7digital — Potential acquisition of 24-7 and share placing

7digital — Potential acquisition of 24-7 and share placing

FY16 results were in line and with £8m of contract wins during the year, 7digital looks on track to deliver its targeted FY17 EBITDA profitability. The proposed acquisition of its last significant competitor, 24-7, would add scale, synergy potential and cements its position as the leading provider of platform services to the rapidly evolving digital music industry.

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7digital

Potential acquisition of 24-7 and share placing

Media

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13 March 2017

Price

7.2p

Market cap

£11m

Share price graph

Share details

Code

7DIG

Listing

AIM

Shares in issue (post placing)
Indicative shares assuming full issue 162m

150.5m

Business description

7digital is a leading provider of end-to-end digital music platform solutions and services. Its platform and access to global music rights enables businesses in the radio, electronics and telecoms industries around the world to offer and commercialise music streaming and radio services. Customers include musical.ly, Onkyo, Panasonic, Astro, Cdiscount, Electric Jukebox, eMusic and i.am +.

Bull

Global footprint. Leading provider of B2B platform services to the music industry. Well-positioned in the global music industry’s transition to streaming services.

Pipeline of prospects, high-margin recurring licence revenues growing strongly, EBITDA profitability expected across FY17.

Potential deal to acquire 24-7 would consolidate its largest competitor, provides synergy potential and cements its position.

Bear

Disruptive business model; large B2C competitors could retaliate.

The download business, while much lower margin than licensing revenues, is a drag on growth.

Limited share liquidity.

Analysts

Bridie Barrett

+44 (0)20 3077 5727

Fiona Orford-Williams

+44 (0)20 3077 5739


7digital is a research client of Edison Investment Research Limited

FY16 results were in line and with £8m of contract wins during the year, 7digital looks on track to deliver its targeted FY17 EBITDA profitability. The proposed acquisition of its most significant European competitor, 24-7, would add scale, synergy potential and cements its position as the leading provider of platform services to the rapidly evolving digital music industry.

Proposed acquisition and £3m fund raise

7digital is in the final stages of negotiating the acquisition of Copenhagen’s 24-7, its largest European competitor. The all-share transaction values 24-7 at approximately £1.6m with 24-7’s parent company, MediaMarktSaturn (Europe’s leading consumer electronic retailer), becoming a shareholder and significant customer of the enlarged group, which will continue to service its Europe-wide Juke! service. The acquisition would add approximately £1m of EBITDA in FY18. In parallel, 7digital has announced a £2.26m share placing (at 6.5p) and open offer of up to £0.75m to raise £3m in total. We estimate the proposed transaction, net with the dilution effect of the share issue would reduce consensus EPS in FY18 by 10% to 15%.

EBITDA profitability targeted in FY17

FY16 revenues increased 15% to £11.9m and the EBITDA loss of £3.5m is in line with consensus. Licensing (+5%) was affected by the administration of Guvera. Excluding this, underlying growth was 15% (with momentum building in H216 +21%). Content grew strongly (+28%) and Creative was more stable (+5%). Snowite has been fully integrated and the targeted £1m of overhead savings have been delivered, moving the group to an EBITDA break-even position in Q416. New contract wins with a value of c £8m were announced during FY16 (double FY15’s level) and this should underpin revenue momentum moving into FY17. 62% of revenues are now from high-margin licence deals and operational gearing effects should ensure a large proportion of future revenue growth is converted to profits, putting the group on track for its targeted EBITDA profitability in FY17.

Step change in scale, consolidating largest peer

The consolidation of 24-7 would add scale, synergy potential and with the strengthening of the balance sheet, would make 7digital the ‘go-to’ platform for companies looking to launch music streaming services. With the support of all three major music labels as customers and partners and a new strategic shareholder on the register, 7digital is well positioned to benefit from the rapid evolution of the market for music streaming services. This is not being reflected in its 0.6x EV/sales rating (post placing, pre-acquisition).

Consensus estimates (pre deal)

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT
(£m)

EPS
(p)

EV/Sales
(x)

EV/EBITDA
(x)

P/E
(x)

12/15

10.4

(2.1)

(2.9)

(2.8)

0.8

N/A

N/A

12/16

11.9

(3.5)

(4.7)

(4.5)

0.7

N/A

N/A

12/17e

14.0

0.8

0.1

0.1

0.6

10.2

72.0

Source: 7digital accounts, Bloomberg. (post-placing)

Disclaimer

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 7digital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
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Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt St,

Sydney NSW 2000

Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 7digital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt St,

Sydney NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt St,

Sydney NSW 2000

Australia

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