Investors who have any interest in the proposed merger between Nielsen and Arbitron Inc. (NYSE:ARB) would do well to investigate the former company’s deal with Onex in detail. For starters, it might be helpful to compare the three companies that stand to benefit the most from this transaction.
Compare and Contrast: Onex, Nielsen and Arbitron
ONEX Corporation (TSE:OCX) is a major private equity firm that has a hand in a number of distinct industries. Although it focuses on manufacturing, technology, and healthcare the company also has a sizable presence in the retail and media industries. Unfortunately, it has hit something of a rough patch over the past few years. In 2012, ONEX Corporation (TSE:OCX) lost about $121 million on gross revenue of just under $27.5 billion. By comparison, Nielsen earned $284 million on revenue of nearly $5.7 billion. Arbitron reported a profit of about $57 million on gross revenue of $450 million. As such, Arbitron is clearly the most profitable firm of this group.
Onex also has a hefty debt load of more than $10.5 billion. This is somewhat mitigated by its healthy cash flow of over $2 billion and its cash reserves of nearly $3.5 billion. By contrast, Arbitron Inc. (NYSE:ARB) has no substantial long-term debts and an adequate cash flow figure of $110 million. On the other hand, Nielsen has just $233 million in cash to about $6.3 billion in cash. Of course, the ONEX Corporation (TSE:OCX) transaction will provide it with a much-needed capital boost.
How the Deal Will Happen
Even if this deal had no implications for the merger between Nielsen Hldg NV (NYSE:NLSN) and Arbitron, it would still be a newsworthy event. After all, Nielsen Expositions is a major player in the booming trade-show industry, and it maintains a special niche that caters to very large business-to-business meetings. Although the exposition business is a bit more staid than media ratings, it has provided Nielsen with a solid source of profit over the years. Nevertheless, this is obviously not a core business for the company, which according to recent filings, accounted for just 3% of the company’s 2012 revenue. Most market-watchers agree that Nielsen Hldg NV (NYSE:NLSN) should focus on strengthening its position as the premier provider of audience analysis services.
The deal itself is relatively straightforward. ONEX Corporation (TSE:OCX) has agreed to pay $950 million in cash for the expositions business. The company’s Onex Partners III subsidiary will use $350 million of its own reserves for the purchase and finance the bulk of the rest with leverage.
This purchase price provides Nielsen Hldg NV (NYSE:NLSN) with nearly 80% of the cash that it will need to finance the merger with Arbitron. As one observer astutely notes, this sets up a virtual three-way “trade” with Nielsen at the center. Although a firm closing date has not yet been given for the deal, it should go through within the next few months. Thus far no regulatory action or shareholder issues have arisen to impede it. It seems unlikely that this will occur at all.
Implications for Nielsen-Arbitron Merger
The deal between ONEX Corporation (TSE:OCX) and Nielsen accomplishes two important things by providing Nielsen Hldg NV (NYSE:NLSN) with the capital that it needs to acquire Arbitron without using any leverage and significantly increasing the likelihood that the deal between the two media-watching firms will pass regulatory muster. In light of skepticism from federal agencies that worried about the combined company’s establishment of a monopoly in the media-measurement business, this latter point is especially important.
In the call that announced and explained the divestiture of Nielsen Expositions, the company’s CFO argued that Onex’s cash infusion might also permit Nielsen to begin returning capital to its shareholders on a regular basis. Although he gave no firm timetable for this capital return, he implied that the company could increase its dividends or launch share buybacks during the coming months and years.
Where’s the Profit?
Now that Arbitron’s shareholders have approved the merger with Nielsen Hldg NV (NYSE:NLSN), it seems far more likely that it will go through as currently planned. To review, the terms of the all-cash deal require Nielsen to provide Arbitron’s shareholders with payments of $48 per share. Relative to Arbitron’s current share price of just under $47, this represents a premium of around 2%. As such, cautious investors who wish to lock in a small but real arbitrage profit should not be timid about initiating long positions in Arbitron.
On the other hand, those who wish to profit on a longer-term basis may wish to open a long position in Nielsen. As the company’s CFO noted in the Exposition call, neither deal is likely to have a significant negative impact on Nielsen’s earnings. Once the company digests the financial impact of the transactions, its stock price could continue to appreciate nicely.
In sum, the sale of Nielsen Expositions to ONEX Corporation (TSE:OCX) provides Nielsen Holdings with much-needed cash and increases the likelihood that its Arbitron purchase will go through. If these pieces fall into place, investors can profit from the deals by taking long positions in Nielsen or Arbitron. Given the long-term growth in the two companies’ core areas of operation, these transactions could prove to be quite lucrative.
The article What Does the Business Unit Sale Mean for the Big Merger? originally appeared on Fool.com and is written by Mike Thiessen.
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