Outdoor advertising catches private equity's eye

While the effects of increased digitisation cause disruptive ripples throughout nearly every industry, one that is now finding its footing again is the advertising sector. And within the space, the only channel that has generated consistent revenues over the past five years is outdoor advertising.

"Over the past five years, with the maturing of broadband internet, there has been a real fragmentation in the advertising market," says Tim Green, managing partner at GMT Communications Partners, an investor in outdoor advertiser Primesight. "There is now a huge amount of choice for advertisers, as well as more choice for consumers, making it increasingly challenging to measure the impact and effectiveness of advertising."

According to the Outdoor Media Centre, the UK trade body for outdoor advertising, total revenues for the UK OOH advertising sector reached £990m in 2013, comfortably surpassing the 2007 peak of £976m. Unsurprisingly, the space was hit by the downturn, with revenues slipping to £782m in 2009, but the sector has proved its relative defensiveness compared to other forms of advertising including print, TV and radio. Notably, print revenues have fallen from £5bn in 2004 to £3bn in 2011. Also of little surprise is the meteoric rise of online advertising, which has risen from next to nothing in the early-2000's to generating revenues of more than £5bn in 2011.

Given the huge structural upheavals experienced across the entire advertising industry, outdoor has held onto its clear position. "Whereas with set-top boxes and digital forms of advertising it has become easier to avoid adverts, that is not the case with outdoor – it really is the last true mass-market media," says Green.

And private equity has not ignored the benefits of OOH, with GMT picking up outdoor advertising company Primesight in 2007 for £62m, while LDC purchased Ocean Outdoor in May 2012 in a £35m secondary buyout from previous backer Smedvig Capital. Furthermore, Platinum Equity carved out CBS Outdoor International, which oversees all advertising on the London Underground, from NYSE-listed parent CBS Corporation in July last year.

This is not to say that digitisation has not impacted OOH advertising, but the changes morphed into new strengths. "From a revenue point of view, digital OOH advertising allows the media owner to target advertising budgets that were previously unavailable to a traditional OOH media owner, therefore the revenue upside potential is huge," says David Andrews, investment manager at LDC in London and backer of Ocean Outdoor, which recently acquired Signature Outdoor. Digitisation of outdoor media means that rather than selling in two-week slots, which was the traditional model, campaigns can now be changed on a minute-by-minute basis.

Says Green: "Today, with digital sites, we can sell individual time slots; we can tailor campaigns to rush hour or lunch time. Digital is fundamentally changing the thinking behind OOH and boosting revenue for sites."

Fresh perspective
While OOH clearly has huge attractions, the sector understandably comes with its own set of challenges. "Because outdoor depends solely on advertising spend it is very cyclical, so you need to be very sure of where you are in the cycle." Green also points out that the industry is subject to high fixed costs and rent rates, especially if exposed to large municipal contracts: "These are very competitively bid on and tend to have fixed rents, with indexed-upward-only increases."

According to Andrews, the challenge is managing and educating the established consumer chain. He explains that 90% of OOH advertising is still sold in two-week slots, despite the rise of digital sites, so in order to take advantage of the reduced wastage offered by digital, the entire process – from creative to posting – needs an updated mindset.

Furthermore, the rise of digital sites does incur a heavy cost burden. "Another challenge is the cost of the equipment, which puts huge focus on the location of the screens. A digital screen in a bad location will lose you hundreds of thousands but a digital screen in a prime, iconic location will always be the first choice on an advertiser's schedule," says Andrews.

Fortunately, Green believes there will naturally be more investment into sites as the economy recovers. And digital sites are already generating healthy revenues, coming in at £214m for 2013, up from £182m in 2012.

Beyond the rise of digital screens, another important development in the outdoor market has been the creation of a new measuring platform – Route – which can show advertisers and agencies how to best reach audiences. "It's an important step for further developing outdoor," says Green.

And it would seem the OOH industry is keen to continue its evolution with developments in near-field communication (NFC) on the horizon. Says Green: "Billboards that communicate with phones is something that will come further down the line. NFC would allow targeted marketing campaigns by offering discounts and promotions to passers-by, but this is a further development for outdoor."

Of course, exciting technological developments in the outdoor space provide a good case for investment; however, the most inviting aspect for private equity is how fragmented the market is at the moment. "There is certainly some room for consolidation," notes Andrews. "We have seen a growing trend in the broader media and digital space towards smaller, specialised and high-growth companies like Ocean being bought by larger organisations looking to expand into niche markets. It's quite possible that we will also witness a similar trend emerging in the outdoor advertising space."

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