By Chris Stark and Craig Berry, Stark Capital Solutions
For more than 20 years, Stark Capital has had the unique opportunity to be involved in both the financing and M&A segments of the billboard industry. We frequently talk with operators country-wide about their businesses, which gives us a unique perspective to identify upcoming trends in the industry. Based on the conversations we have had, as well as first-hand experience with our clients, there are multiple trends we are noticing.
1: Valuations on Newly Developed Locations
Historically, recently built locations with no trailing cash flow have been difficult to sell. Newly built locations typically require a deeply discounted multiple to the proforma cash flow for buyers to justify the lack of performance history. However, based on transactions we have financed or brokered over the past 18-24 months, we’ve seen a major shift in the value being paid to new assets without trailing revenue history. These deals are very market and location-specific, but buyers are becoming comfortable paying a higher value if they feel confident in the proforma and/or if the asset has unique characteristics that cannot be easily duplicated. Based on the deals we have been involved in, we are seeing these types of transactions fall between 8-10.5x proforma cash flow.
2: Availability of Capital
Compared to the last two decades, there is more money available for those who are looking to develop or complete an acquisition. With an increase in the number of specialty lenders focusing solely on the OOH Industry, as well as traditional lenders funding certain operators, it is important for plant owners to understand who they are working with and their track record in the industry. It’s also important to understand what other services a lender can bring to the table for future needs. Here are some important questions to ask yourself:
- Can they provide equity if it’s needed later?
- Do they have past M&A experience to help advise me on an eventual sale?
- Do they offer multiple funding options & structures?
- Do they have any case studies on how they’ve helped similar operators in the past?
- How did they handle OOH borrowers during COVID?
We do expect to see many traditional lenders pull back as the credit market becomes tighter and rates continue to increase.
3: Creative Buy/Sell Proposals
Nearly all past sale transactions have been asset purchases with cash at closing. However, we are seeing more equity partnerships and joint-venture proposals now than ever before. This could be because buyers are wanting to hedge their risks given the economic uncertainties. Although no two situations are alike, we are big supporters of thinking outside the box to maximize profits!
4: Expiring Digital Screens
Digital screens have an average useful life of 10 years before they need to be replaced. These digital screens started becoming more popular around 10 years ago when prices became more feasible and advertiser demand started increasing. Now that these initial screens are nearing the end of their assumed lifespan, we will begin to experience the need to replace expiring digital screens — and it will continue each year into the future.
If you need to modernize your screens, Stark Capital has an exciting program in place with Formetco for those who need easy financing for screen replacements. Now is the time to strategize and develop a disciplined plan for screen replacement.
5: New Development Strategies
The opportunities for traditional buy-right billboard development are becoming increasingly scarce. Now, we are seeing more operators creatively working out partnerships with cities and cutting development agreements to 1) share ad space for civic engagement promotions or 2) share revenue to fund city programs.
If municipalities aren’t open to strategic partnerships, many billboard companies are challenging the ways ordinances are written due to language that suppresses freedom of speech. More regulations and ordinances are being thrown out because they do not protect constitutionality, and this is a trend we expect to see into the future.
6: Remote Sales
Traditionally, billboard companies have employed sales executives where their assets are physically located. However, since COVID, we are seeing a shift to remote sales via websites, email, buy-side platforms, virtual meetings and more. Many of our clients are operating a centralized footprint with sales execs located all over the country, which is something we were not experiencing years ago. However, it is important to note that this trend is mostly impacting digital sales and that vinyl billboard locations still require people locally to process vinyl changes, manage rotary programs, etc.
7: More Thoughtful Valuations
Over the past 18-24 months, we have experienced average sale multiples peak to the highest the industry has ever seen. We are noticing deals being closed today (that were negotiated several months prior) are still commanding these high multiples. However, through conversations with various buyers on multiple active deals in the marketplace today, we are witnessing the following:
- More in-depth Q&A prior to issuing an LOI
- A slight softening on the average sale multiple
- More stringent APA negotiations to protect buyer’s interest in the assets
The number of buyers in the market is still strong and incredibly active, but the industry may see a trend of lower valuations on average due to this change of behavior from the large acquirers.
What are your predictions for 2023?
With more than two decades of experience in the billboard industry, Stark Capital Solutions has built a reputation of honesty and integrity with many trusted partners. We predict another strong year of deploying capital in the industry and are excited to help even more clients with their goals this year. If you have opportunities in your pipeline, let’s talk about how we can best assist you in completing your 2023 projects.
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