Lionsgate: Good Results and Outlook But As Usual Confusion

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Lionsgate (LGF) shares are trading down about 4% following the release of the company’s 4Q07 results and 2008 guidance. As usual, the accounting is complicated but overall I think the results and guidance are fine and expect the shares to bounce back.
For 4Q07, LGF reported EPS of 19 cents on revenues of $332 million. EPS were a little shot of the 22 cents consensus while revenues were $10 million higher than expected. Given the volatility in LGF’s quarterly numbers due to timing issues regarding revenue and expense recognition in film and TV production, I see these results as essentially in line with expectations.
For 2008, LGF expects to produce free cash flow “in excess of $100 million” on revenue growth of 10-15%. However, EBITDA and Net Income will be significantly negative as the company absorbs an incremental $200 million in marketing expenses for an expanded slate of theatrical releases and the associated expenses related to DVD releases on the films. The discrepancy is the result of the new film financing deal LGF announced on Tuesday that will provide $400 million in off balance sheet financing for the company’s film slate to be released this fiscal year. LGF has to recognize 100% of the expenses related to these films even though the financing vehicle will pick up 50% of the costs. On the call management explained that the cash flow statement will pull back the difference between free cash flow and EBITDA. The addition of even more complex accounting is not good news of LGF but the explanation makes sense and the numbers seem to balance in the end at close to the levels the street was expecting….

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Bullish News For NII Holdings

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NII Holdings (NIHD) shares rose over 3% yesterday following an announcement that the company would be issuing $1 billion in new convertible notes and buying back $500 million shares. Four million shares will be purchased contemporaneously with the closing of the convertible offering. Full use of the authority will retire about 3% of the outstanding shares. Essentially, NIHD is buying back shares at current prices and selling an option to buy shares near $115. The message is quite positive.
The convertible will have attractive pricing from the NIHD perpsective with around a 3% coupon and a conversion premium of 45-50%. NIHD stated that proceeds of the convertible and the green shoe if exercised would be used for the possible purchase of spectrum or other telecom assets, accelerated build out of the networks in Brazil and Chile, the balance of the share repurchase authority, the refinancing of other debt, and general corporate purposes.
Analysts applauded the move and reiterated their mostly bullish recommendations. NIHD is about to finish the build out of its Mexican network leading to a surge in operating margins and free cash flow. By authorizing and executing a share repurchase at current prices, management is showing great confidence in the business outlook and strongly indicating what the use of free cash flow will be in the future. Not to be overlooked is the fact that share repurchase is being completed following a doubling of the share price in the last 18 months and with the shares near all-time highs….
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Disney Radio Sale Set To Close

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While Disney (DIS) shareholders digest the box office and stock market reaction to Pirates of the Caribbean: At World’s End, the company announced details of the divestiture of most its radio business. According to press release issued Friday, on June 12th, DIS shareholders will receive .0766 shares of Citadel Broadcasting (CDL) for each share of DIS they own as of the close on June 6th. CDL is buying DIS’s radio business including radio stations and the ABC Radio Network. DIS will continue to be involved in radio through its ownership of the Radio Disney and ESPN radio networks and a few stations operating with content from these networks.
CDL shares have performed poorly since announcing the acquisition of the DIS radio assets last year. CDL is essentially doubling down on radio as the DIS assets are as large as CDL’s current business. CDL is paying an above market price for the DIS even after DIS agreed to a modest renegotiation of the deal terms. Compounding the troubles for CDL has been deteriorating advertising growth for the radio industry as it loses share to online advertising.
While CDL shares have worked steadily lower since mid-February, radio stocks as a group have actually performed fairly well, beating the market’s return about 75% of the week’s so far this year according to recent data from Credit Suisse. Consequently, I think it is possible that consummation of the DIS deal might allow CDL shares to perform relatively well for a few weeks. On the other hand, the newly issued and distributed CDL shares seem likely to be sold creating a near-term supply-demand imbalance. CDL is issuing approximately 150 million shares to DIS shareholders vs. 100 million currently outstanding. Given the vastly different investment profiles of DIS and CDL, it seems fair to assume that many individual and institutional DIS shareholders will be looking to sell their newly received CDL shares….

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Pirates Sets Sail Under Moderate Winds

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Pirates of the Caribbean: At World’s End performed in line with expectations pulling in $156 million over the Memorial Day weekend to set a new record for the holiday period. However, whisper numbers were higher as many observers, including myself, thought the film could bring in $175-200 million. Most Wall Street analysts were looking for the lower figure so estimates at Disney (DIS) should not be impacted but depending on the second weekend gross, some potential upside in DIS’s numbers I was hoping for may be not come about.
Despite the somewhat lower than expected numbers for Pirates and a good but not great second weekend for Shrek, the box office set a Memorial Day weekend record with receipts up 8% vs. last year for the top 12 films. The box office remains on pace for a record setting year with total gross admissions up 7.1% though Monday. Receipts are also running over 4% ahead of 2004, the all-time record year. These figures and a favorable release schedule through June leaves the short-term bull case for the theatre stocks intact. I remain long Regal Entertainment (RGC) and still anticipate the shares can move to $23-24 by the end of June….

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Central European Media Enterprises Pulls Back On Czech News

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Central European Media Enterprises (CETV) shares have pulled back this week amid news out of the Czech Republic concerning the awarding of new digital television licenses. The licensing process has been full of fits and starts with the government initially awarding six new national licenses but failing to provide licenses for the two national analog stations including CETV’s TV Nova which is far and away the number one station in the Czech Republic. Following objections from Nova and the #2 station, TV Prima owned by Modern Times Group, the government threw out the awards.
Without warning, earlier this week the government announced that the six licenses originally awarded would be granted and that Nova and Prima would receive their licenses for free. The new licenses would be provisional with a five year term. Analog services would be turned off in 2009 when the switch to digital went nationwide. The government also gave interested parties just 48 hours to respond compared to the constitutionally mandated 13 days.
This news has plusses and minuses for CETV. On the downside, the six new national digital stations would be on the air several years sooner than expected. When the initial awards were thrown out, it was presumed that the whole process would be restarted and no new national stations would launch before 2012. Another problem for Nova would be the analog signal going dark in 2009. Short of the government handing out new digital set top boxes there is no way that all the TV households in the Czech Republic would be able to watch TV on the new digital channels. The combination of new national competitors and loss of reach clearly would be a negative for the long-term growth of CETV’s largest asset. This is partially offset by the granting of a free license for the digital Nova, which could be broadcasting from day one of the digital era without any new programming investments unlike the new competitors which would have to spend huge sums on programming and infrastructure with no established audience.
Based on my discussions with management of CETV and other large shareholders, I don’t see how the latest moves by the government will pass constitutional muster with the same Czech courts that already threw out the first awards. Besides Nova and Prima, there are other parties upset with the ruling including those who were passed over when the initial licenses were rewarded….

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Valuevision At Critical Juncture

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Valuevision (VVTV), owner of the ShopNBC, the #3 home shopping channel, reported disappointing 1Q08 results after the close. Similar to QVC and HSN, ShopNBC had weaker than expected sales. VVTV has a high fixed cost base due to expensive distribution contracts it signed with cable and satellite providers. As a result, 5% sales growth translated into a small EBITDA loss.
In response, the company announced an across the cost savings program, expected to produce run rate expense reduction of $10 million once fully implemented. This is real money to VVTV as the company’s new 2007 guidance calls for revenue growth of 6-8% and EBITDA of $15-20 million vs. $14 million last year. Additionally, the company announced a $25 million share buyback, enough to retire over 5% of the current outstanding shares.
VVTV is a stock I have owned personally for about a year and have owned on and off for clients over the past several years though I hold no position now. The market cap enterprise value is around $400 million, placing the per subscriber value at under $7. I think that represents real value to a third party but I am not sure there is a path to realize the value….

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Shrek The Third Off To A Good Start

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Shrek The Third beat expectations this weekend as I thought it would. The total box office of $122 million is the third highest opening weekend of all time behind only Spiderman 3 and Pirates 2. It will fall to fourth next weekend when Pirates 3 likely surpasses Spiderman 3. The weekend box office was up more than 9%and the summer season is off to a great start. Year-to-date the box office is now up 7%. The quarter is also shaping well and comparisons remain favorable next weekend and through June. Regal Entertainment (RGC) closed at an all-time high on Friday and still has some room to run.

Virgin Media Takeover Speculation Revived

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As I noted last week, it seemed possible that Virgin Media (VMED) might be back in the crosshairs of private equity when one of its largest shareholders, Franklin Mutual Advisers, indicated that it wanted to meet with management and other shareholders regarding the poor performance of the company. My guess appears to have been accurate as the UK newspaper The Observer reported yesterday that Providence Equity is rekindling its interest in VMED and opening talks with potential partners. Approximately one year ago, private equity groups reportedly offered $31 to VMED and were turned down by a combination of Richard Branson and major shareholders who got their stock through the company’s bankruptcy reorganization a few years ago. Those shareholders have been selling their positions and gave up a Board seat recently and might not be in a position to block a deal this time. As for Branson, it is unclear where he would stand. The reports of the new deal suggest a deal at very little premium to current prices but if the Board indicated it was willing to talk, I think a price close to $30 is still plausible despite the weak fundamentals. I am not long VMED and don’t recommend getting involved given the weak fundamentals but I expect the stock to move up nicely today.

Shrek The Third Hits Theatres

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The second big movie of the summer season, Shrek The Third, hits theatres today (actually showings began at 10 PM on Thursday night but those will count as opening day and opening weekend totals). No other new films are in wide release this weekend and Spiderman 3 is fading fast – even though it is still headed well over $300 million it will fall well short of the first two installments.
Expectations for Shrek 3 are for an opening around $110 million, well behind the new record set by Spiderman 3 of $151 million set just two weeks ago. My sense is that there is some worry that Shrek 3 may get squeezed between Spiderman 3 and Pirates 3 which opens next weekend and is apparently tracking extremely well.
All three Shrek movies opened on the same weekend. The original opened in 2001 and pulled in $42 million its first weekend on its way to $267 million domestically. On the second Memorial Day weekend, the three day gross matched the opening weekend. The film showed great legs, finishing with six times its opening weekend gross.
Shrek 2 opened on a Wednesday in 2004 and pulled in $21 million the first two days before picking up $108 million on its first weekend. The second Memorial Day weekend saw the gross fall to $72 million on its way to domestic box office of $441 million, good for second all-time if you disregard the gross form the 1997 re-release of Star Wars. Shrek 2 also showed good legs, especially as the era of frontloaded box office receipts was firmly in place by its 2004 release.
Shrek 3 should benefit from the broadening of the audience base as evidenced by the much larger gross of the second film compared to the first. However, early reviews have been mixed to poor which could hurt. The first two films were very well reviewed. Then again, Spiderman 3 met with mixed reviews before blowing away the opening weekend record and beating high expectations.
I think that Shrek 3 may surprise to the upside because expectations have been held in check by its placement between Spiderman 3 and Pirates 3…..

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A Hedge Fund Manager Responds To Comcast Going Private

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In response to yesterday’s post about the Bernstein analysis of Comcast as a private equity buyout candidate I received an email from my good friend and media confidante KG, who is also a hedge fund manager. As usual, KG is thought provoking:
I read that Moffett analysis yesterday, and also read your piece. Such rationalization for an attractive stock price actually worries me a bit, which shouldn’t surprise you. His whole thesis is predicated on the EV in five years being over 8x EBITDA at that time. The math works at that level, but what if the exit multiple was, say, 6x? That $10 billion of upfront equity will have grown all the way to……….$11.7 billion, hardly great LBO economics.
Extrapolating the crazy present LBO environment into the distant future could be dangerous. I think CMCSK is on the cheap side of “reasonably valued” and I own it in my fund. But the way I look at it is if they do everything they say they will do by 2009, FCF/share might be about $2.25. At a reasonable 6% FCF yield, the ’09 stock price would be $37.50. Assume that happens in late ’09, 30 months from now. That gives us a prospective stock price appreciation of 15% per year for the next 2 1/2 years, decent for a big cap quality cable play but hardly “stupid cheap”.
KG is an appropriately skeptical investor and is currently bearish on the market which explains the “shouldn’t surprise you” comment. His points are valid and I would point to another stock he and I often discuss, Virgin Media (VMED) as evidence supporting his case. VMED trades around 6 times current year EBITDA reflecting slow growth in the brutally competitive UK environment for triple play services. One could certainly make the argument that the US will trend toward the UK environment over the next five years as AT&T (T) and Verizon (VZ) go national with their multichannel TV offerings, higher speed wireless data offerings become prevalent, and browser based video becomes more widely adopted….

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