Description

While CCO’s equity has been written up a few times on VIC, see ATM’s prior write up which does a good job laying the equity story out, we believe the 7.75% and 7.5% Senior Notes at 15.4% and 14.7% YTM offer an attractive risk-reward while lending against a high-quality asset base.

CCO is the #2 out-of-home (“OOH”) advertising company globally, behind JCDecaux, and arguably the #2 player in the US—with Lamar the clear #1 and Outfront, as we will contend, the #3 player (admittedly not by a large margin). To date, CCO has been a widow-maker of an event-driven stock, having gone from ~$3.71 in March of 2022 to ~$1.21 at present. The thesis has largely remained the same: CCO is an orphaned security given it was a thinly-traded & controlled company before most of the float was listed in late ‘19 as a result of iHeartMedia’s restructuring, COVID exacerbated a classic “good company bad balance sheet” dynamic, the company has a relatively weak European division it intends to sell, and subsequent to divesting the European division there is a thesis surrounding the placing of the remaining high-quality US assets into a REIT structure (see LAMR). While we think all of these points broadly hold, we think the equity is a little too spicy, and a lot too illiquid, for our taste. Again, as an example, the recent weakness in Europe related to the Ukraine conflict, and the potential difficulties that could pose to the sale process, sent the levered stub from ~$3.00 to $1.00. Ouch. The unsecured bonds, however, offer an ability to earn a well-covered ~15% yield over a multi-year period even if the European divestiture program proves to be difficult—and the possibility of earning a better IRR should the sale process go better than the market fears.

Basic Cap Structure:

• Term Loan & Senior Secured Note are pari
• CCIBV = European opco debt
• The 7.5% and 7.75% Senior notes are pari
• There is a 7x First Lien net leverage covenant tested quarterly on a LTM basis
• Restricted payments capacity on CCIBV is ~25 mm but company has ability to recycle proceeds into European capex to preserve liquidity

Model the business

• While we will let everyone come to their own conclusions regarding the future state of the economy but below is the basic annual output for our base case
• We model the US up ~1.6% yoy
• Europe is up ~3% yoy constant currency but is flat/down reported due to Swiss Divestiture (close modeled Q3’23) & slight FX headwind
• We have them missing the mid of guidance (~2.64 Bn) by 5%, missing street (2.6 Bn) by 4.3%, and low end of guidance (2.57 Bn) by 2.8%.
• We think since giving guidance on 2/28/2023 players such as JC Decaux have guided to weaker Q1’23 numbers, SVB etc has potentially slowed US economy (tough to tell)
• We think given the move in the bonds/equity since guidance (while really levered, the equity is down ~30%) the buyside is probably also at low end of guidance
• We concede we could be a tad conservative on the top-line
• For EBITDA, we have them generating ~544 mm of EBITDA, in line with the bottom end of guidance range
• Broadly think ~45-48% incrementals/decrementals are an applicable rule of thumb—was implicitly baked into their guidance range
• Capex, interest, etc is modeled in line with guidance provided by company
• Cash is tight, management and the market is aware, we have them generating free cash flow beginning in 2025
• Given PIMCO owns both the bonds & equity, and has board representation, we don’t think there is material risk the equity tries to screw creditors
• We don’t understand exactly why Ares is buying so much stock (anyone?).

Creation Value on US:

• Another way to look at the opportunity is the value you are creating the remainco US business assuming Europe is punitively only worth the value of the European notes (any excess proceeds would improve this math)
• We assume ~50 mm of corporate travels with Europe
• For context ~98% of remainco EBITDA = Americas (remainder being LATAM)
• We believe in this rather harsh state of the world you are creating the US remainco through the unsecured debt at ~9x at market, and 10.5x at face
• The recent sale of Switzerland (expected to close early this year) equated to a pre-tax transaction multiple of 9.6x EV/EBITDA vs. the ~5.5-6x our math assumes (JC Decaux trades at 8.6x; Ocean Outdoor sold for ~11x)

US Business Value:

• We think the US business is the real crown jewel asset here (worth 12-13x EBITDA) which will be the majority of remainco EBITDA following European divestiture
• Our general philosophy is that when bucketing OOH business’s fragmented supply & regional regulatory complexity = good mix (high multiple) and large competitive tender processes to government entities = bad mix (lower multiple)
• For example, the reason that roadside billboard exposure in the US is so attractive is that a.) many of the billboards are “grandfathered in”, i.e. were legal at the time they were built but are no longer legal under contemporary policy and b.) the billboard operator owns the permit and thus the landlord would be unable to get a new permit / tenant creating outsized bargaining power. This, coupled with the regulatory complexity of having hyperlocal zoning laws, creates barriers to entry in the OOH business (the competitive position of LAMR, Outfront, and CCO in their local billboard markets is extremely strong)
• OOH business that comes by way of competitive, often government-sponsored, tender processes, which is very prevalent in Europe—is a much less defensible business, it is priced to a much lower return on invested capital, and it deserves a lower multiple.
• We think if you look at where JC Decaux has traded vs LAMR (presently 8.6x EBITDA vs 13.5x) the market generally understands this
• We think if you compare the US operations of CCO vs Outfront along this criteria, CCO edges out Outfront
• Both CCO and Outfront have core roadside billboard franchises (~74% & 78% of 2022 sales, respectively)—but CCO’s non roadside billboard exposure is largely US airports (which have recovered strongly from COVID lows) while Outfront’s is tied more to return-to-office transit (in particular, a large contract with the MTA) and we broadly like travel beta better than return-to-office beta
• If you compare CCO to Outfront by % of revenue tied to major markets like LA, NY, and Chicago (more competitive markets)—Outfront has a higher concentration (37% vs 25% for CCO) which is less desirable mix
• Excluding airports, the CCO US business looks very similar to LAMR (90% billboard) and we believe deserves a similar multiple (it has ~40% (EBITDA – Capex) margins vs ~42% for LAMR)
• If you wanted to do a “SOTP”, and put a LAMR multiple (13.5x forward) on the US business ex-aiport, and a JC-Decaux multiple (8.6x forward) on the airports business, you would get a weighted average multiple of 13x
• We broadly think OOH multiples are cheap on an absolute basis given worries about cyclicality
• We think the digital conversion story is real, from 2018 to 2022 CCO US spent ~381 mm in total capex and grew EBITDA by 95 mm (25% ROIIC) despite a soft macro backdrop and a stunted travel market as a result of COVID.
• Lastly, we think that CCO could potentially try and sell particular markets if needed, although this would be undesirable for long term value, to players like LAMR (there is precedent for this at healthy multiples) or potentially pe operators  

Comps:

Business Mix:

US Business Comparison:

Market Analysis:

Catalyst

Sale of European Division 

Conversion to REIT