Zinc Media Group plc (LON:ZIN) Chief Executive Officer Mark Browning caught up with DirectorsTalk for an exclusive interview to discuss the acquisition of The Edge, how the deal was structured, what it means for the company, key shareholders and what investors can expect in the coming months.
Q1: First off, congratulations on the acquisition that took place earlier today. Can you just tell us what The Edge does?
A1: The Edge is a production company, they make film and content for brands and businesses. Their clients include the likes of Amazon, Network Rail, EY, AstraZeneca, BT and FIFA to name a few and they tend to work with big global brands in large markets like pharma or banking or finance or transport infrastructure and media and they are based in a London office and an office in Qatar, they’ve been in Qatar for 15 years.
Q2: Mark, can you just talk us through how the deal has been structured?
A2: The deal is in two parts, there’s an initial consideration and then a further deferred consideration through an earnout.
The initial consideration is £2.1 million, £1.6 million of that is payable in cash and £500,000 in shares. That initial consideration values The Edge at three times EBITDA and 0.2 times revenue, and that is based on a 3-year trailing average for the last three years.
The deferred consideration is based on this earnout. The important thing for investors to understand is that the earner is in effect self-funding based on their ability to grow their business over the coming three years. So, it’s structured on a sliding scale and based on their EBIT performance, there is a maximum deferred consideration, which is £3.9 million over 3 years if they generate £5 million of EBIT over the three-year period, or £1.7 million on average per year, which would mean to get to that maximum they would need to triple their EBIT performance.
There’s quite a lot of numbers in there so the scenario that I have been using when asked about this to illustrate the sliding scale, just take their last financial year, they delivered £600,000 of EBIT, if they grow that to £900,000 a year and maintain that level for the next three years then that would pay them 75% of the maximum consideration so they get about £2.8 million for generating £900,000 a year for three years.
Q3: Now, the other question that investors are probably going to ask is what does this transaction mean for the company?
A3: Well, we’ve been alluding to the need for scale for some time, and this is, I think, the transformational moment for the group to get that scale. It’s a very good deal for our shareholders, it’s at sensible valuation multiples and it’s a good deal for The Edge, it brings them into a much larger group with obvious synergies and scale, which I’ll touch on in a minute.
When I last spoke to you and I spoke to investors back in May, I said our strategy was continued solid organic growth and acquisitive growth, and we’ll show very good organic growth this year and this acquisition then adds that kind of important scale that we’ve been talking about for a while.
The Edge’s consistently booked £8-10 million of revenue for the last decade or so, its profitable, it’s remained profitable during COVID so the new combined group can look forward to being profitable and cash generative, continuing to grow organically. That, in turn, that virtuous circle will provide the springboard for further scale down the line.
They produce content in areas where Zinc also produce television content, they produce for brands, we produce for brands and businesses, so do we and that presents opportunity to leverage clients. We have slightly different products and we can transfer some of our products into their client base and theirs into ours and similar skill sets.
They also operate in some markets that we’re not in, they do learning development training films. they also work internationally in the Middle East markets with products that we’re not in. Zinc bring brings television, traditional television opportunities to their respective clients, which might be in the form of advertiser funded programming, it might be in the form of audio, for example, in our radio and podcasting business.
So, we think there’s opportunities for both companies to get value here and to find synergies and to upsell and cross sell together.
Q4: Raising money in this market is obviously very difficult, why do you feel investors have bought into Zinc Media and who are the key shareholders?
A4: Our shareholder register is on our website for those who want to have a look at it but includes the likes of Herald, and Canaccord, Premier Miton, Ruffer, Edale, and there are new big institutional investors joining the journey at this point.
Yes, I did enter this with a degree of trepidation, knowing the headwinds that we’re all feeling and the economy is feeling, and certainly our investors are feeling, but I think the reason why we have managed to be successful and arguably to swim against the tide of the market, I think goes back to the elements of trust and transparency about what we’re doing.
So, when I joined the group three years ago, I set out what I then called the transformation plan, and within that transformation plan were a series of really clear KPI’s that we had to deliver on and a set of criteria we had to meet in order to move out of the transformation plan into the acceleration and scale phase of our journey, which is what we’re in now.
We’ve delivered on all of those, despite COVID. We’ve improved our TV margins, we’ve diversified our revenue, we’ve invested in the core or the spine of the group in things like HR and Technology and Finance, all in readiness for an acquisition to build that central infrastructure. That has had cost associated with it, which is why our profits haven’t flowed through in the same level of our revenue growth because we’ve also invested at the same time in building this core infrastructure in order to ready ourselves for this acquisition opportunity when they come along.
So, I think doing what you say you’re going to do builds trust with investors, and trust is what investors have to continue investing in the business. It’s also a good deal for investors so they have seen that, they have understood it, it’s quite a simple proposition, it’s a very established company, it’s got a very good track record in big markets with good gross margins and, as I say, we’ve agreed it at a sensible valuation so I think that has helped.
We’re in the content making business and the content making business if you believe that content is a differentiator for brands and television stations and platforms, then investing in a content making company where content is a must have for very many businesses in the global economy because it differentiates their proposition and investing in a content creator is a good thing.
We have a strong and trusted relationship with our investors, we speak regularly, we share transparently and we do what we say we’re going to do.
Q5: Finally, what can investors expect from Zinc Media in the coming months?
A5: I laid out the things that investors should expect from us when I spoke to you last in May, they haven’t substantially changed.
I talked about scale, we’ve delivered on that, good year on year revenue growth, we are comfortable and confident about that and we’re going to focus a lot on integrating The Edge and delivering in the short, medium and long term.
Over the next coming months, we really need to focus on following through on this deal and making sure they’re comfortable, making sure they got what they need, making sure they deliver on the numbers that they want to deliver on. That’s in everyone’s best interest, so we’ll be focusing on that and, as ever, further diversification as we build a really solid business in content creating.