Univision Sale Supports Upside in CETV But Has Few Other Ramifications

/0 Comments/in /by

The Univision (UVN) auction came grinding to an end with announcement that the company would be sold for $36.50 per share or $12.3 billion. The private equity financed buyers will also assume debt of $1.4 billion. After adjusting for acash and other assets, the total value of the deal is about $13 billion. Analysts estimate that UVN will have EBITDA in 2006 of about $800 million. Thus, the EBITDA multiple on the deal is about 16.2 times.
Based on initial estimates and media commentary a sale price of $36.50 is considered to be a poor outcome as many thought the company might fetch $40 or more per share. The perception of a weak auction was furthered by the apparent falling apart of the bidding group that included Grupo Televisa (TV).
However, I’d characterize the outcome of the UVN auction as “pretty solid.” After all, 16 times current year EBITDA is a huge premium to where any other traditional media asset in the world is currently trading. At $40, the multiple would have been just short of 18 times, or roughly twice the multiple of any other media stock can name. I think the slight disappointment in pricing is attributable to rising interest rates (financing cost are up 50 basis points at least since the auction began), a tricky path to regulatory approval for TV’s group, lack of bidders among the media conglomerates who are either divesting assets or just finishing acquisitions, and an acknowledgement that UVN’s growth is moderating toward low double digits from 20% plus. The bottom line is I wouldn’t call a 16 multiple a failure. Rather, I consider it a fair price for a great asset….

Read more

Mid-Year Updates Provide Little Cheer For Newspaper Stocks

/0 Comments/in /by

Newspapers companies presented to analysts last week in the annual mid-year review. I did not attend the meetings or listen in on any webcasts but I did review several summary reports prepared by analysts including Lauren Fine of Merrill Lynch and Mark Fenton of Citigroup.
Overall, the presentations gave little hope for the short-term other than a contrarian call based on lower interest in the group (as measured by lower than usual attendance) and continued pessimism on near-term fundamentals. Analysts did note that relative to recent conference calls and presentations managements were more subdued and more accepting the bearish outlook toward newspaper print advertising held by the street. This is potentially another sign that we could be closer to a bottom than current fundamentals and sentiment would suggest.
Unfortunately, any bullishness is tempered by continued weakness in advertising trends and stocks that are not unusually cheap by historical standards. Conseqeunty, I see little reason to be in any stocks in the group unless you are hoping to hit the lottery with a premium takeover bid.
Getting back the management presentations….

Read more

Another Up Weekend For The Movies

/0 Comments/in /by

If my bullish thesis on the summer box office is to come to fruition, it should be evident over the next few weeks with the back to back openings of Superman Returns and Pirates of the Caribbean: Dead Man’s Chest (POTC) on June 28th and July 7th, respectively. These are two of the most anticipated films of the summer and early reviews for both are very good.
In the meantime, Adam Sandler once again proved his star power as his latest film, Click led the box office to its sixth consecutive up weekend. On a year to date basis, the box office is not up about 5% with the second quarter trending up over 10%. Sandler’s last four films each opened to $37 million to $43 million and went on to earn $125 million to $160 million. Click opened right in the middle of the range of previous films with $40 million. With the long holiday weekend coming up and no other comedies in theatres, observers see the film heading toward $150 million. Click is a Sony (SNE) property, continuing a very good year for the studio. However, given the company’s reliance on hardware, box office success is not enough to move the stock price…..

Read more

Conference Call With NTL CEO

/0 Comments/in /by

On Monday morning, UBS Cable Analyst Aryeh Bourkoff hosted a conference call with Stephen Burch, CEO of NTL Incorporated (NTLI). I thought the call went well although the stock went down on Monday and Tuesday. I continue to hold all of Northlake’s long positions in NTLI and feel the stock offers incredible value at current levels.
There were several highlights on the call….

Read more

Box Office Continues To Strengthen

/0 Comments/in /by

The box office was up for fifth consecutive weekend, led by a solid second weekend for Cars and respectable openings for three new films: Nacho Libre, Fast and Furious Tokyo Nights, and The Lake House. The Break-Up and earlier releases like X-Men and The Da Vinci Code continue to pull in moviegoers. Although the summer season is still without a major breakout hit, good depth of movies appealing to all demographics is proving that decent product will bring people into theatres. Don’t read too much into my “lack of hits” comments, as two films have already grossed $200 million plus, two more have grossed $130 million plus and Cars is on track for around $200 million….

Read more

Upfront Moving Slowly So Far For TV Networks

/0 Comments/in /by

So far, the results of the upfront selling season for network TV advertising have been slow. The upfront occurs every May and June when the broadcast and cable networks introduce their lineups and cut deals with advertisers for advertising over the new TV season that follows in the fall.
FOX Ahead of Other Broadcast Networks in Selling Its New Season
According to an article in the Wall Street Journal late last week, the pace of deals between advertisers and the broadcast networks (ABC, CBS, NBC, and FOX) is lagging well behind last year’s weak upfront, and pricing is worse than expected. FOX is the only network that has completed the bulk of its upfront deals, selling 70% of its inventory at price increases of 2%-3%. FOX is coming off a strong season for ratings when “American Idol” was more popular than ever, and several other shows — including “24,” “Prison Break,” and “House” — had higher ratings.
ABC And CBS Will Have to Accept Ad Pricing Bar Set By FOX Deals
ABC and CBS each had some ratings success but have been slow to cut deals. Both networks appear to be looking for price increases ahead of what FOX accepted. So far, that is a no go with advertisers. ABC had a good season in terms of ratings growth but failed to add any new hits following the turnaround driven by “Desperate Housewives,” “Lost,” and “Grey’s Anatomy.” CBS led last season in total ratings across the broad demographic, but ratings have not grown in a couple of years. FOX has probably set the bar, and ABC and CBS will have to accept lower price increases. Both networks may hold back inventory, selling less than the 70% of FOX, hoping to meet ratings guarantees and then sell ads in the scatter market this fall at premium prices to the upfront.
NBC Continues to Cut Prices to Attract Advertisers
NBC, like FOX, has sold a lot of advertising time. In NBC’s case, however, the sales have been made at lower prices than a year ago. This was also the case last year when NBC first felt the pain of its ratings collapse. Another down year of ratings, and the network is again cutting prices to attract advertisers. This is probably a good strategy for NBC as it can earn some good faith from advertisers in the hopes that ratings have bottomed out.
Advertisers Moving Money Online and Committing Closer to Start of Their Shows
Overall, it appears that this year represents an acceleration in the trend away from an upfront-driven TV advertising market. Advertisers are moving more money online and prefer to make commitments closer to airing of their ads. So far, the impact on the networks is felt more in their loss of leverage vs. advertisers than a loss of ad dollars. Advertisers have more places to go and want better measurement of ad effectiveness such as that seen on the Internet.
Erosion of Network Power Hurts Stocks of Network Owners
In the long run, the gradual erosion of network power is a negative for the owners of those networks, which include Viacom (VIAB), Disney (DIS), News Corp and General Electric (GE). This issue has been recognized by investors and is one reason for the steady erosion in multiples that has occurred over the past few years. The bottom line is that growth rates in broadcast and cable network advertising business are likely to remain below the levels they have been in the past when compared to GDP growth. That is a negative for stocks, but it is also conventional wisdom. To me, that means it is largely incorporated in stock prices. And that is why I have spent a lot less time analyzing the upfront this year.
New Outlets Possible for Products From Media Conglomerates
Is there a potential positive out there to offset the network’s reduced negotiating position? If there is, it is likely the development of new outlets for all the programming these entertainment conglomerates produce. Whether that will be enough to offset lost revenue from the traditional industry is to be determined.
I remain long DIS, looking for strong earnings the next two quarters to drive the stock back into the low $30s.

Is There Excess Value At Tribune?

/0 Comments/in /by

One of the theories behind breaking up Tribune (TRB) is that the broadcast television assets are worth a significant premium to the current valuation of TRB shares. Recent TV station sales support this idea but an article last week in the Wall Street Journal there outlined the pressure that local TV stations are feeling. It makes me wonder if a breakup of TRB might not yield as much upside as some expect.
On the other hand, the New York Times has reported that several of the major private equity shops that specialize in media have already approached the Chandler family about either buying out their stake or partnering with the family on a buyout of TRB.
The Jounral articles notes that for now reasoningthe TV business is still basically OK which is what attracts private equity money. The question, though, is whether the 8 times EBITDA multiple for CBS (CBS) or the 12-14 times multiple of recent station sales are the correct valuations. It makes a big difference to your opinion of TRB.
I suppose TRB is a good place to hide given the heightened speculation about a breakup of the company. I still have this nagging concern that any restructuring short of a sale of the entire company will produce a stock price that falls far short of bullish estimates north of $40. The depressed valuation of CBS and the fact that pure play newspaper companies are trading at the same multiple as TRB are the source of my concern.

Lionsgate Earnings and Guidance Provide No Catalyst

/0 Comments/in /by

On Thursday, LionsGate Entertainment (LGF) reported mixed 4Q06 results and announced 2007 guidance which was inline with expectations. The shares are responded well initially, rising more than 3%. After almost a year of disappointing financial results, I think the rally in the shares is more a function of relief than the result of any important new positive fundamental trends.
Revenues Far Ahead of Estimates
For 4Q06, revenues came in at $313 million, far ahead of analyst estimates that ranged from $250 million to $300 million. Strength came from higher than expected home video revenues, which were due to good sales of DVD titles from recently released films. Theater revenue and TV revenue came in as expected. The revenue upside did not flow through to operating income as EBITDA only met guidance of $20 million. Expenses were too high once again, which is a problem that recurred throughout FY06 and raises questions about the long-term profitability of LGF’s business model. Despite the lack of operating leverage, free cash flow (FCF) easily beat estimates, coming in at $48 million as working capital items again contributed greatly. The shares are probably responding to the better than expected free cash flow but the continued disconnect between EBITDA and FCF leaves earnings quality issues front and center.
Revenue Guidance for 2007 Tops $900 Million
For FY2007, LGF provided revenue guidance of “greater than $900 million” and free cash flow guidance of around $85 million. Management based the revenue guidance on what it called conservative assumptions for box office receipts along with general commentary for TV, library and home video revenue. FCF guidance of $85 million is less than the $103 million the company reported in 2006. But management noted that 4Q06 included a $20 million working capital benefit, so in reality they are forecasting flat comparisons.
Closing the Gap Between EBITDA and FCF
On the call, management noted that it plans to close the gap between EBITDA and FCF by increasing its operating profits. This will have to be the case as almost all of 2006 FCF came from balance sheet items. Balance sheet items can play an unusually large role for TV and film production companies, but ultimately operating income has to support FCF. Unfortunately, management provided no EBITDA guidance for FY07. Repeated questions by analysts did help to flush out the composition of 2007 FCF but there is still much looseness in the cash flow model for me.
Guidance of Flat Results for 2007 Reflects Mediocre Earnings Quality
I don’t mean to be overly negative in my assessment of the quarter and guidance. I sold the stock partially because I was concerned about earnings quality. But the main reason I soured on LGF was that I did not see growth potential in FCF over the next couple of years that would support what I see as a full valuation for anything short of a takeover. I think guidance for flat results in 2007 supports my thesis.
There are reasons to be optimistic. Investors will respond if 2007 FCF and EBITDA converge. The company continues to build library value in both films and TV. TV especially looks strong with the number of series and pilots the company is producing growing nicely in 2007. Carl Icahn has taken a stake in LGF, complementing a stake built over the past year by a former associate.
LGF Remains a Suitable Takeover Candidate
LGF is a unique asset as the only sizable independent movie and TV studio. The company fits well with many public companies that could easily swallow the financial commitment to acquire LGF. There are significant shareholders with a history of agitation. Stabilizing financial performance, asset value, and takeover speculation will support the shares unless there is another significant setback related to earnings quality. Management has heard the earnings quality complaints and seems to be responding. We’ll probably wake up one day to news that LGF is being taken over. I’ll regret not owning its shares that day but until then I just don’t have the confidence in the company’s growth profile or cash generation consistency to be long.

Japan’s GDP Report Supports Bull Case

/0 Comments/in /by

Earlier this week, the 1Q06 GDP report in Japan was revised. Several statistics noted in this Bloomberg article article discussing the report support my bull case on Japan.
GDP grew by a healthy 3.1% in 1Q06, revised upward from 1.9%. Corporate spending rose at its second fastest rate since 1990. Machinery orders were up almost 11%. Inventory investment rose sharply. Bank lending has risen for four straight months. These datapoints all indicate that corporate confidence in continuing GDP growth is high. Modestly improving consumer spending shows that consumer confidence also supports future growth.
As is the rest of the world, inflation is up in Japan….

Read more

Disney Downgraded at Citigroup

/0 Comments/in /by

On top of the slightly weaker than expected opening for Cars, Disney caught a downgrade from Citigroup which has the shares down about 3% this morning. However, the downgrade had nothing to do with Cars. Rather it was totally predicated on the analyst’s expectation that theme park revenues and operating income would fall well short of consensus in 2007 leading DIS to miss the current 2007 consensus forecast of $1.64 by 11 cents. Citigroup believes that theme park attendance will fall short due to tough comparisons against 2006 growth that was driven by the 50th anniversary marketing. Additionally, waning consumer confidence correlates with lower them park attendance.
Back to Cars, I quickly browsed through analyst commentary and found that most analysts noted the slight shortfall but few felt it would have any significant impact on profits. Merrill Lynch said that at most over the next two years when DIS is projected to earn over $3.00 combined, the shortfall could cost 3-4 cents, just 1% of EPS. Merrill went on to state that at a presentation it hosted in London last week, the head of Disney’s consumer product division said that the Cars launch was the strongest for any Pixar film ever with most of the initial inventory fill selling out. This is an important point as the Pixar acquisition must be analyzed relative to its contributions across all of Disney’s businesses, not just eh box office for any single film.
DIS shares have fallen almost 10% from last week’s 52-week high at today’s open. I think that more compensates for the slight shortfall of the Cars opening and Citigroup’s concerns over theme park growth in 2007. Sentiment on the shares will now be sour for the short-term but as I wrote earlier today I think near-term earnings will remain very strong and Pirates of the Caribbean and June quarter earnings provide catalysts over the summer.