JSE-listed Caxton & CTP Publishers, Printers and Distributors has proposed to acquire a minority interest in listed digital and communications solutions subsidiary Cognition Holdings for a total consideration of R60.1 million.
The offer is valued at 1.07 cents per share.
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Cognition's share price has traded between 98 cents and R1.10 per share over the past 90 days.
Mr. Caxton owns 75.4% of Cognition's shares.
The proposal was revealed in Caxton's interim results for the six months to the end of December 2023, published on Friday.
If the proposed transaction is successful, Cognition will be delisted.
Shareholders of both companies are aware that Cognition's board of directors will begin formal discussions with Caxton in November 2023, which could result in an offer from Caxton to acquire Cognition shares not already held by Caxton. I was first informed of the possibility of such a transaction when the
Cognition said at the time that the last price Caxton paid for each Cognition share was 99 cents, and that any acquisition consideration was not expected to be less than that level.
Synergies, cost savings
Caxton MD Tim Holden said on Friday that if the proposal was accepted, Caxton would delist Cognition and integrate it into the publishing side of its business, creating synergies and extracting more from the business. He said it should be possible to reduce costs.
Holden said Sens' announcement on the proposal is expected to be released early this week.
“We just paid the full amount into a trust account as a security deposit for the acquisition. It happened this morning. [Friday] So there will be an update early next week,” he said.
Holden said delisting Cognition will also reduce operating costs.
“Cognition is really too small to go public,” he said, adding that the company's product offerings target a customer base very similar to Caxton's.
Caxton will be able to offer a “full service” to its customers, from advertising campaigns to contest management to providing all the services Cognition offers.
Last year, Cognition sold its headquarters, Cognition House in Randburg, to Luma (Pty) Ltd for R11.87 million.
Mr Holden said Cognition had since moved to Caxton House on Jan Smuts Avenue in Johannesburg, which also helped reduce costs.
result
Mr Caxton reported on Friday that, as expected, a more difficult trading environment emerged in the six months to the end of December 2023 as consumers battled inflation, low economic growth and load shedding.
The company said that although the period was characterized by an overall revenue decline and margin compression, these were offset by good cost management and an increase in financial net income.
Revenue decreased by 3.3% from R3.8 billion to R3.69 billion. This includes the impact of the sale and closure of subsidiaries, which accounted for his R163.7 million in reduced sales.
Excluding this, revenue would have shown a slight increase of R36.2 million compared to the previous period.
Operating profit before depreciation and amortization decreased by 16.7% from R505.69 million to R421.45 million.
Composite earnings per share decreased 6% from 90.7 cents to 85.1 cents.
Caxton reported that national advertising revenue was down 6% year over year, marking a significant change in historical trends for the local newspaper business.
The decline was primarily due to declines in the technology and do-it-yourself markets, with media spending down 28%, the company said.
Consumers under pressure
Holden said Caxton's local newspaper business had always been successful in growing national advertising revenue from major retailers, but the technology and building materials market had declined significantly during the reporting period.
He cited financial results from building materials companies such as Cashbuild, which indicate a tough market.
“After COVID-19, they had a big boom and we all benefited from that, but they have taken a big step back.
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“It’s not that they aren’t using our paper anymore, it’s that they are printing fewer and fewer brochures.
“I don't think we'll see any growth in national advertising towards the end of the year until the economy changes and interest rates start to come down and consumers have a little more money,” he added.
Mr Holden said the group was trying to address the issue by exploring new sources of income and reducing the cost of producing newspapers.
He added that 8% of the country's revenue during this period came from new customers, and that people who had not used the company's media before were starting to do so.
Caxton reported that its daily newspaper, The Citizen, like other publications, is facing a decline in circulation as consumers continue to consume news digitally.
Read: SA publishers turn hostile in battle with Google
It said the decline in advertising, primarily in the national retail sector, was offset to some extent by an increase in legal advertising and, most encouragingly, a 33% increase in digital revenue.
Caxton said the company remains focused on aggressively growing digital revenue and tightly controlling costs while protecting print revenue.
Packing work
Although the group's packaging business achieved solid results, it was unable to repeat last year's record performance.
Read: Packaging business drives Caxton to record full-year results [Oct 2023]
Caxton said that while the 8.1% increase in sales was commendable, increased competition in some markets had put pressure on margins, and higher weighted average costs for raw materials had put further pressure on margins.
In the folding carton segment, the bulk wine bag-in-the-box segment's record performance last year was impacted by wine shortages and consumer restraint, with volumes down year-on-year.
This trend is expected to continue this year as the wine industry reports lower harvests.
Caxton reported that the quick service restaurant (QSR) market ended almost flat year-over-year after several years of double-digit growth.
“This segment is an indicator of the state of consumers who are under intense pressure and have less discretionary spending,” the report said.
“The fast-moving consumer goods sector (FMCG) did not show growth, and some premium product sectors saw the impact of cash-strapped consumers being felt, with volume declines.”
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Mr Holden confirmed Mr Caxton expected the next six months to be tough and that the trade environment would start to improve once interest rates were lowered and the decline in consumer spending eased.
He said some of the customers are an indicator of the state of the consumer.
“If you take fast food as an example, we've had double-digit growth for the past two years, but it's been flat over this period,” he said.
“I think this is just indicative of the state of the consumer. Until interest rates start to come down and consumers have more money in their hands, we're not going to be in a situation like this for the foreseeable future.” You will have to face it.”
Caxton shares fell 1.72% on Friday to close at R10.30 per share.
Disclosure: Caxton's majority shareholder is also a significant shareholder in African Media Entertainment (AME), the owner of Moneyweb.
