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Jagran Prakashan will acquire Mid Day's newspaper business, mainly comprising four editions of an English tabloid daily. The share-swap deal will dilute Jagran's equity by 5% but valuations are reasonable at 2x EV(enterprise value)/sales. However, we are concerned by management's strategic shift to focus on newer opportunities in the Mumbai market and the English print. Both are hyper competitive and market-share gain may be difficult. Jagran is trading at 18x FY11CL (current liabilities) PE (price-to earnings) and we downgrade the stock from Outperform to Underperform.Jagran publishes India's leading Hindi daily newspaper Dainik Jagran, which is printed in 37 editions across 11 states. The company has announced an arrangement with Mid Day multimedia to merge its newspaper businesses. MidDay's business comprises four editions of the daily tabloid, as well as Gujarati Mid Day and Inquilab (in Urdu), besides related Internet properties. In addition to its flagship Hindi daily, Jagran also publishes an English infotainment: City Plus (24 editions) and a bilingual newspaper I-Next (12 editions).The Jagran-Mid Day deal is fixed at two Jagran shares for seven Mid Day shares, implying an equity valuation of Rs 1.74 b/$39m. Mid Day's newspaper business revenue stands at Rs 950m for FY10, so the EV/sales valuation is 2x, which is lower than Jagran's own 4x EV/sales. However, Mid Day's Ebitda (earnings before interest, taxes, depreciation and amortisation) margin at 20% is also 10% lower than Jagran. The deal valuation, while reasonable, marks a strategic shift in Jagran's management strategy. Mid Day faces intense competition. Even though the English print is a large and attractive market, it also remains intensely competitive. In the Mumbai market, Mid Day's flagship edition is the 5th largest newspaper, with a readership of 417,000 versus 1.45 m for the Times of India, with Mumbai Mirror the closest competitor with a readership of 811,000. With Mid-Day, it will compete with the might of English print majors of Times of India and Hindustan Times in Mumbai, as well as an aggressive company in DNA.Even as Jagran's core Hindi business remains on the growth path, we are concerned about management's strategic shift to focus on newer markets and, in particular, the English print. These hyper competitive spaces make market-share gain difficult.—CLSA
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