On Thursday evening, word surfaced on the Wall Street Journal that IAC/InterActiveCorp (IAC, Financial) was in “advanced talks” to acquire the magazine and digital components of Meredith Corp. (MDP, Financial) in a deal that could be valued at more than $2.5 billion.
IAC is a media holding company that focuses on acquiring a portfolio of media and internet companies. It allocates business investments to the subsidiaries that hold the most promise of growth, and it is known for frequently spinning off its subsidiaries if it believes they will attract a higher price tag as separate companies. Meredith is a media company that owns a collection of magazines, TV stations, websites and radio stations.
Less than a day after the rumors of the potential deal cropped up, Meredith’s stock has been bid up 25% to $56.10 per share for a market cap of $2.56 billon.
It seems traders lost no time in taking advantage of the arbitrage opportunity. If Meredith really could be acquired for $2.5 billion or more, regardless of whether the buyer was IAC or another company, then the deal was really too good to be true, since Meredith’s closing price yesterday – a mere $44.89 – represented a significant discount to the rumored buying price.
However, at a market cap of more than $2.5 billion, it seems like any potential arbitrage opportunity has already been snapped up. At the current price, Meredith’s stock would likely see little further upside from an acquisition unless someone swoops in with a higher bid, and if acquisition talks were to fall through, the speculative gains could easily be wiped out. In comparison, the market is more hesitant to consider the value of the deal for IAC if it were to be completed, despite the potential value creation for IAC.
A deal of question marks
Even though no deal has yet been agreed upon, in today’s stock market, where just about everything seems overvalued and investors find high price tags everywhere they go, the arbitrage opportunity presented by the Meredith acquisition talks provided a rare easy-money situation for investors who got in before market close on Sept. 23.
However, no acquisition agreement has been finalized. When asked for details about a potential deal, representatives from both companies declined to comment on “rumors or speculation.”
According to the Wall Street Journal, IAC “pulled ahead of another group vying for Meredith,” which includes private-equity firm Najafi Cos., suggesting that even if IAC doesn’t buy Meredith in the end, the company might still sell itself to another buyer. That’s what made Meredith’s stock so attractive all of a sudden – the seeming promise of an all-but-guaranteed $2.5 billion or more acquisition, with multiple bidders vying for the deal.
If the company is truly determined to be acquired, it is possible that it could attract a higher bidder. It is also possible that talks could fall through. The company might decide it’s not worth it to find a buyer, or if IAC backs out, it could end up settling for less than $2.5 billion. Either of these situations could trigger a selloff due to feelings of disappointment among investors and traders alike.
Even if the deal doesn’t go through, though, the rumors help to place a price tag on Meredith’s magazine and digital businesses.
In the 12 months through the second quarter of 2021, the digital business generated around $700 million in revenue, while the magazine segment brought in $1.3 billion. Combined, these two businesses represent $1.9 billion out of the company’s total trailing 12-month revenue of $2.9 billion. The company entered into an agreement to sell its broadcast portfolio of 17 TV stations to Gray Television (GTN.A, Financial) in May for $2.7 billion, a deal which is expected to close in the fourth quarter of calendar 2021.
IAC and Meredith
Compared to Meredith’s sharp spike, IAC has posted a much more modest share price gain of 5% following the rumors of the acquisition talks. Shares reached $140.37 apiece on Sept. 24 for a market cap of $12.53 billion.
Mathematically speaking, if it were really to purchase Meredith’s digital and magazine businesses for $2.5 billion, IAC would be buying approximately $1.9 billion in trailing 12-month revenue to add to its own $3.3 billion in trailing 12-month revenue.
IAC could be in a good position to grow the assets it purchases from Meredith as well. “In our view, IAC is mainly focused on Meredith’s digital media assets,” Cowen analyst John Blackledge wrote in a research note Friday about the unconfirmed report. This would complement IAC’s Dotdash online publishing business. Blackledge continued:
“Dotdash has implemented what we view as a best-in-class approach to open-internet monetization of inventory, relying on slimmed-down ad loads and improved page speed to generate organic traffic… There may be potential for revenue synergies at Meredith by implementing aspects of Dotdash’s playbook.”
Overall, the market is being slower in its assessment of the value that IAC could gain from buying Meredith, which makes sense, since it’s much more uncertain that IAC’s share price will post significant gains from the deal. Meanwhile, the arbitrage opportunity posed by Meredith was quick to disappear.
Rumors of IAC or another company potentially buying Meredith’s digital and magazine businesses have resulted in traders going on a speculative spree for both stocks. The result is that both stocks carry a certain amount of downside volatility risk. If the deal fails to materialize as rumored, both stocks could lose their gains, especially Meredith.
However, the deal could prove highly profitable and value-accretive for IAC if it does go through. Investors who have already been keeping an eye on IAC may find it worth it to take the risk and invest at current levels in case a deal with Meredith is secured. The risk is high, though, and at this stage should still be classified purely as speculation.