Two of the stock exchange's hottest growth stocks are considering a merger if reports in today's Australian newspaper are to be believed.
Credit analytics company Veda Group Ltd (ASX: VED) and media intelligence group iSentia Group Ltd (ASX: ISD) are proposed as the married couple even though they provide widely differing business services to their extensive client rosters.
Veda acts as a provider of credit analytics services to consumers and businesses, while iSentia provides media monitoring services to companies across the Asia Pacific. Although, both businesses enjoy the tailwinds of the digital future and boast double-digit growth rates.
Both companies are also widely coveted by investors for their growth potential and rightly so with Veda boasting competitive advantages via the market-leading quality of its credit analytics capacity, a long growth runway, healthy margins and leverage to growing demand for credit and risk management services.
However, iSentia may have more potential given it has been posting stronger organic growth than Veda as a provider of media monitoring and business intelligence services in tune with the fast-changing digital media landscape.
Public opinion on products and companies is now increasingly shaped by social media and diverse online channels rather than the traditional mainstream media outlets of old like broadcast television and newspapers.
iSentia has leveraged this phenomenon to build a market-leading reputation as its image conscious corporate and public sector clients across the Asia Pacific region seek a partner to help them make sense of the new media and public relations landscape.
The group is also moving heavily into the content marketing space which provides the opportunity to cross sell into existing clients' marketing budgets with strategy, content, social media, public relations, analytics, monitoring and digital insight services among others.
It recently acquired King Content to accelerate this push and iSentia continues to win new clients across an Asia Pacific market that is mouth-wateringly large in its potential.
Moreover, the capital light, digitally-oriented business model means earnings can grow faster than revenues, cash flows are strong and mid-teens organic earnings growth is expected in the year ahead.
Deal chances?
Veda then would have to stump up a substantial premium to iSentia's already frothy valuation around $690 million at $3.44 per share on around 16x FY15's EBITDA of $42.5 million, or 25x the group's underlying earnings per share based on underlying net profit.
The sky-high valuation a considerable obstacle for Veda alongside the fact that Veda's heavy focus on credit analytics suggests the two businesses don't appear to have many obvious synergies to suggest they would be a stronger force combined rather than as individual businesses.
Any proposed takeover looks like it would be a hard sell to both sets of shareholders, although both remain two of the best growth stocks on the ASX in my opinion.
Veda Group's current valuation at $2.08 makes it look a buy, while iSentia has an attractive outlook but that is more than reflected in its current valuation to make the stock a hold at its current valuation.
