The hottest names this week were ATUS (245bps better than the S&P), DISH (237bps), WWE (182bps), AMCX (92bps), and CBS (5bps).
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With CMCSA earnings coming up next week (1/23), we provide our thoughts on the numbers, sentiment and what to do with the stocks into the print. Please see the Full PDF link below for our detailed 30 page slide deck. OK
We think an SSP-COX deal makes the most sense. Recall that on 7/24, Cox Enterprises announced its intention to explore strategic options for its 14 TV stations in 10 markets. Our view at the time was that Cox understood its need for scale (Cox covers only 6% of the U.S. with the UHF discount) and is looking for a partner (i.e. GTN-Raycom) rather than the highest bidder. While the process initially involved just about every broadcaster in the space, there are 3 final bidders per press reports – SSP, TGNA & Hearst – looking to pay “almost $3B”, or 11x ‘18/’19 EBITDA per our ests. Based on our analysis, an SSP deal makes the most sense from a geographic/regulatory and an accretion standpoint (16% ‘18/’19 blended FCF/sh.) but we also ran the math for two additional scenarios: TGNA buys the whole thing (15% FCF accretive) or TGNA & Hearst team up to split the assets (12% FCF accretive to TGNA). CONFIRMATION SHOULD COME END OF JAN/EARLY FEB.
This note details our conversations with London investors, with the biggest surprises being: 1) The skepticism regrading New DIS – particularly the value of streaming vs. long-tailed content. That said, should uncertainties become more certain, this is the one most still want to buy. 2) The tremendous pushback on CMCSA – all because of Sky. And 3) the number of requests for our ATUS and OUT models (which must be positive signs, no?). PERHAPS THE BIGGEST TAKEAWAY IS HOW IMPORTANT MANAGEMENT TRANSPARENCY AND CREDIBILITY HAVE BECOME – above and beyond the numbers and the balance sheet.
Eric, Stephan, Se and I are reintroducing our WHAT’s HOT WHAT’s NOT weekly wrap up – this being our first edition from Wolfe Research.
It’s no secret that the RSN sale is not going swimmingly. While the press is reporting significant interest (i.e. 40 bidders in Round 1), the price tag seems to be well below what we would call DIS’s “acceptable range” so far. Of course, there is still quite a bit of runway left to get a final deal done – so it’s not ovah until it’s ovah. In this note, we dive deep into the RSNs – with a detailed history, financial snapshot and potential valuation. We also look at our coverage group to see who has the most interest AND ability to potentially transact. We have 2 over-riding conclusions: 1) While DIS is likely to lose ~$9B of deal value, the RSN sale does NOT materially impact PF synergies, PF growth, or DIS’s ability to de-lever. 2) We view the Yankees as the most likely buyer of YES ($5-6B) and SBGI as the most likely “winner” (or not) of the remaining 21 RSNs (~$11B).
We went straight from our launch (check out our 252-page slide deck – which was NOT an easy feat) to a whirlwind of marketing – hitting NYC, NYC (not a typo), Boston, the Mid-Atlantic, and more NYC. Ahead of us is CT, the West Coast, NYC (again, not a typo), and then Europe (Cheers!). The biggest surprises from our first set of meetings have been: 1) The fact that just about every conversation has begun with New DIS and New FOXA (there are way more bulls than bears). 2) There appears to be significant incremental interest in OUT and ATUS. 3) There appears to be significantly more concern re. CBS & VIAB. 4) No one has pushed back on our “downgrade” of DISH (Peer Perform). And 5) Local isn’t a huge focus due to macro and leverage. BOTTOM LINE: We feel incrementally positive on New DIS, New FOXA, CMCSA, ATUS and OUT; we are worried that our positive call on VIAB might take longer to play out.
In our view, SBGI is a cheap stock with a very healthy balance sheet (levered at 3.3x as of 9/30) and a ton of cash and free cash flow – which we would love to see put towards its $1B buyback and recurring dividend as well as growth initiatives that we are able to understand. Unfortunately, it sounds like this company has its heart set on on buying the FOX RSNs, which completely muddies our view. One, these RSNs are insanely expensive - going for $20B-plus with YES and $16B-plus without, per press reports. (We know private equity is involved but still – they are EXPENSIVE); Second, the sports rights renewals scare us in terms of how high they could be (this is true of all sports rights but RSNs in particular). Third, the Street has been bearish on the RSNs for forever. And fourth, we think the best and most natural operator of the RSNs would be FOXA itself – not an affiliate even with the backing of a private equity group. Outside of the RSNs, we view SBGI as having the least station M&A optionality of its peer group. David Smith is not a seller. And we don’t think David Smith can be a buyer of stations even if he wants to be. SBGI can bid all it wants on Cox or any other broadcast group that comes up for sale. We just don’t see how a seller becomes comfortable pursuing a transaction with SBGI given the regulatory risk post-TRCO, and the ALJ suit is not yet over. One last concern is the fact that SBGI’s FCC licenses renew in June 2020 – we don’t know that the FCC will do anything drastic here, but we also can’t guarantee that it won’t. Again, we love SBGI’s cash profile – we just worry how this cash might be spent and view this stock as messier than peers; hence we initiate with an Underperform rating and a $34 price target.
We think AMCX is doing the absolute best it can with the assets it has. And it has been a good stock – relative to the rest of our sector(s) under coverage, +6% YTD vs. the S&P, +1%. But we’re not sure that the “as-long-as-it-isn’t-as-bad-as-expected-thestock-will-work” thesis is sustainable. We want to be clear – our call is that this stock is likely to underperform its peers next year, but we still get 16% upside from today’s price. It just isn’t enough for us to hang our hat on – we would love to see real momentum (or even stabilization) in the story from some of the really good content that AMCX has on its schedule (Better Call Saul, Preacher, Into The Badlands, The Son, Dietland, The Terror, Lodge 49, McMafia, etc.). But it still feels as if there is so much reliance on The Walking Dead (TWD) – just listen to the last earnings call or read the transcript. You know how many times TWD was mentioned in prepared remarks? We counted – it was 23. That’s way too many for me to survive a drinking game (although admittedly I am a total light weight so maybe I should say that is way too many for ERIC to survive a drinking game – he said he’s willing to find out). So relative to our expectation for its peers, we initiate on AMCX with an Underperform and $66 price target.
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