CBS CORP CBS
August 01, 2014 - 9:26pm EST by
dsteiner84
2014 2015
Price: 57.03 EPS $0.00 $0.00
Shares Out. (in M): 524 P/E 0.0x 0.0x
Market Cap (in $M): 29,868 P/FCF 0.0x 0.0x
Net Debt (in $M): 7,683 EBIT 0 0
TEV ($): 37,551 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

  • Media
  • Potential Buybacks
  • Broadcast TV
  • Multi System Operator (MSO), CATV, Cable
 

Description

CBS is the only stock we’ve bought in size over the past two months.  We like the business and how the model is evolving, the management team from both an operational and capital allocation perspective, and think that analysts are underestimating the number of shares the company will buyback over the next few years.

A number of factors have dragged CBS down YTD and helped create an attractive entry point:

  1.  Weak-ish revenue across multiple segments in their 1Q EPS report, mostly driven by tough comps (Super Bowl aired on CBS in 2013 and not 2014)
  2. Aereo / cord cutting concerns (Supreme Court ruled against Aereo, and as of this point in time The Copyright Office is not allowing Aereo to re-classify as a cable system which should be its death blow)
  3. Arbs heading for the exits after receiving fewer shares than expected in the CBS Outdoor (CBSO) split-off (all should have exited by now)
  4. Upfront advertising market weaker than expected (although rumors of CBS at +5% are fairly in-line with estimates but below the 7.5% increase from last year)
  5. Concerns their prodigious cash flow might be used for an acquisition as opposed to continuing buybacks

With the stock down 10% YTD in a strong market for large caps, CBS is now an out of favor security after maybe being a little too popular a few months back.  This seems like a stock nobody wants to call a bottom in but everyone will love at higher prices in three to six months when the business is clicking with Thursday Night Football and a strong programming slate, mid-term political ad spending is ramping up, and the company continues to shrink the float with their strong free cash flow and a potential re-leveraging of the balance sheet.

CBS is now a pure content company that owns a wide range of media assets including the eponymous broadcast television network, thirty local television stations, Showtime, 126 radio stations, and the publishing company Simon & Schuster.  These are high quality assets and include the most watched broadcast network for the past six years, a credible rival to HBO in the premium cable space, television stations in the 7 largest markets and 15 of the top 20, and radio stations predominantly located in the top 25 markets. 

The company recently split-off CBSO to shareholders in a tax efficient manner months ahead of schedule after selling off their International billboard assets last year.  As a result, the company is close to reaching its goal of reducing advertising revenue to 50% of total revenues, and going forward will be less cyclical which bodes well for valuation.  CBS is focused on creating and monetizing premium content, and growing revenue from high incremental margin retransmission and licensing fees. 

CBS has done a great job creating and monetizing content in a variety of ways over the past few years at both CBS and Showtime, and the future looks bright.  On the content creation side, CBS has been the number one watched network for the past six years and eleven of the last twelve, and Showtime has created a number of hit shows and can be mentioned in the same breath as HBO.  Once created, content is a highly scalable asset that can be monetized in a variety of ways from international distribution to licensing to SVOD players like Netflix, Amazon and Hulu Plus.  CBS now owns, or partially owns, more of the content on their stations than ever before which will lead to more licensing revenue in out years.  The increase in the number of bidders for content helps pricing, and in recent years CBS has done a good job monetizing content via International licensing and from SVOD players mentioned above.  CBS has created a year round content model in the past twelve months.  Where previously the summer would be a time to show re-runs, CBS will be producing 90 hours of original programming this summer - up from 2.5 hours four years ago.  They used an interesting model to fund last year’s big summer hit “Under the Dome” whereby they pre-sold streaming rights to Amazon and made International deals before the show aired.  As a result, the show was profitable from day one even if viewership was poor (although poor viewership would obviously hurt their ability to do similar deals in the future).  CBS can then monetize the content for years to come and took very little upfront risk while creating a hit show.  Overall, CBS has done a good job de-risking its business model and focusing on the creation and monetization of original content.

In addition to owned content, CBS has done an excellent job locking up premium sports programming to long-term contracts.  With the advent of DVR, sports are one of the few programs that need to be watched live - making sports programming one of the best ways to ensure that people don’t cut the cord.  Coming out of the recession, CBS locked up Sunday AFC football games through 2022 and will broadcast the Super Bowl in 2016, 2019 and 2022.  CBS also owns the rights to the NCAA Basketball tournament though 2024, has SEC football rights for another decade, and will broadcast Thursday night NFL games this year. 

CBS’ focus on high incremental revenue opportunities is centered on retrans and reverse comp agreements and content licensing to SVOD’s and in the International market. 

Due to their strong viewership levels we think CBS will be able to reach their recently stated goal of $2 billion in retrans revenue by 2020, up from a previous goal of $1 billion by 2017.  Management refers to these as “100 cent dollars” as there is no incremental cost associated with retrans revenue streams.  CBS currently delivers 10% of the pay TV audience but only collects 2% of the affiliate fees so there should be room for growth here.  The remainder of 2014 is expected to be fairly retrans heavy while reverse comp has fewer deals in 2014, but that should accelerate into 2015 and 2016.  Management (mostly Les) tends to be a bit on the promotional side (he’s a sales guy) but they have a strong track record of doing what they say they’re going to do.

More owned content on both CBS and Showtime provide plenty of runway for licensing deals.  The International market has been a good source of growth and more bidders in the U.S. are leading to higher prices for what might at first glance appear to be average content.  CBS can still license 300 episodes of CSI and 200 episodes of NCIS in addition to other programs owned and partially owned.  Management has been creative with deals, making some exclusive content deals, others not, and pre-funding new shows by pre-selling streaming rights.  There will also be a minor benefit next year forward after Colbert takes over for Letterman as the content rights are more favorable to CBS with Colbert at the helm.

On the advertising front, for the first time ever CBS was able to sign deals that pay them for C-7 viewership up from C-3 (CBS gets paid for impressions 7 days after a program airs as opposed to three).  Due to the large percentage of shows viewed on DVR after the original airing, CBS successfully pushed to be compensated for these additional impressions.  It’s the very early innings here, and some commercials lend themselves better to delayed viewing than others, but management believes this can eventually be a “nine-figure” opportunity.  We’re taking a wait and see approach here but think this is an incremental positive.  The second half of 2014 will benefit from increased upfront rates for the Fall, Thursday Night Football, and mid-term political ad spending.

Overall, we think the business is as strong as it has been, and has multi-year tailwinds in the form of content licensing and retrans and reverse compensation.

And it’s not just the business that’s strong, the balance sheet looks great and a less cyclical core business should enable the company to re-lever and buyback shares as soon as the second half of this year.  Management has been focused on the successful split-off of CBSO, but now that the separation is complete, they can move their attention to balance sheet optimization.

The company is committed to returning $6 billion in 2014.  It bought back $2 billion in the first quarter, including $1.5 billion via an ASR, and retired approx. $2.85 billion via the CBSO split-off.  That leaves $1.15 billion for Q’s 2-4.  Given that the company can increase leverage by a full turn and still remain investment grade, throws off a tremendous amount of free cash, and management is shareholder friendly - we think that seems too low for remainder of the year and think 2015 buyback estimates are extremely understated by analysts. (Note: Morgan Stanley released a report as I was finishing this up stating that CBS can buyback $10 billion of shares in 2015 and 2016 which is more in-line with our thinking.)

Management has made it clear that returning capital is their number one priority for the time being and we would expect another big buyback announcement on either of the next two earnings releases.  On the low end, we expect an additional $1 billion this year and $3 billion total next year.  Depending on where management wants their leverage ratio to be we estimate they could potentially double those figures.

Valuation

Moving forward we think buybacks from free cash flow can add 6-9%/year to EPS and retrans can add another 5-7% - licensing should be good for another few points (although it will be lumpy) and you have some optionality from a pick-up in ad spending and/or collecting more from C-7 advertising as well as from adding a turn of leverage to the balance sheet. 

Analysts are in a reasonably tight operating income and EBITDA range for the next two years but we think they are off on the denominator. 

We think CBS can complete the previously announced $6 billion buyback this year (nearly $5 billion is in the bag) and do an additional $4 billion over the remainder of this year and 2015 primarily using internally generated FCF.  Taking on additional leverage, which we expect (but don’t know to what degree) would provide a further boost to our estimates.

Modeling in the share shrink and some minor advertising revenue growth, retrans and licensing we have CBS earning approximately $4.25/share in 2015 – at 17x we get to $72 share.  The stock has recently traded at just above 15x but we think the disposal of CBSO and the less cyclical nature of the business coupled with the growth opportunities outlined above leads to a slightly higher multiple.  We’d note comps trade in the 20x range.  Using a blended EV/EBITDA or OIBDA multiple we can get into the low 80’s by the end of 2015.  There has been a lot of discussion about how much HBO is worth in light of the Fox bid - if Time Warner were to IPO a percentage of HBO and shares traded at a premium valuation we think that could attract attention to Showtime and potentially result in a higher sum-of-the-parts valuation for CBS.

We think shares should appreciate 25-35% in the next year, potentially more if they maximize the balance sheet, and have the potential to keep compounding from there as CBS continues to shrink their share count and higher margin revenues accelerate into 2020.

Rumor Mill

Fox recently made a $80/share bid for Time Warner which set off a wave of takeover/disposal rumors throughout the media sector.  With cable companies consolidating it would not be surprising to see media/content companies merge in the coming months to gain scale and improve negotiating positions.  Two of the most prominent rumors were that if Fox completes the Time Warner transaction they would dispose of CNN with CBS and Disney being the two most likely buyers.  The other being that Time Warner might bid for CBS to prevent the Fox takeover.  CNN could be an interesting asset for CBS if it was acquired from a forced seller, if multiple bidders were to get involved we would much prefer continued buybacks (TWX doesn’t break out CNN’s financials and the estimated price tag varies significantly).  CNN is a strong brand with global reach/distribution that is, to put it mildly, not firing on all cylinders.  For the right price, we like the fit.  On paper, CBS looks like a prime acquisition candidate given its majority voting shareholder is 91, Les’ contract ends in 2017, and he receives $190 million from a “without cause termination” - but most don’t think Sumner is a seller.  A TWX-CBS merger would make a lot of strategic sense though.  Another common thought is that Sumner wants to bring CBS and Viacom back under the same roof, but given that there would only be one CEO post at the combined company and Sumner appears to have much more than your typical Chairman/CEO relationship with both CEO’s this seems unlikely to us. 

Risks

Weaker than expected ad spend and general economic trends: while CBS has reduced their reliance on advertising revenue it still accounts for a majority of their revenue.  In general, we’re more upbeat about the economy than the stock market/valuations.

Cord Cutting: this isn’t a new concern – we’re comforted by the long-term sports programming and the fact that CBS is consistently the #1 watched broadcast network.

Any regulatory changes to retrans and reverse comp – Aereo pulling a rabbit from a hat.

Sumner Redstone controls the voting shares and is 91.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Capital Allocation announcement

Continued share shrink

Additional licensing and retrans announcements

Potential for TWX to IPO part of HBO = more attention paid to Showtime

    sort by    

    Description

    CBS is the only stock we’ve bought in size over the past two months.  We like the business and how the model is evolving, the management team from both an operational and capital allocation perspective, and think that analysts are underestimating the number of shares the company will buyback over the next few years.

    A number of factors have dragged CBS down YTD and helped create an attractive entry point:

    1.  Weak-ish revenue across multiple segments in their 1Q EPS report, mostly driven by tough comps (Super Bowl aired on CBS in 2013 and not 2014)
    2. Aereo / cord cutting concerns (Supreme Court ruled against Aereo, and as of this point in time The Copyright Office is not allowing Aereo to re-classify as a cable system which should be its death blow)
    3. Arbs heading for the exits after receiving fewer shares than expected in the CBS Outdoor (CBSO) split-off (all should have exited by now)
    4. Upfront advertising market weaker than expected (although rumors of CBS at +5% are fairly in-line with estimates but below the 7.5% increase from last year)
    5. Concerns their prodigious cash flow might be used for an acquisition as opposed to continuing buybacks

    With the stock down 10% YTD in a strong market for large caps, CBS is now an out of favor security after maybe being a little too popular a few months back.  This seems like a stock nobody wants to call a bottom in but everyone will love at higher prices in three to six months when the business is clicking with Thursday Night Football and a strong programming slate, mid-term political ad spending is ramping up, and the company continues to shrink the float with their strong free cash flow and a potential re-leveraging of the balance sheet.

    CBS is now a pure content company that owns a wide range of media assets including the eponymous broadcast television network, thirty local television stations, Showtime, 126 radio stations, and the publishing company Simon & Schuster.  These are high quality assets and include the most watched broadcast network for the past six years, a credible rival to HBO in the premium cable space, television stations in the 7 largest markets and 15 of the top 20, and radio stations predominantly located in the top 25 markets. 

    The company recently split-off CBSO to shareholders in a tax efficient manner months ahead of schedule after selling off their International billboard assets last year.  As a result, the company is close to reaching its goal of reducing advertising revenue to 50% of total revenues, and going forward will be less cyclical which bodes well for valuation.  CBS is focused on creating and monetizing premium content, and growing revenue from high incremental margin retransmission and licensing fees. 

    CBS has done a great job creating and monetizing content in a variety of ways over the past few years at both CBS and Showtime, and the future looks bright.  On the content creation side, CBS has been the number one watched network for the past six years and eleven of the last twelve, and Showtime has created a number of hit shows and can be mentioned in the same breath as HBO.  Once created, content is a highly scalable asset that can be monetized in a variety of ways from international distribution to licensing to SVOD players like Netflix, Amazon and Hulu Plus.  CBS now owns, or partially owns, more of the content on their stations than ever before which will lead to more licensing revenue in out years.  The increase in the number of bidders for content helps pricing, and in recent years CBS has done a good job monetizing content via International licensing and from SVOD players mentioned above.  CBS has created a year round content model in the past twelve months.  Where previously the summer would be a time to show re-runs, CBS will be producing 90 hours of original programming this summer - up from 2.5 hours four years ago.  They used an interesting model to fund last year’s big summer hit “Under the Dome” whereby they pre-sold streaming rights to Amazon and made International deals before the show aired.  As a result, the show was profitable from day one even if viewership was poor (although poor viewership would obviously hurt their ability to do similar deals in the future).  CBS can then monetize the content for years to come and took very little upfront risk while creating a hit show.  Overall, CBS has done a good job de-risking its business model and focusing on the creation and monetization of original content.

    In addition to owned content, CBS has done an excellent job locking up premium sports programming to long-term contracts.  With the advent of DVR, sports are one of the few programs that need to be watched live - making sports programming one of the best ways to ensure that people don’t cut the cord.  Coming out of the recession, CBS locked up Sunday AFC football games through 2022 and will broadcast the Super Bowl in 2016, 2019 and 2022.  CBS also owns the rights to the NCAA Basketball tournament though 2024, has SEC football rights for another decade, and will broadcast Thursday night NFL games this year. 

    CBS’ focus on high incremental revenue opportunities is centered on retrans and reverse comp agreements and content licensing to SVOD’s and in the International market. 

    Due to their strong viewership levels we think CBS will be able to reach their recently stated goal of $2 billion in retrans revenue by 2020, up from a previous goal of $1 billion by 2017.  Management refers to these as “100 cent dollars” as there is no incremental cost associated with retrans revenue streams.  CBS currently delivers 10% of the pay TV audience but only collects 2% of the affiliate fees so there should be room for growth here.  The remainder of 2014 is expected to be fairly retrans heavy while reverse comp has fewer deals in 2014, but that should accelerate into 2015 and 2016.  Management (mostly Les) tends to be a bit on the promotional side (he’s a sales guy) but they have a strong track record of doing what they say they’re going to do.

    More owned content on both CBS and Showtime provide plenty of runway for licensing deals.  The International market has been a good source of growth and more bidders in the U.S. are leading to higher prices for what might at first glance appear to be average content.  CBS can still license 300 episodes of CSI and 200 episodes of NCIS in addition to other programs owned and partially owned.  Management has been creative with deals, making some exclusive content deals, others not, and pre-funding new shows by pre-selling streaming rights.  There will also be a minor benefit next year forward after Colbert takes over for Letterman as the content rights are more favorable to CBS with Colbert at the helm.

    On the advertising front, for the first time ever CBS was able to sign deals that pay them for C-7 viewership up from C-3 (CBS gets paid for impressions 7 days after a program airs as opposed to three).  Due to the large percentage of shows viewed on DVR after the original airing, CBS successfully pushed to be compensated for these additional impressions.  It’s the very early innings here, and some commercials lend themselves better to delayed viewing than others, but management believes this can eventually be a “nine-figure” opportunity.  We’re taking a wait and see approach here but think this is an incremental positive.  The second half of 2014 will benefit from increased upfront rates for the Fall, Thursday Night Football, and mid-term political ad spending.

    Overall, we think the business is as strong as it has been, and has multi-year tailwinds in the form of content licensing and retrans and reverse compensation.

    And it’s not just the business that’s strong, the balance sheet looks great and a less cyclical core business should enable the company to re-lever and buyback shares as soon as the second half of this year.  Management has been focused on the successful split-off of CBSO, but now that the separation is complete, they can move their attention to balance sheet optimization.

    The company is committed to returning $6 billion in 2014.  It bought back $2 billion in the first quarter, including $1.5 billion via an ASR, and retired approx. $2.85 billion via the CBSO split-off.  That leaves $1.15 billion for Q’s 2-4.  Given that the company can increase leverage by a full turn and still remain investment grade, throws off a tremendous amount of free cash, and management is shareholder friendly - we think that seems too low for remainder of the year and think 2015 buyback estimates are extremely understated by analysts. (Note: Morgan Stanley released a report as I was finishing this up stating that CBS can buyback $10 billion of shares in 2015 and 2016 which is more in-line with our thinking.)

    Management has made it clear that returning capital is their number one priority for the time being and we would expect another big buyback announcement on either of the next two earnings releases.  On the low end, we expect an additional $1 billion this year and $3 billion total next year.  Depending on where management wants their leverage ratio to be we estimate they could potentially double those figures.

    Valuation

    Moving forward we think buybacks from free cash flow can add 6-9%/year to EPS and retrans can add another 5-7% - licensing should be good for another few points (although it will be lumpy) and you have some optionality from a pick-up in ad spending and/or collecting more from C-7 advertising as well as from adding a turn of leverage to the balance sheet. 

    Analysts are in a reasonably tight operating income and EBITDA range for the next two years but we think they are off on the denominator. 

    We think CBS can complete the previously announced $6 billion buyback this year (nearly $5 billion is in the bag) and do an additional $4 billion over the remainder of this year and 2015 primarily using internally generated FCF.  Taking on additional leverage, which we expect (but don’t know to what degree) would provide a further boost to our estimates.

    Modeling in the share shrink and some minor advertising revenue growth, retrans and licensing we have CBS earning approximately $4.25/share in 2015 – at 17x we get to $72 share.  The stock has recently traded at just above 15x but we think the disposal of CBSO and the less cyclical nature of the business coupled with the growth opportunities outlined above leads to a slightly higher multiple.  We’d note comps trade in the 20x range.  Using a blended EV/EBITDA or OIBDA multiple we can get into the low 80’s by the end of 2015.  There has been a lot of discussion about how much HBO is worth in light of the Fox bid - if Time Warner were to IPO a percentage of HBO and shares traded at a premium valuation we think that could attract attention to Showtime and potentially result in a higher sum-of-the-parts valuation for CBS.

    We think shares should appreciate 25-35% in the next year, potentially more if they maximize the balance sheet, and have the potential to keep compounding from there as CBS continues to shrink their share count and higher margin revenues accelerate into 2020.

    Rumor Mill

    Fox recently made a $80/share bid for Time Warner which set off a wave of takeover/disposal rumors throughout the media sector.  With cable companies consolidating it would not be surprising to see media/content companies merge in the coming months to gain scale and improve negotiating positions.  Two of the most prominent rumors were that if Fox completes the Time Warner transaction they would dispose of CNN with CBS and Disney being the two most likely buyers.  The other being that Time Warner might bid for CBS to prevent the Fox takeover.  CNN could be an interesting asset for CBS if it was acquired from a forced seller, if multiple bidders were to get involved we would much prefer continued buybacks (TWX doesn’t break out CNN’s financials and the estimated price tag varies significantly).  CNN is a strong brand with global reach/distribution that is, to put it mildly, not firing on all cylinders.  For the right price, we like the fit.  On paper, CBS looks like a prime acquisition candidate given its majority voting shareholder is 91, Les’ contract ends in 2017, and he receives $190 million from a “without cause termination” - but most don’t think Sumner is a seller.  A TWX-CBS merger would make a lot of strategic sense though.  Another common thought is that Sumner wants to bring CBS and Viacom back under the same roof, but given that there would only be one CEO post at the combined company and Sumner appears to have much more than your typical Chairman/CEO relationship with both CEO’s this seems unlikely to us. 

    Risks

    Weaker than expected ad spend and general economic trends: while CBS has reduced their reliance on advertising revenue it still accounts for a majority of their revenue.  In general, we’re more upbeat about the economy than the stock market/valuations.

    Cord Cutting: this isn’t a new concern – we’re comforted by the long-term sports programming and the fact that CBS is consistently the #1 watched broadcast network.

    Any regulatory changes to retrans and reverse comp – Aereo pulling a rabbit from a hat.

    Sumner Redstone controls the voting shares and is 91.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Capital Allocation announcement

    Continued share shrink

    Additional licensing and retrans announcements

    Potential for TWX to IPO part of HBO = more attention paid to Showtime

    Messages


    SubjectRE: CBS vs. TWX vs. FOXA vs. DIS
    Entry08/20/2014 10:59 AM
    MemberWinBrun
    cnm3d-recognize this was not addressed to me, but will give one quick take. the large buybacks currently funded by these media companies are a mixed blessing. on the one hand, they will increase short-term per share earnings. on the other hand, they are going to need to take some risks to stay competitive in a rapidly changing environment.  five years ago, Netflix was dismissed by Jeff Bewkes as the "albanian army" and Amazon Prime was a counting trick Jeff Bezos could do in his head. no one really knows where the emerging threats for attention and dollars will come from.  CBS touts its place as the number one prime time network. is that position sacrosanct? CBS is going to return a like $4B through a buyback-what else could that could get you? (depending on one's investment time frame, there will be very different opinions ).  you have to give Rupert Murdoch credit; he makes big moves. It is a different dynamic with Bewkes, Iger and Moonves,(they are each fantastic executives-but unlikely to be as bold as Rupert for a variety of reasons). 
     
    aside from the reasons you gave, I like TWX.  HBO provides important optionality in an environment subject to major, unpredictable changes.
     
    short-term (i.e. over the next 1-2 years) there is a lot to like about all these companies (visbility of growing affiliate fees; increasing licensing revenue from large SVOD buyers;  substantial funds earmarked for buybacks and dividends).  longer-term, it is different.  who are they really going to be competing against and how do the decisions made today improve their chances.
     
     
     

    SubjectRE: RE: RE: RE: CBS vs. TWX vs. FOXA vs. DIS
    Entry08/21/2014 02:36 PM
    MemberWinBrun
    cnm3d-good points.  I think HBO would have a higher EV than Netflix if it went public tomorrow. I cannot fathom it trading at less than 15x EBITDA.   I would like to see TWX acquire high value content assets to bundle with an HBO led digital offering. This would be a key differentiator from Netflix, which is basically pure licensing.  Acquiring high value content assets is almost less about the ability to directly monetize those assets than it is making them exclusive to your service.  For example, if HBO acquired STARZ, HBO would gain access to the Sony first run film output through 2021 (in North America).  HBO would then control the first run film output rights in the pay-window to Sony, Universal, Fox and Warner Bros.  That is a powerful suite of first run film rights than is meaningfully differentiated from Netflix, which will only have first run output rights for Disney (a good one to have).  If HBO can position the standalone service as a premuium service i.e. charge a premium price, this can put them in a better position to economically bid on content rights as the rights continue to come up for renewal at higher prices.  This is probably somewhat similar to what ESPN has done with sports rights; bidding them up to a level that makes it difficult for many competitors to economically bid.  What you don't want is a fair auction. What you do want is your competitor to have to strain itself financially.   The content can then be nutured in a way that only reinforces the channel as the right home for that content (Sportscenter and PTI are the water and sunlight). 
     
    The depth of the Warner Bros film and TV library would provide an added benefit if this content was not available for Netflix, or any other streaming service.  What would be good is if HBO controls the widest range of high value content distribution rights possible, with Netflix left to compete with Amazon Prime (or whoever else jumps in the ring) for the remaining desirable rights.  By putting Fox and Warner Bros together, Rupert Murdoch could have made the entire Fox and Time Warner TV libraries available only through HBO. He could have also merged the two TV studios and given his brands first look at all the best projects.  A risk to the short-term bottom line, but arguably a real competitive advantage over time.  There is no way to recreate the library assets; and there is no way to recreate the television production assets.  To accept any of this, you have to believe that Rupert Murdoch wants to sell content directly to the customer. This is partly why I don't put much weight on an argument that TWX can grow earnings 20% for the next decade based on its current operating model.  In ten years, everything probably looks a lot different.  The fundamental issue to me is what assets do you need to own or control in order to give yourself a change to compete in an unpredictable industry.  I keep coming back to HBO on that question.
     
    Your point about TWX successfully producing content for a long-time is fair. But that is not going to be what really makes this work, in my opinion.  They will keep producing movies, some hits, some flops.  They have scale advantages in television production, which should continue to be a good business (probably more accurate to think of its as video production historically distributed through TV). But they are going to need to position the business to most efficiently monetize the content they produce. i am not sure advertising-supported cable networks will be optimal.  movies are always a risk.  the scale advantages to producing content are a good start. but they can't count on that being enough. 
     
     
     
     
     

    SubjectRE: RE: RE: RE: CBS vs. TWX vs. FOXA vs. DIS
    Entry08/21/2014 08:14 PM
    MemberWinBrun
    http://www.hollywoodreporter.com/news/michael-wolff-jeff-bewkes-whats-726178
     
    very good take on this topic. 

    SubjectRE: RE: RE: RE: CBS vs. TWX vs. FOXA vs. DIS
    Entry09/02/2014 07:25 PM
    MemberWinBrun
    Thank you for your reply and thoughtful commentary.  I agree with you.

    SubjectShowtime
    Entry09/24/2014 12:50 PM
    MemberWinBrun
    At what point does Showtime represent enough of the Enterprise Value that the conglomerate discount is too actue for Sumner to ignore? Les Moonves said at one of the recent media conferences that Showtime was going to do ~$1B in EBITDA this year. It has one of the of best cost structures among the premium pay television channels because it does not license any first film output-a risky decision that was great in hindsight. Showtime also can grow subscribers-HBO has ~28MM; Showtime has 23MM.  I believe a buyer would pay 13-16x EBITDA (in this market) for Showtime, which puts its Enterprise Value at around $15B.  At the current price, the implied valuation of the rest of CBS is ~$15B.  Does not seem expensive. 
     
    Is there any possibility that Sumner and Les would do anything to highlight the value of Showtime? 

    SubjectRE: STRZA - buyout? what am i missing?
    Entry09/29/2014 10:51 PM
    MemberWinBrun
    I posted STARZ  two months or so ago.  Even though i posted it as a long-I have grown skeptical that there is a buyer. I found the entire publicly declared "for sale" process weird.  Which media company needed to be told STARZ was for sale? John Malone could pick up the phone and get any executive on the line. 
     
    The synergy argument sounds good in theory. I am not convinced. The major media companies that would achieve synergy are Fox/Time Warner/Disney; the distributors are Comcast; DirecTV (two biggest STARZ distributors).  Disney is not going to buy it; Disney is spending money on digital (Maker Studios) and intellectual property.  I doubt Fox is a buyer, even though they don't have a premium channel.  I don't think this is an easy sell to shareholders at $5B after Rupert said he is going to be disciplined.  Time Warner could bring it together with HBO and control a lot of good first run movie rights. But I think there are probably better places Time Warner could spend the money overseas.  I seriously doubt Jeff Bewkes would do this deal.  CBS could be interesting it STARZ was packaged with Showtime.  But this would be a very large deal for CBS with a market capitalization of ~$30B. Tough sell to shareholders.  The problem is that US linear premium video market is not growing.  STARZ would need a real hit to grow revenue producing subscribers in this market. The threshold for a big hit is growing.  A good show with some positive buzz is not enough. 
     
    The distributors are all tied up (Comcast/Time Warner);(DirectTV;AT&T) . Maybe Verizon-but I doubt it.  International buyer could want it for the glamor. But no real synergy would exist and it is expensive. John Malone could want to do something with it overseas.  But STARZ does not control enough international distribution rights yet for that to happen for some time. 
     
    I actually think Sony is the most logical buyer.  But Sony is not in good enough financial shape to do this deal. Amazon is buying things like Twitch-which probably makes more sense than STARZ. 
     
    There is a risk at this price if subscriber numbers go the wrong direction. Investors are going to get very concerned that STARZ has enough time to produce something that makes it must carry television.  The financial characteristics of the business are good. And at $26/share, it is more attractive. But if a deal does not materialize and the subscriber numbers go down in the face of the biggest debut in the history of the channel (Outlander), the stock is going to go back down.  I would not be suprised to see this trade in a wide range for some time.
     
    I just don't believe that a major media company is going to spend ~$5B to buy it. I would be very suprised to see a bidding war.   I do believe that the business can steadily grow earnings over time by reducing its share count and generating good free cash flow. And If John Malone concluded that STARZ was not going to get a good return on spending on original content production, he could change the capital allocation. Unlikely they are going to throw good money after bad.       
     
    One interesting thing to consider is that STARZ could monetize the Sony rights (and the remaining Disney rights).  In theory, STARZ could license the Sony or Disney streaming rights to Amazon Prime or Netflix (highly unlikely it would be Netflix given the history).  Not sure of the size of a potential deal.  And STARZ would risk aggravating the MVPDs distributors and devaluing the subscription.  But the Sony and Disney streaming rights are valuable and are probably not being fully monetized in the current structure. 
     

    SubjectRE: RE: RE: STRZA - buyout? what am i missing?
    Entry10/02/2014 11:19 AM
    MemberWinBrun
    cnm3d-I would almost like to discuss this with you offline.  Let me know if you are interested. 
     
    I would be extremely surprised if any of the media companies buy STARZ.  As a shareholder in both CBS and Time Warner, I would actually be aggravated if they bought STARZ. I would rather them buy MGM or Lion's Gate or international production assets that allow them to make local content. STARZ  Does not control enough international distribution rights nor is the programming gaining much traction.  I was a STARZ bull for awhile.  But the value of a STARZ subscription is not increasing in this market with so many compelling forms of entertainment.  STARZ really does not give any of these companies an advantage.  The only dark horse is that Rupert Murdoch buys MGM and then buys STARZ as a platform for an exclusive distribution vehicle for combined Fox/MGM television and film content. But I doubt that happens.  Buying STARZ when all the major pay-1 deals are locked up in every market for the next several years does not make sense.   I know John Malone and Liberty will be completely rational.  And you probably can make money on the investment.  But I don't believe anyone is going to buy them.  And there is downside if subscriber numbers show secular declines. 
     
     
    As an aside, I believe that the recent annoucements by Netflix that it has signed an exclusive feature film deal with The Weinstein Company (Crouching Tiger sequel) and Adam Sandler (exclusive film release only on Netflix globally) are a huge deal.  The economics of distribution are going to change dramatically i.e. less spend on marketing; box office becomes less important. This is a great development for talent and potentially small studios.  Adam Sandler presumably did this deal with Netflix because he will get guaranteed money upfront.  He does not have to wait and take participation on the box office and back-end-which can be uncertain.  He is a big star-if this deal makes sense for him-it is going to make sense for a lot of others.  The subscription model makes this possible.  
     
     It can also be positive for HBO. The subcription video model completely turns over the economics of windowing. Netflix and HBO have one business objective-sell subscriptions.  Time Warner is a vertically integrated content company that never used the vertical integration to monetize the content because it could be more efficiently monetized through windowing. Warner Bros. television production sells shows to all the networks because that was the most efficient way to monetize it.   Now..though..if Warner Bros television production can efficiently monetize its content by distributing it through HBO via gaining more subscribers-that is an extremely powerful model. It also prevents competing SVOD services from accessing Warner Bros television production (this biggest television producer in the world).   The marginal cost of digitial distribution combined with HBO's international scale is a unique.  Only Netflix (and to some extent Amazon Prime) can match it.  The difference is that Time Warner owns the production assets and owns rights in a film and tv big library.  It also owns quality intellectual property.  Netflix does not have those assets; so what Netflix is doing is signing up the talent for long-term exclusive deals-which is effectively securing production assets.  Right now, Warner Bros. television production is actually selling shows to Netflix (Gotham).  this is fairly nuts given that Netflix is not only HBO's biggest long-term competitor--it is also a threat to the Turner Networks collectively because more time spent on SVOD is less time spent watching linear television which is going to cause deflation in CPM (over time..not immediately).  Why would Warner not exclusively distribute its television product through its global distribution platform i.e. HBO.  HBO can launch a Comic Book multiplex channel with DC intellectual proeprty that is exclusive to the subscription.  this would have global appeal. 
     
    Why would HBO not do the exact same thing as Netflix and debut feature films exclusively on the service? I find this extremely compelling as a customer-there are a lot of movies I want to see but don't.  If I am paying $10/month for Netflix and they stream me feature films--I will watch them and also feel like my subscription is more valuable.  I don't have to leave my house. I can pause when I want. I see more films. I can save money. All good for the customer. 
     
     
     
     

    SubjectRE: RE: RE: STRZA - buyout? what am i missing?
    Entry10/02/2014 12:47 PM
    MemberWinBrun
    One more thing. I would like to hear the argument as to why Time Warner should not split the cable networks business off from the rest of the Company.  If you think about the fact that Netflix has ~one/half the market value of Time Warner-it is incredible.  The cable channels business has an entirely different set of economics and growth. Can you imagine Netflix combining its core business with CNN? A global news organization with an entirely different set of economics, objectives and culture.   The affiliate fee structure is not sustainable without ratings.  It is very difficult to envision how cable network ratings are going to improve over the next few years. There is a fundamental difference between subscription revenue that comes from a customer that is paying directly for a service they love-and a distributor that is resentful and angry about every check they have to write.  Afiliates are dropping Viacom channels. Customers are signing up for Netflix. What more proof does one need? 
     
    Netflix looks like a media company you would start if you were completely unburdened by legacy industry structures or past decisions.  I do not believe that Time Warner can worry about the affiliates; they have to worry first about the customer.  This is what Netflix is doing.  Netflix is being more inventive (i.e. film distribution on the service); growing faster; has more subscribers in the United States and is building direct relationships with customers. These choices are aggregating to create a dominant subscription video business that is going to probably erode the value of the cable channel bundles that do not provide something of truly high quality to the customer.  

    SubjectRE: RE: R i missing?
    Entry10/02/2014 07:15 PM
    MemberWinBrun
    Here is why I think there is a difference between Showtime and STARZ. Showtime began its ascent in 2006. Before Amazon Prime; Instagram; Netflix Streaming; the smartphone and the boom of original programming on cable (though it was starting). Showtime, Starz and HBO had an effective oligopoly on edgy, scripted content with sex and violence. There was plenty of time for Showtime to methodically build a following and a brand.  Showtime also had a run of well received programming; Weeds; Dexter; Californication; Homeland (a huge hit) and now Ray Donovan.  Showtime was offering programing that you could not find anywhere else. It has developed a brand that stands for quality original content. This is rare and good. 
     
    STARZ is operating in a different environment and has done no shows of any real import. What does STARZ stand for? It is not enough to have original programming. It is not enough to have some pretty good shows.  There needs to be an entire subscription that is worth paying for amidst a lot choices of subscription services that are worth paying for. If you believe that the industry structure of the linear model will be stable for a long time-STARZ has time to methodically build a brand.  If you believe that video distribution and content are going to proliferate-both in types of content (i.e. YouTube;) and services, then STARZ does not have the benefit of time.  It is more complicated that just saying-original programming. It needs to be original programming worth paying for. This does not necessarily mean a hit. But it does not mean something that stands out in some way.   
     
    You can't use Showtime's decision to drop the premium film ouput as a parallel because Showtime made this choice before streaming became important. The pay-1 rights are not as crucial for a linear video business (though they are still important)-but they are absolutely crucial for a streaming business.  STARZ did not necessarily need the Disney rights to make the television subscription more appealing-but they did need them to make the streaming component of the subscription more valuable.  A significant part of the value of HBO-Go are the streaming rights to Universal;Fox; Paramount and Summit. HBO could probably lift its EBITDA tomorow by $200MM if it dropped one of those deals.  It won't do that because then Netflix would get it. 
     
    I acutally think Sony wanted STARZ to have the pay-1 run rights over Netflix (and maybe even took less money) because Sony was planning a streaming video service.  -but I am a conspiracy theorist. 
     
     I was a shareholder in STARZ for some time and was initially glad that they moved away from Disney. I thought that this would free up a lot of money for original programming spend versus spending money on Disney movies which people probably did not care about.  I now think I was wrong and wish STARZ did have the Disney rights locked up through 2020 because it would make STARZ PLAY a much more attractive streaming service to subscribers and to an acquiror.  Movies are still an important part of a video subscription-movies are extremely important to HBO; HBO could have dropped movies a long time ago with its reputation for programming. But subscribers care about movies.  Netflix built its early business around movies. Movies are important for subscription service because they have broad reach-i.e. there are many constituencies that like to watch movies-which can bring more people to the subscription  I would bet that STARZ did not let Disney go-instead they were outbid by a large buyer that was offering a price that was uneconomical for STARZ because STARZ knew that it could not monetize the Disney content within the current linear video model.  But there is little question that the Disney North American Pay-1 film rights are a great asset that can be vital to a streaming service.  STARZ original content is not necesarrily vital to anyone.   
     
    The argument that someone would buy STARZ for the existing distribution and then put their own content on STARZ does not move me.  You have to get paid for content.  Putting content on STARZ means not licensing the content somewhere else which means that the content owner must believe it can monetize the content better through STARZ.  How do you do that? You have to gain more subscribers or negotiate better terms with affiliates.  The only content that has that type of built-in power is already being licensed for very large amounts of money.  Take Fox-Rupert Murdoch is licensing the Pay-1 21st Century Fox film output to HBO.  If he bought STARZ and put that content on STARZ-he is going to give up hundreds of millions of dollars in incremental profit? He has to make that up. If he thought that was a low-risk proposition;-he probably would have already bought it. 
     
    I still like the business a lot.  They may be able to grow EPS at 12-15% but steadily from some increasing affiliate fees moderate cost contols and buybacks. And I would never rule out the possibility that a Softbank or a Fosun got involved.  Goes without saying, there is no one you can rely on more than John Malone to take care of you. 

    SubjectRE: RE: STRZA - buyout? what am i missing?
    Entry10/02/2014 08:06 PM
    MemberWinBrun
    Thank you for your response. Do I have profile on SA? have not checked in awhile. 
     
    Regarding LGF; valuation is high. But it would be interesting if Time Warner could acquire libraries and production assets-particularly television production assets.  LGF has both. These are not necessarily financially accretive but they can be strategically important if for no other reason than to prevent competitors from accessing a breadth of content.  LGF also has strong relationships in China. 
     
    Decline may take years to play out. But I think it could be sooner.  If you are Time Warner-why wait? wise men in the beginning...fool in the end. Netflix is really doing interesting things with the new film model. Who knows what else they can to do accelerate the decline of the linear video model.   The new day and date exclusive film move is going to systematically destroy the packaged home video market and probably hurt the productivity of large film distribution businesses like Fox and Time Warner.  the Adam Sandler movies are going to be released by Netflix all over the world digitally over the internet. Previously-that would have required a lot of resources from a large distributor. 
     
    I am concerned that letting Netflix grow quickly in new markets is a mistake. HBO has more international subscribers. But Netflix has the direct relationship.  These relationships are what is going to prove valuable.  Netflix is moving at lightspeed.  As Netflix increases its offerings on their service-they are going to crowd out competing SVOD offerings. HBO can position the business in a different light based on the quality of its shows-at least today (cannot take that for granted either).   
     
    I think Time Warner could make a bold move by repositioning the assets as a vertically integrated premium subscription video business with the largest library of film and television content anywhere.  Unlike Netflix, it would generate large free cash flow immediately.  Unlike Netflix, it could amass ownership of scale production assets and libraries.  I don't understand how spending money to reprogram TBS with risky original content is going to improve the long-term competitive position of the business.  If they had to do it, I would get it. But they don't. I do accept that Turner has a good international business.  
     
    Also-I cannot understand why Warner Bros. sells shows to Netflix (i.e. Gotham).  The are giving oxygen to a competitor. Helps the P&L for the people at Warners-but it is helping their most serious competitor grow. There is no chance Netflix would license content to HBO.  If the business was aligned around the singular focus of becoming a global direct to customer video subscription business-difficult to conceive of them selling shows to Netflix. 

    SubjectRE: RE: RE: RE: R - buyout? what am i missing?
    Entry10/06/2014 03:08 PM
    MemberWinBrun
    cnm3d-if you look at these figures, it really becomes difficult to understand why HBO would be part of the larger conglomerate-unless the entire business was going to be repositioned as a global direct to customer video subscription business.

    Consider that for the six months ended 6/30/14, HBO's content revenue was $481MM (this is revenue from home video and SVOD licensing-not affiliate fees); For the six months ended 6/30/13-it was $359MM- an increase of $122MM.  HBO notes that a lot of this is from the Amazon library deal.  There is no incremental cost associated with this licensing revenue.  If HBO was trading as a standalone company-this may get valued at a 15-20x EBITDA multiple-creating $1.8-$2B of value (depending on the capital structure-there could be leverage to the equity). Netflix is trading at 60x EBITDA (but can't have it both ways-HBO is either a licensing business or it is a direct streaming business).  As part of the Time Warner conglomerate-these high incremental margin dollars are not only not going to get valued appropriately--they may not get valued at all depending on the movements in other material contributors to revenue.   This is only six months worth of licensing revenue and this is only for library content that is three years old and it is only in the United States.  HBO is going to have a large amount of affilate fee deals coming up for renewal which are going to have essentially the same dynamic-high incremental margin. Likely there are other library deals to do as well (the Amazon deal was the first one they have ever done).  Assuming that these profits are not offset by a decline in home video sales or increased programming costs (which I believe are fair assumptions) this does not make sense.  If HBO is going to remain a licensing business-then it should not receive the valuation of a cable channels and film and television production business.  
     
    I would also argue that not repositioning this business as a global direct to customer subscription video business is creating major strategic dysynergies.  Why on earth would Warner Bros license the international rights to Gotham (A DC property) to Netflix-which only helps Netflix grow its international subscriber base by leveraging the popularity of an icnonic property that appeals to children and adults? Why is Cartoon Network licensing programming to Netflix? Netflix has been consistent for a long time that it views HBO as its primary long-term competitor.  Time Warner's non-HBO subsidiaries are empowering the competitor of its most important business.  You can't blame the executive at Warner Bros television distribution because he is trying to monetize the content by selling to the highest bidder-which is almost always going to be Netflix.  Gotham could not be monetized on HBO and Netflix was probably willing to pay way more than anyone else because this show can attract a global audience and only Netflix (and Amazon) have global subscriber bases (other than HBO).  If the executive at Warner Bros is being compensated based on Warner's television licensing P&L-he did the rational thing.  But I fail to see how this is a wise long-term move by Time Warner-given Netflix must be viewed as their most important competitor.  Netflix has put video stores out of business.  It has compeletly changed the economics of linear television-to its benefit.   I don't know if Time Warner is taking it seriously enough. 
     
     
     

    Subjectany update
    Entry04/07/2015 01:27 PM
    Memberspike945

    really nice write up and comments here.  anyone have thoughts/update on CBS?

    TIA


    SubjectRe: any update
    Entry04/07/2015 01:34 PM
    Memberjhu2000

    They should merge with Time Warner and create scale in sports programming and premium subscription television.  Les Moonves could run the consolidated business when Jeff Bewkes steps down.  Showtime does not have the scale it needs to compete in a completely stand-alone world.  It does not have the scale to become a large overseas stand-alone product.  HBO + Showtime would be great for customers and for the business.   The sports programming of Turner + CBS would be must carry for every distributor and would open up new over-the-top possbilities.  


    SubjectRe: Re: any update
    Entry04/07/2015 04:35 PM
    Memberspike945

    is a twx merger a real possibility?

    in that scenario what type of upside do you see for the stock (initially and over time).

    thanks for the comments much appreciated.


    SubjectRe: Re: Re: any update
    Entry04/07/2015 05:17 PM
    Memberjhu2000

    My own unscientific but interested observation is that Jeff Bewkes and Les Moonves would love to do it (they have both discussed it publicly-Les Moonves was on CNBC about two months ago going through all of the overlap between the companies).  I think there would be significant upside-though it is difficult to quantify.  It is hard to believe that the market would not really like the prospect of putting two great content companies with complementary assets together.  They do the NCAA tournament together.  They both have big news divisions.  They own the CW together.  HBO and Showtime are in the same business.   

    Think about a joint HBO/Showtime standalone subscription product priced at $20 or so.  That would be a very desirable product, both domestically, and over time, globally.  A joint entity would have considerable leverage in any negotiation with distributors-and it would probably be able to structure interesting direct-to-customer products.  Likely there would be large synergies and relatively little incremental cost.  Cultural clashes are always a risk.  I believe Les Moonves has a good relationship with TWX back from his days at Warner Bros.  

    Assuming you accept the above, my guess is that the biggest impediment is that the Redstone family would have to cede control of CBS-TWX is not going to do a deal that gives the Redstone's any voting control over the combined entity.  The second biggest impediment would be agreeing to a reasonable premium for CBS stockholders. The multiples are currently pretty close to each other.  I think this can be overcome by both companies explaining to shareholders why would be stronger together.  I don't know why any CBS shareholder would not be excited at the prospect of doing away with Redstone control and then merging with Time Warner.   

     


    SubjectRe: Re: Re: Re: any update
    Entry04/07/2015 06:13 PM
    Memberspike945

    thanks very much for the color and look forward to any other thoughts.   i do agree wtih many of your points.

    as an aside i am quite surprised at the number of subscribers SHO and HBO have.  they are great assets.


    SubjectShowtime CEO retiring
    Entry06/11/2015 10:45 AM
    Memberrepetek827

    Showtime's CEO is retiring after 20.5 years come January 1, 2016. NFLX stock at all time high. TWX and CBS buying in stock. HBO stuck internally at a discount to true value, just screaming for an Ackman or Come on TWX, step up and structure a deal with CBS for the benefit of everyone along the lines of jhu2000's plan..

      Back to top