do not impact the consolidated financials materially, given that the contribution is ~1% of consolidated revenues.
After this transaction, the near-term tax rates may be lower, which could boost reported EPS. However, we would not really ascribe a multiple to such a non-recurring tax benefit.
The small transactions do not move the needle, in our view. We reiterate buy with a target price of R255 and believe that DBCLs strong franchise, presence in regional markets and recent investments in new states should help the earnings growth and the stock in the medium term as advertising recovers.