Ascent Media Corporation ASCMA W
October 31, 2008 - 11:23am EST by
mark81
2008 2009
Price: 24.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 343 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Recommendation

Long Ascent Media Corporation, ticker:  ASCMA.  This is a now simplified yet still undiscovered spinoff.  The upshot is that Ascent has traded largely in the $24 range, has $22.50 of net cash, and has a real (albeit average at best) business being given away.

 

Background

The “old” Discover Holding Company (DISCA) owned 2/3 of Discovery Communications, as well as 100% of Ascent Media and AccentHealth.  DISCA and their partner in Discovery Communications, Advance/Newhouse, decided to combine their interests to form a new public company.

 

DISCA is now Discovery Communications, which is a pure-play owned by the former Discovery Holding shareholders and Advance/Newhouse.  DISCA and Advance/Newhouse could not come to an agreement on the value of Ascent, so the cleanest way to handle the situation was to spin it off.

 

AccentHealth was sold on 8/8/08, and the Information Statement filed with the SEC displays the most recent financials as of 6/30/08.  As with most spin-off documents, there are all kinds of pro forma presentations that frankly don’t clearly spell things out, namely the pro forma doesn’t match pieces of the MD&A, as the business units’ EBITDA is presented without corporate SG&A.  Further complicating matters, one must be careful to only pay attention to the financials that exclude the AccentHealth business.  Finally, the most recent balance sheet does not include the cash proceeds received from the sale of AccentHealth, which is the key to this idea.  There is only one line from the Information Statement that clearly spells out the situation (page 35, Liquidity and Capital Resources section):

 

At the effective time of the spin-off we have cash and cash equivalents of approximately $340 million, including cash received from the sale of AccentHealth.

 

Elsewhere in the document it says that the pre-tax gain on the AccentHealth sale was $63M – I have chosen to assume they owe but have not yet paid taxes of $25M (assuming a 40% tax rate). On 14M shares we come to $22.50/share of net cash.  So for $2/share or $28M you can buy what I believe should be a normalized EBITDA number of $60M.  To be clear, this is not a peach of a business.  It is competitive (more on that below) and capital intensive; however they do state that 2008 CapEx is expected to be $45M – given the D&A shield, I assume EBITDA – CapEx = free cash flow, which I think is fair.  I believe these assumptions are reasonably conservative, and while it is a tough business to award even a market multiple, it doesn’t take much of a multiple to earn an attractive risk-adjusted return here.

 

With respect to the cash, I do not claim to know what they will do with it, which is of course a risk.  I could see them repurchasing shares, and/or waiting for a cheap acquisition.  This is slightly uncomfortable, however I feel better about it given that John Malone owns over 700k shares and controls 31% of the vote – part of my attraction is Malone, who despite recent news stories on his personal margin calls, I trust and admire.  It is a small position for him, but he has never been one to fritter away money, and historically it has been prudent and lucrative to buy him while he’s “down” (which I believe is a common misperception at the moment).  Finally, management appears competent, engaged, and incentivized by the right things (namely EBITDA and free cash flow targets).

 
The Business

There is a section from the Information Statement that does a nice, succinct job of explaining what they do, their customer base, and what the recent environment has looked like:

 

Ascent Media provides creative and network services to the media and entertainment industries in the United States, the United Kingdom (“UK”) and Singapore. Ascent Media’s clients include major motion picture studios, independent producers, broadcast networks, programming networks, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports, corporate, educational, industrial and advertising content. Ascent Media’s operations are organized into the following two groups: the creative services group and the network services group.

 

On November 5, 2007, the Writers Guild declared a strike affecting the script writing for television shows and films. The strike, which lasted until February 12, 2008, had a significant adverse effect on the revenue generated by Ascent Media’s creative services business for services provided on new entertainment projects utilizing scripted content and the production of new television commercials. The 2007-2008 television season was significantly affected by the strike. Networks and producers resumed production of some scripted television programming interrupted by the strike. However, some programming never resumed production this season.

 

The contract between the Screen Actors Guild and the Alliance of Motion Picture and Television Producers (“AMPTP”) for theatrical motion picture and television performances expired on June 30, 2008. A failure by the Screen Actors Guild to finalize and ratify a new agreement with the AMPTP within a reasonable period of time after expiration of the prior contract could lead to a strike or other job action. Any such labor dispute could have an adverse effect on the television and motion picture production industries, including Ascent Media’s business, and in the case of a severe or prolonged work stoppage, the adverse effect on Ascent Media’s business, operations, results of operations and/or financial condition could be material.

 

In recent years, Ascent Media has been challenged by increasing competition and resulting downward rate pressure for certain of its networks services. Such factors have caused some margin compression and lower operating income. Ascent Media believes that while its networks margins in 2007 and 2008 are lower than in some previous years, they have stabilized for the time being, and Ascent Media is continuing to focus on leveraging its broad array of traditional media and file-based services to be a full service provider to new and existing customers within the feature film, television production and advertising industries. Its strategy focuses on providing a unified portfolio of business-to-business services intended to enable media companies to realize increasing benefits from digital distribution. With facilities in the U.S., the U.K. and Singapore, Ascent Media hopes to increase its services to multinational companies on a worldwide basis. The challenges that it faces include continued development of end to end file-based solutions, increased competition in both its creative and network services, differentiation of products and services to help maintain or increase operating margins and financing capital expenditures for equipment and other items to meet customers’ requirements for integrated and file-based workflows.

Catalyst

The investment community and/or the sell-side is alerted to the cash balance.
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    Description

    Recommendation

    Long Ascent Media Corporation, ticker:  ASCMA.  This is a now simplified yet still undiscovered spinoff.  The upshot is that Ascent has traded largely in the $24 range, has $22.50 of net cash, and has a real (albeit average at best) business being given away.

     

    Background

    The “old” Discover Holding Company (DISCA) owned 2/3 of Discovery Communications, as well as 100% of Ascent Media and AccentHealth.  DISCA and their partner in Discovery Communications, Advance/Newhouse, decided to combine their interests to form a new public company.

     

    DISCA is now Discovery Communications, which is a pure-play owned by the former Discovery Holding shareholders and Advance/Newhouse.  DISCA and Advance/Newhouse could not come to an agreement on the value of Ascent, so the cleanest way to handle the situation was to spin it off.

     

    AccentHealth was sold on 8/8/08, and the Information Statement filed with the SEC displays the most recent financials as of 6/30/08.  As with most spin-off documents, there are all kinds of pro forma presentations that frankly don’t clearly spell things out, namely the pro forma doesn’t match pieces of the MD&A, as the business units’ EBITDA is presented without corporate SG&A.  Further complicating matters, one must be careful to only pay attention to the financials that exclude the AccentHealth business.  Finally, the most recent balance sheet does not include the cash proceeds received from the sale of AccentHealth, which is the key to this idea.  There is only one line from the Information Statement that clearly spells out the situation (page 35, Liquidity and Capital Resources section):

     

    At the effective time of the spin-off we have cash and cash equivalents of approximately $340 million, including cash received from the sale of AccentHealth.

     

    Elsewhere in the document it says that the pre-tax gain on the AccentHealth sale was $63M – I have chosen to assume they owe but have not yet paid taxes of $25M (assuming a 40% tax rate). On 14M shares we come to $22.50/share of net cash.  So for $2/share or $28M you can buy what I believe should be a normalized EBITDA number of $60M.  To be clear, this is not a peach of a business.  It is competitive (more on that below) and capital intensive; however they do state that 2008 CapEx is expected to be $45M – given the D&A shield, I assume EBITDA – CapEx = free cash flow, which I think is fair.  I believe these assumptions are reasonably conservative, and while it is a tough business to award even a market multiple, it doesn’t take much of a multiple to earn an attractive risk-adjusted return here.

     

    With respect to the cash, I do not claim to know what they will do with it, which is of course a risk.  I could see them repurchasing shares, and/or waiting for a cheap acquisition.  This is slightly uncomfortable, however I feel better about it given that John Malone owns over 700k shares and controls 31% of the vote – part of my attraction is Malone, who despite recent news stories on his personal margin calls, I trust and admire.  It is a small position for him, but he has never been one to fritter away money, and historically it has been prudent and lucrative to buy him while he’s “down” (which I believe is a common misperception at the moment).  Finally, management appears competent, engaged, and incentivized by the right things (namely EBITDA and free cash flow targets).

     
    The Business

    There is a section from the Information Statement that does a nice, succinct job of explaining what they do, their customer base, and what the recent environment has looked like:

     

    Ascent Media provides creative and network services to the media and entertainment industries in the United States, the United Kingdom (“UK”) and Singapore. Ascent Media’s clients include major motion picture studios, independent producers, broadcast networks, programming networks, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports, corporate, educational, industrial and advertising content. Ascent Media’s operations are organized into the following two groups: the creative services group and the network services group.

     

    On November 5, 2007, the Writers Guild declared a strike affecting the script writing for television shows and films. The strike, which lasted until February 12, 2008, had a significant adverse effect on the revenue generated by Ascent Media’s creative services business for services provided on new entertainment projects utilizing scripted content and the production of new television commercials. The 2007-2008 television season was significantly affected by the strike. Networks and producers resumed production of some scripted television programming interrupted by the strike. However, some programming never resumed production this season.

     

    The contract between the Screen Actors Guild and the Alliance of Motion Picture and Television Producers (“AMPTP”) for theatrical motion picture and television performances expired on June 30, 2008. A failure by the Screen Actors Guild to finalize and ratify a new agreement with the AMPTP within a reasonable period of time after expiration of the prior contract could lead to a strike or other job action. Any such labor dispute could have an adverse effect on the television and motion picture production industries, including Ascent Media’s business, and in the case of a severe or prolonged work stoppage, the adverse effect on Ascent Media’s business, operations, results of operations and/or financial condition could be material.

     

    In recent years, Ascent Media has been challenged by increasing competition and resulting downward rate pressure for certain of its networks services. Such factors have caused some margin compression and lower operating income. Ascent Media believes that while its networks margins in 2007 and 2008 are lower than in some previous years, they have stabilized for the time being, and Ascent Media is continuing to focus on leveraging its broad array of traditional media and file-based services to be a full service provider to new and existing customers within the feature film, television production and advertising industries. Its strategy focuses on providing a unified portfolio of business-to-business services intended to enable media companies to realize increasing benefits from digital distribution. With facilities in the U.S., the U.K. and Singapore, Ascent Media hopes to increase its services to multinational companies on a worldwide basis. The challenges that it faces include continued development of end to end file-based solutions, increased competition in both its creative and network services, differentiation of products and services to help maintain or increase operating margins and financing capital expenditures for equipment and other items to meet customers’ requirements for integrated and file-based workflows.

    Catalyst

    The investment community and/or the sell-side is alerted to the cash balance.

    Messages


    SubjectThoughts on Actual Business
    Entry10/31/2008 12:17 PM
    Membergreenshoes93
    It's great finding a company trading just above net cash but what are your thoughts on the earnings power and competitive advantages to the core advent business? Doesn't seem to me like a very high quality company. Also, what do you think they do with their cash position? Is it a strong management team with a focus on returns on capital? If they spend frivolously, doesn't seem like you can bank on downside protection from cash.

    Subjectmgmt/liberty/incentives
    Entry10/31/2008 07:08 PM
    Membermadler934
    i looked at this when it came out and was very concerned about the relationship between william fitzgerald and liberty media. my understanding is that he is really employed by liberty, which is reimbursed by ASCM through a mgmt services agreeement. he has been employed by liberty for years. my concern is that his incentives are with liberty and not creating value with the substantial cash balances on the books. specifically i could envision a scenario where ascm buys assets out of liberty at not very attractive prices. what are your thoughts on these relationships and mgmts incentives to create value in this company?

    SubjectGreat idea
    Entry10/31/2008 07:31 PM
    Membermaggie1002
    I intended to write this up as well and commend you for doing so. I was with a Board member (known him for 14 years) most of today. He is licking his chops for options to be priced at this level.

    SubjectRE: Thoughts on Actual Busines
    Entry11/03/2008 06:09 PM
    Membermark81
    as i said, this isn't a great company as it is capital intensive and operates in a competitive environment.

    i think it does $60M of ebitda and that ebitda - capex should be $15M = free cash flow.

    at 3x ebitda you get $35/share, which implies less than 12x unleveraged FCF. i realize there are lots of opportunities out there and in many minds better reward profiles. however, this one has minimal risk.

    i think the biggest risk here is what they do with the cash, and i think if anyone spends frivolously, you cannot bank on the cash. the guys running this have largely been there a while and appear competent.

    SubjectRE: mgmt/liberty/incentives
    Entry11/03/2008 06:14 PM
    Membermark81
    that could happen of course. what assets in particular could they buy at bad prices that would worry you?

    SubjectRE: Great idea
    Entry11/03/2008 06:14 PM
    Membermark81
    thank you. that was my thought (and hope) as well.

    Subjectcash deployment
    Entry11/03/2008 06:40 PM
    Membersam12
    while hard to argue cash balance is compelling, biggest concern is around what mgmt does w/ this cash ... to get comfortable that the cash balance is truly fungible, really have to have a strong view on mgmt ... and their capital allocation prowess in the past

    also, would you mind providing some background info on the network biz ... not a bad biz but hard to get hands around

    Subjecteconomic sensitivity
    Entry11/03/2008 09:50 PM
    Memberdurian966
    could you comment on the economic sensitivity of the post-production and network businesses. Both seem to need to win a fair number of new contracts every year to sustain revenue. so if TV, commercial and movie production get cut back, along with the systems integration stuff that seems to be a big part of network, wouldn't they see a big dropoff in revenue? so how useful is trailing EBITDA?

    SubjectRE: cash deployment
    Entry11/06/2008 04:37 PM
    Membermark81
    your decision re: capital allocation.

    as far as network biz goes, i agree -- the best i can do for you is the section in the Information Statement, starting page 38.

    SubjectRE: economic sensitivity
    Entry11/06/2008 04:41 PM
    Membermark81
    production could be cut back, but not long-term, in my opinion. provided they don't blow the cash, it doesn't matter until the stock starts to build in the fact that there is a sustainable business here.

    personally, i am more concerned with the competition and general price deflation forced by their customers, as i would of any "sub-contractor" in a the middle of a recession.

    SubjectComps
    Entry11/07/2008 05:07 AM
    Memberwan161
    Are there any public traded comps to Ascent? Thanks

    SubjectRE: Comps
    Entry11/12/2008 12:06 PM
    Membermark81
    no pure-play, publicly traded comps, as far as i know. their competition operates mostly as divisions within larger entities.

    SubjectRE: capex
    Entry11/12/2008 12:20 PM
    Membermark81
    that is a hard question to answer. we do know that in 2007 capex was $45M, which included the health business i believe, and we know that capex so far this year has trended below that -- over this time period, EBITDA has improved slightly.

    the risk here is that mgmt has delayed capex and will need to catch-up at some point.

    SubjectRE: RE: mgmt/liberty/incentive
    Entry11/14/2008 05:58 PM
    Membermadler934
    i didnt have a specific one in mind...my point was more general that given the cash balance and the assumption that they are not going to just return it to shareholders i think there needs to be a thesis here that mgmt will invest that cash wisely otherwise i have seen many instances where you buy the co for "free" but it doesnt work out that way because the cash balance is not invested for the benefit of shareholders. it is more concerning in this case where it doesnt seem like the incentives are very strong to make the stock price go up.

    SubjectRE: RE: RE: mgmt/liberty/incen
    Entry11/17/2008 04:30 PM
    Memberluke0903
    Madler - check the 8k that was just filed. It looks as if the CEO just got 350k options and another 90k in restricted stock...and there was an interesting change of control provision in his contract. So it seems as if his interests are very much in line with ASCMA's.

    SubjectManagement
    Entry12/30/2008 10:04 PM
    Memberjriz1021
    Has anyone been able to speak with management and really drill down on what they want to do with the cash? I've tried to get a hold of them several times but no luck so far..
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