|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||2,000||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
Belo Corp is a company that owns TV and newspaper assets. It recently announced that it would split into two companies. It has an enterprise value of 3.25 billion and a market cap of 2 billion. I believe that at current prices, you are getting the newspaper assets essentially for free, and that with the split, upside may be about 30 percent from here.
Family controlled, Belo has a long history as the publisher of the Dallas Morning News. As with most newspapers, circulation is declining and with declinging circulation comes declining advertising rates. Along the way the company has managed to amass 20 television stations, most of which are #1 or #2 in their markets, and three cable news networks.
These stations comprise the vast bulk of Belo’s value but the minority of its attention from the analyst community.
In the spinoff, the television company will take the entire 1.25 billion dollars of debt that the company has.
Television stations tend to follow a two year cycle, with election years driving higher ebitda.
In 2006, the TV stations had $326 million of segment ebitda before corporate allocation, in 2005 they had $273 million in 2004 they had $310 million. The difference can be mostly attributed to levels of political advertising (of about $50 million in the even years). Interestingly, this year, even though we are not in an election year, revenue at the television stations is up this year and EBITDA is roughly flat with last year, which management attributes mostly to better station performance and to cable retransmission fees (which are going to increase again).
In the past couple of years corporate overhead was about 100 million dollars for the entire enterprise but according to management a fair amount of this overhead was going towards projects that were one time in nature and management is comfortable that this number is going to fall. It was less than 60 million on effectively the same assets in 2004. Attributing half of the 06 corporate expense to the TV stations suggests, they had about 276 million in ebitda after corporate allocation and that the number should be similar this year.
In 2008, we may have the first contested presidential election in
While private market valuations for these sorts of streams may run as high as 14 times station operating income, an 11 times multiple on ebitda less maintenance capex including corporate would yield an enterprise value for the television asset of 3.3 billion and a market cap of just over 2 billion, which is effectively where the stock – TV and newspaper assets – trades today.
The newspaper assets are what they are.
Last year they threw off 159 million in segment ebitda. This year that number will certainly be less. Although because of the curtailment of the pension plan and falling newsprint prices, ebitda hasn’t fallen off a cliff. Analysts have newspaper ebitda for this year at around 140 million or about 90 million after corporate allocation if corporate spending does not fall. Also, apparently 8 percent of Dallas Morning News revenue is now online advertising and it is growing at a 30 percent clip. Management in general has been more innovative than most, giving its reporters portable cameras to boost the success of the online venture, teaming up with Yahoo!, and lowering the radius in which the newspaper is delivered to save on costs. They have also localized the news as much as possible and targeted advertising to localized zones
It is worth mentioning that the newspaper owns its own buildings, including its headquarters in downtown
If in fact the television assets do trade at about 11 times ebitda less maintenance capex and the newspapers trade at 7 times ebitda, the two combined should trade at about $26.
I believe that to date the progress being made by the television assets has been obscured by the deterioration of the newspaper assets and that the spinoff will lead to higher valuations. Obviously risks include a weakening of television ad spend caused either by migration to the internet or economic weakness or (to a lesser extent) a more serious dropoff than I anticipate in the newspaper assets. However, at current prices, it is hard to see how the two assets once separated will trade meaningfully below today’s price.
|Subject||Multiple / MCX|
|Entry||10/18/2007 05:19 PM|
|Thanks for the BLC write-up. First I agree that EBITDA-MCX is a good metric to use. However, I think that it's more appropriate to blend political/non-political years together. Also I'm wondering where you're getting your estimate of $330mm of 2008 EBITDA? My estimate derived from looking across a few sellside models for 2007 is $260mm and 2008 is $310mm (I'm sure you've noticed that some analysts do not net stock comp from their EBITDA est and this is nearly $20mm/yr). That blends to $285mm. While it's splitting hairs I give a 10x multiple as this is a business in a tough place - one data point is that US advertising on broadcast TV from 1996-2006 was a CAGR of just 2.6%. So 10x $255 = $2.55b. On the current balance sheet net debt of $1.23b that creates equity value of $1,32b. With 103mm S/O = $13. Give $6/sh of value to newspaper and we're at $19. |
And is this level of MCX truly the level that maintains earnings power? BLC has spent far above $60mm of CX/yr for quite some time. Perhaps $60mm is what keeps equipment running, but history suggests that more CX is needed to actually grow earnings (they've spent closer to $90mm/yr for past few years and haven't grown profitability).
Also given mgmt's voting control, I don't think it's clear that BLC deserves the very high multiples afforded to peers that have announced they are up for sale.
Would love to hear your arguments against the above points.