This is a classic cigar butt investment, but the embers are glowing. Acme owns eight television stations and is in a process of controlled liquidation. There is a near-term catalyst in the likely sale of one station for an amount representing about 37% of the current enterprise value. Assuming that sale goes through, the enterprise value of the remaining stations will be roughly 15% below their original cost and perhaps 30% below market value. I believe there is an attractive opportunity for a return as the remaining stations are sold over time.
This situation is timely because Acme is in the process of selling its Ft. Myers, Florida station WTVK to Sun Broadcasting for $45 million. This station was originally purchased in 1998 for $15.5 million. Acme carries $18.7 million on its balance sheet as assets held for sale related to this property. The transaction was announced last May, but has been held up at the FCC by an objection from a competitor. Just yesterday, the FCC denied the objection and approved the transfer of the license. It therefore appears highly likely this transaction will be consummated. However, it is not clear that the market has fully absorbed this information. The FCC’s letter can be obtained via the following link:
Following the anticipated sale of WTVK, Acme will own seven stations, six of which are affiliated with the new CW network and one of which (KASY in Albuquerque) is affiliated with MyNetworkTV. Rather than repeat information that’s readily available, I will refer you to the latest 10-Q and 10-K for details if you’re interested. There’s also a 2003 VIC writeup that provides background information on the company and its management.
The remaining stations were purchased or started between 1999 and 2002. As best I can determine, the aggregate initial cost of these stations was approximately $90 million. The market is current valuing these stations, net of the WTVK sale, as follows:
$5.40 per share ACME value
x 16.05 million shares
$87 million equity value
$35 million net debt at 9/06
($45 million) WTVK proceeds
$77 million net station value
A Deutsche Bank estimate from last September valued the remaining seven stations at $116 million. Acme’s credit agreement implies a collateral value of $88 million, though the bank values have historically been conservative. A station value of $100-110 million, plus approximately $10 million of cash, would suggest a value between $6.85 and $7.50 per share. Obviously, there are other issues to consider, including operating cash flows, shutdown costs, and taxes. Acme has $79 million of net operating loss carryforwards, so taxes shouldn’t be a material consideration. I expect the cash burn from operations to be modest and believe there’s upside to some of the station values (e.g., WTVK is selling for nearly three times its cost and well above Deutsche Bank’s estimate). As a result, I believe $6.85-7.50 per share is a reasonable target range, though there are scenarios that would be higher or lower. Assuming the WTVK sale is completed, I expect management may accelerate efforts to sell the remaining stations individually, to begin making distributions to shareholders, and/or to sell the remaining stations in a single transaction.
1. Cash sale of WTVK
2. Clarity on outlook for distributions and/or sale.