|Shares Out. (in M):||105||P/E||0.0x||0.0x|
|Market Cap (in $M):||7,800||P/FCF||10.0x||0.0x|
|Net Debt (in $M):||3,300||EBIT||0||0|
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Ticker – TRBAA
Price – $74.50
Market Cap – $7.8bn
Net Debt – $3.3bn
Enterprise Value – $11.1bn
Shares Outstanding – 105 million
Recommendation: Long TRBAA
Price Target: $100/share (Base Case)
Why does the Opportunity Exist? – Following the announcement that the Supreme Court would hear the Aereo case later this year, Tribune along with its local broadcasting peers (SBGI, GCI, LIN, GTN, CBS, FOX) sold off in January anywhere from 10% for the majors to 30% for the smaller local stations. The market is worried that Aereo will win at the Supreme Court and that Netflix or one of the cable companies will acquire Aereo; eventually leading to no retransmission fees for the broadcasters.
Over the years, whenever Aereo has stimulated media headlines, the right call has been to buy the broadcasters at lower levels. The recent Aereo overhang isn’t any different. Aereo is a technology that provides consumers with the ability to transmit broadcast TV for a monthly fee; however, Aereo doesn’t pay the broadcasters for their content and retransmits the signal without permission. Even if Aereo wins at the Supreme Court (to appease the internet companies and the concerns around the digital locker), Congress will most likely amend the Copyright Act to make sure Aereo has to pay retrans. Even though Aereo is selling antennas that individually transmit a broadcast signal, it’s the collective strength of all those antennas that are able to make the signal work effectively. As a result, this means that Aereo is actually not just providing a technology product, but actually a service without legal authorization. Aereo is an exogenous risk that has had minimal business impact on the broadcasters over the last few years (Aereo is not a new offering) and the current worries create an opportunity to own the broadcasters at an attractive valuation with predictable cash flow growth streams (retrains, political revenues).
In addition to the Aereo related weakness, there are a number of “easy to fix” issues contributing to the valuation discount at TRBAA.
Tribune is my top choice among the local broadcasters because it is the cheapest retransmission story in the market along with having many revaluation catalysts or “multiple ways to win.”
Investment Thesis – The Aereo overhang has actually been made an already undervalued stock more attractive. At the current price, investors in Tribune get a high quality, FCF compounder with a number of valuable fundamental business levers for cheap or no-cost, including:
When Peter Liguori (credited for building FX Networks) decided to join Tribune as CEO in early 2013, he set his vision on building a scalable TV business with strong distribution and quality programming content. Oaktree Capital agreed with Liguori plan and has completely endorsed him. Liguori’s has a two part agenda: 1) integrate and leverage the broadcasting business and 2) rejuvenate the WGN Network. As part of this dual approach, Liguori has been recruiting some of his key FX Network colleagues to Tribune in an effort to get the “gang back together.” Improving WGN will be contingent on creating the right original content while the broadcasting business is more centered around driving retrans higher and political ad dollars higher across its key swing states.
With a 10% pre-tax running FCF yield, Tribune currently trades at a 35%+ discount to its fair value estimate. Following the spin of the publishing division later this year and potential monetization of some of its JV assets, Tribune will be better positioned to close the valuation discount to its sum of parts.
Sum of Parts Valuation –Adding up the base case values for Tribune’s different segments and netting out net debt and other liabilities, we arrive at approx. $100/share or 35% upside.
Following the recent acquisition of Local TV, Tribune consists of a number of 4 components including, broadcasting (TRB legacy + Local TV), publishing, JV assets (Food Network, Career Builder and Classified Ventures) and real estate.
Revaluation Catalysts – Tribune comes with a number of ways to win. Below is a rough timeline of the different catalysts in the queue for Tribune.
4Q13 – LocalTV deal closing
1Q14 – Sale of apartments.com
1Q14 – Form 10 filed with SEC for Newspaper spin
2Q14 – Publishing Spin off date
2Q14 – Listing of Tribune share
2H14 – Debt paydown/buyback initiation
1yr+ – Sale of real estate and/or JV interests
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