|Shares Out. (in M):||25,900||P/E||0.0x||0.0x|
|Market Cap (in $M):||194,250||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-38,800||EBIT||0||0|
The Outdoor Channel will merge with the Sportsman Channel and the publisher of Guns & Ammo (Petersen’s Hunting, In-Fisherman and 12 other sport enthusiast titles).
Buy OUTD because you will own a better pro-forma company, at a reasonable price, once the merger with the Sportsman Channel closes in March of next year. Today you can buy a share of OUTD for $7.46, and at the close of the merger receive $4.46 in cash and 0.443 shares of NewCo. That means you will have paid $3.00 for your shares of NewCo. Then at the close of the deal OUTD will delist, and NewCo will assume the OUTD ticker and then relist on Nasdaq.
In a recent S-4 filing, the acquiring company tells us that there will be 35.6mm fully diluted shares outstanding at the close of the transaction. So, $3.00 x 35.6mm shares implies a market cap of $241mm. We are also told that debt at the close will be $140mm, and that we should expect around $5mm in cash from the disposition of an asset, plus some normal cash build during the 4Q12 and 1Q13. Let’s be conservative and assume just $5mm of pro-forma cash and note that company has arranged for a $10mm five year revolver that it expects to be undrawn at the close. A market cap of $241mm plus net debt of ($140mm debt -$5mm cash) = $135mm implies a total enterprise value of ($241 + 135) = $376mm.
Management thinks NewCo can generate $10-$15mm of synergies over the next 12-18 months, but has so far given pro-forma guidance that simply sums the projected EBITDA of OUTD and the acquirer (ex-stock comp, discontinued ops and non-recurring charges unrelated to the transaction). If we use their guidance, then at 9.1x 2013E OUTD appears fairly price relative to peers such as AMCX (9.3x), SNI (8.3x) and CRWN (8.1x). However, if we give NewCo credit for $10mm of synergies then the business looks cheap relative to its peers at 7.3x ‘13E. Multiple expansions to 8.3x from 7.3x would imply 20% upside in the NewCo share price.
|-Election cash||4.46||Cash consideration/share|
|(OUTD - $4.46)/0.443||6.77||Implied cost of a NewCo share|
|PF Shares (FD)||35.6||S-4 p. 170|
|PF Mkt Cap||240.8||$6.77 x 35.6mm shares|
|PF Cash||5.0||Mgmt expects some cash build + $5mm asset sales|
|PF Debt||140.0||140mm term loan, undrawn 10mm revolver|
|PF Net Debt||135.0||$140 - $5|
|NOL '11A||49.9||S-4 p. F-22|
|LTM 3Q12||35.2||10.7||3.8||provided on M&A call|
|Post-Synergy (+10mm)||EBITDA||TEV/||Net Debt/|
Admittedly, to come up with a $38.4mm figure in 2013E we have to give credit for synergies, and ignore cash integration costs. The cash integration costs will be one time in nature, whereas the synergies will be ongoing. The market traditionally looks past the integration costs, and instead focuses on the future earnings prospects of the company. Their $140mm five year note bears interest at a rate of LIBOR+5% and requires that 50% of excess cash flow be used to repay principal. The note also requires 5% amortization in year one and year two, 7.5% in year 3 and year 4 and then a balloon payment in year five. At $38mm of amortization we de-lever in 3.7 years, and at say $28mm we de-lever in 5 years. The main idea is that the company may comfortably reduce Net Debt/EBITDA through a combination of profit growth and principal repayment.The acquiring company has substantial NOLs ($49.9mm at YE2011) and a high depreciable tax basis on its assets that will both survive the transaction. On the M&A conference call management said that the combined company is therefore unlikely to pay cash taxes in the near future. Capital spending is roughly $6mm/year ($5mm at OUTD and $1mm at the acquirer), and interest on the new debt should run approximately $7mm/year. So, 2013E pro-forma free cash flow should be roughly $51.4mm EBITDA - $6mm Capex - $7mm interest expense = $38.4mm. The market cap we said was $241mm, so that would be $241mm/$38.4mm = 6.27x free cash flow or a 15.9% free cash flow yield. For argument’s sake, let’s suppose the free cash flow estimate is off by a factor of two: then we still wind up at 12.5x free cash, or roughly an 8% free cash yield.
Leo Hindrey is the managing partner of the private equity firm that controls the companies that are merging into OUTD. Hindrey is a media industry veteran who sold TCI to AT&T in 1999 and became head of AT&T Broadband (http://en.wikipedia.org/wiki/Leo_Hindery).
On Nov 3, 2009, zach721 posted a write up on OUTD, wherein he showed that micro-cap cable companies tend to get a low acquisition multiple of TEV/Subscriber ($3.80-$7.29). However, companies with TEV in excess of $300mm, tend to get TEV/Sub acquisition prices in the range of $12.50-$34.24. On a combined basis, adjusted for overlap, the NewCo will have 50mm cable subscribers, print circulation of approximately 2.3 million and total readership in excess of 24 million persons per month. At say $12.50 EV/Sub and ignoring the value of the print business, NewCo could be acquired for TEV of $625mm. TEV of $625mm/$51.4mm 2013PF EBITDA equates to roughly 12.1x, and $625mm TEV – Net debt of $135mm would imply a per share acquisition price of $490mm/35.6 =$13.76, or 84% upside.
When zach721 posted on OUTD three years ago, the stock was around seven bucks, and if the deal breaks for some unlikely reason I would expect the shares to trade around this same level. Note that the financing is committed and that the gating items on the deal are a shareholder vote, SEC approval of the definitive S-4, HSR expiration and an FCC review.
For readers interested in parsing the S-4, I put together some historical numbers and combined them with the forecast data provided in the filing, this will save you some time.
|Adj. EBITDA Margin||12.7%||15.5%||21.4%||16.7%||15.0%||16.1%||17.0%||17.9%||18.7%|
|Adj. EBITDA Margin||11.3%||15.6%||19.3%||21.6%||27.7%||29.1%||32.0%||34.9%||38.2%|
|Adj. EBITDA Margin||12.0%||15.6%||20.1%||19.8%||22.8%||24.1%||26.3%||28.6%||31.3%|
So, in summary, buy OUTD because there is roughly 20% upside if the market prices in a turn of multiple expansion - or 80%+ if the company is rewarded for scale by an acquirer. The downside is that the deal breaks and the share price languish around $7, where it has been for years.