Toronto-based Onex Corp. (OTC:ONEXF) completed its acquisition of Nielsen Holdings' (NYSE:NLSN) exhibition business June 18 for $950 million. The deal brings together one of the biggest private equity firms in North America with one of the world's biggest consumer insight companies. Both are interesting stocks. I'll tell you which you should own.
What Onex Acquired
Nielsen Exhibitions (renamed Emerald Acquisitions by Onex) was a small sliver of Nielsen's overall business. In fiscal 2012 the exhibition business generated $183 million in revenue along with operating income of $72 million. While the margins are good, the segment represents just 3.3% of revenue and 7% of operating profits. Clearly it didn't fit into Nielsen's future.
As far as pure-play exhibition companies go, there's really only Premier Exhibitions (Nasdaq:PRXI), a micro-cap best known for its Titanic exhibit. More business-to-business oriented is Phoenix-based Viad Corp. (NYSE:VVI), whose Marketing & Events Group offers best-in-class exhibition and event production. However, in addition to the events group, it also has a travel business in both Canada and the U.S. It theoretically could have acquired Nielsen's exhibition business although unlikely because Viad provides services to trade show operators while Nielsen owns and produces annual trade shows such as Outdoor Retailer, Health + Fitness Business Expo and many others.
In other words, Onex or some other large private equity firm was the ideal acquirer.
Why It Did The Deal
In its annual investor day presentation at the end of May, CEO Gerry Schwartz admitted that deals were tough to come by these days. Whether it's a case of sellers being more selective about who they get in bed with or simply that there is more money chasing deals today; the likelihood of successfully bidding for a business has become much less certain. Its latest acquisition will be its ninth since raising $4.7 billion for Onex Partners III in December 2009. To date, its third fund has invested $4.2 billion of its committed capital or $467 million per deal. In the case of Emerald it's investing $350 million in equity of which Onex itself is committing $85 million with the rest coming from third-party investors. With fewer deals seemingly available, the company's focusing on growing recently acquired businesses including Emerald. Onex Partners III has achieved a gross internal rate of return of 13% since 2008, which is lower than earlier funds, but still pretty darn good.
By successfully completing its carve out with Onex, Nielsen has provided itself with almost a billion dollars cash to put toward its $1.3 billion acquisition of Arbitron (NYSE:ARB), which is pending regulatory approval. Arbitron brings to the table a long history tracking radio listening habits, which dovetails nicely with Nielsen's experience in the television medium. Its combined revenues would be $6 billion with EBITDA of $1.7 billion. The deal brings it one step closer to providing advertisers with audience measurement across multiple media outlets including the internet. Closing the loop will dramatically increase its attractiveness to advertisers boosting revenue and profitability. The sale is definitely addition by subtraction.(L5)
Which Is The Better Stock
Although it's an apples-to-oranges comparison, I think it's possible to draw some conclusions about each company. Onex is less about what's happening today and more about tomorrow. It makes money from its management fees and carried interest from its proprietary investment. In other words, the better it does putting the capital into play at the launch of a fund combined with growing the business and finally exiting that business, the higher the returns for it and its third-party investors. However, that doesn't happen overnight. Onex Partners' original fund got its start in November 2003. Ten years later it still has a few investments on the books. As a result, investors must understand that sometimes good things take time. That said, Onex's annual compound return over the last 20 years is 18%, significantly outperforming the S&P 500.
Ironically, Nielsen Holdings is owned by several of the biggest private equity companies in the U.S. including KKR (NYSE:KKR) and The Blackstone Group (NYSE:BX). The group acquired Nielsen in July 2006 for $11.4 billion including the assumption of debt. Almost seven years later the company's enterprise value is $19 billion, a big gain from the original price paid. Nielsen recently conducted a secondary offering where KKR and its other partners sold up 40 million shares at $35 each. After the offering the group will own 41% of the company.
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It's been a good investment for the private equity firms. The question is whether it will continue to be. Nielsen has $6.1 billion in net debt. Its trailing twelve month free cash flow is $495 million. Even if it devoted every penny (annual dividend of 64 cents) to debt repayment, it would take a decade or more to repay. While I like the Arbitron buy and its decision to sell its exhibition business in order to pay for the deal, it's clear that a lot has to go right in order for it to successfully deleverage. I'm not saying growth can't be had but it better come organically once the Arbitron deal goes through or shareholders will be in a world of hurt.
Although the private equity business is getting tougher to produce 20%-plus returns, if anyone can continue to grow Onex, its Gerry Schwartz and the rest of his very capable team. For this reason Onex is most definitely the better stock to own.