Valuation and Projections
We feel that PRISA’s stock price has already priced in a negative market environment in Spain. Barring a blowup in Spain, we feel the stock price should be trading significantly higher than the current price per share. With the debt maturity extended forward, it significantly improves PRISA’s solvency issue while allowing the company to focus on improving operational performance, generating cash flow, and reducing debt.
Based on forecasted EV/EBITDA and PE multiples, PRISA trades at a discount relative to its peers and industry average. We expect PRISA to have an upside of about 100%, with a price target of €1.20, not including the share price impact of an improving Mediaset Espana target price. Our valuation also takes in a conservative debt reduction rate for PRISA and an EBITDA growth rate of 14% after the successful refinancing and extension of its loans. If PRISA was to lower its debt levels in 2012 and beyond at a faster than expected rate, the upside potential is significantly higher as the debt burden puts a ceiling on its upside. PRISA’s CEO has also stated that he will avoid selling Mediaset before having its share price stabilize
Keys to Investment Thesis
New leadership and guidance via Nicolas Berggruen and Martin Franklin has showed a lot of promise. This is a change in business philosophy. Previously, PRISA’s many business decisions were driven by ideology rather than financial numbers. The new investors and board members are turnaround specialists with an impressive track record.
PRISA continues to move more into high growth areas such as Brazil and Argentina. The entry into these high growth areas help diversify PRIS’s revenue stream and also helped hedge against an unfavorable macro environment in Europe and more specifically, Spain. PRISA, relative to its peers, is the least dependent on Spanish advertising. It is also the only media company in its peer group that is exposed to Latam and to education, a benefit because it is a non-cyclical business.
PRISA continues to delever and shore up its financial condition. PRISA continued to shed off non-core business assets at reasonable prices to shore up the company’s capital at reasonable valuations.
PRISA’s stock price is trading at a significantly more attractive multiple relative to its peers. The stock has almost zero coverage. This is a micro-cap that may become a large cap in 2014 and the main negative factor holding it back is the extreme debt load. (When warrants are exercised and full dilution is realized)
It has attracted the investments of Carlos Slim (3.2% of shares outstanding on November 18, 2011 through his investment vehicle Inmobiliaria Carso) This is an additional vote of confidence not too different from Warren Buffett’s investment in Goldman Sachs and Bank of America preferred shares. Slim has expertise and sizeable resources within the media industry and having him onboard may allow PRISA to tap into that.
* Failure to renegotiate the €1.9B syndicated bank loan due in May 2013 and €492M debt due in 2011 and 2012. If the loan and payment cannot be delayed until 2015 as part of a debt restructuring program (bank approval needed), it may force PRISA to sell key assets such as the Santillana book publisher.
o Update: The loans were successfully refinanced on December 27, 2011. The maturities are now: 2007 syndicated bank loan due March 19, 2014 (extendable to December 19. 2014, bridge loan due January 15, 2015 (extendable to September 2015), and subordinated debt due September 2015.
* Failure to raise an additional €500M capital through issuing non-bank debt instruments (as mentioned by its CEO) and/or failure to sell its non-core businesses at reasonable prices.
* Deterioration in the value of PRISA’s high quality assets. One example would be Mediaset, which lost about 50% of its value within 12 months. PRISA owns 70M shares while Mediaset owns 167M shares so the value is significant. The CEO has stated PRISA will hold out and wait for the assets to stabilize before considering any asset sales.
* Spain’s economic environment continues to worsen more than expected. Although we feel that much of Spain’s macro environment has already been priced into PRISA’s stock price, there is a chance that it may get worse. There is still risk that the austerity measures required to reduce Spain’s fiscal deficit will further depress Spain’s economy. Spain is still in pain, with the Spanish 10-year bond yields rising to 5.5%. However, it is still well below last year’s peak of
6.73% on November 25th when PRISA stock was trading considerably higher than today’s price. This would provide further headwind to PRISA’s stock price.
* An unfavorable political climate in Spain may lead to new policies that may make it tougher for PRISA to run its business and generate profits. This would increase the costs of doing business and add on additional hurdles for PRIS to overcome. Recently, Spain’s Ministry of Industry proposed that the broadcasting industry cut its channels in half. We see the probability of this being implemented as being very low, but it does highlight additional policy risk in the future.
* The restructuring may not bring in the desired level of working capital savings. The restructuring plan that was started in 2010 was finally complete at the end of 2011. PRISA estimates that this will result in an annual savings of 65€, in which 2012 will be the first year to realize this impact. If the true savings deviate away from the projected annual savings it will hurt the company’s turnaround plan
On December 27, 2011 PRISA announced through a regulatory filing that it has finalized its refinancing. The loans include: a 2006 syndicated loan, a 2007 bridge loan, a 2007 subordinated loan and some bilateral loans, all totaling €3.4B. All of the banks involved with the loans have signed the agreement, which includes extending debt maturities by 1.4 and 2.1 years barring any setbacks and/or improvements in capital and other milestones. PRISA has stated that the goal is to delever to about 4x Net Debt / EBITDA by the end of 2014. The refinancing has given PRISA some breathing room to operate in the short to medium term and has stabilized its cost of debt.
Because the successful refinancing has been announced the €150M warrants by the Polanco family and the sponsors will be executed and materialized. This is another positive improvement for PRISA’s capital structure.
These recent improvements will allow PRISA’s management to focus its energy on the operational development of the company and to continue to execute its turnaround and restructuring plan.
For 2012 and beyond, we see the possibility of further divestments of PRISA’s assets. The first in line is Mediaset Espana which PRISA has a 17.3% stake (Currently worth about €140M). The next possibility would be Media Capital where PRISA has an 85% stake. (Currently worth €118M)
Media Industry Outlook
We continue to expect an unfavorable Spanish macro environment after the release of poor macro data for the third quarter of 2011. We expect further declines continuing into early 2012 in light of the uncertainties over the future of the Euro zone and Spain’s spending cuts.
Publishing is relatively resilient as the results are geared to macroeconomic conditions. Press and radio are dependent on the ad market while digital subscriber trends are linked to the consumption environment, which is currently penalized by the Spanish recessionary climate.
We feel that the market has priced in too much of Europe’s negative outlook into PRISA’s stock price. PRISA has performed up to par in the wake of the turbulent macro environment in Europe. Because PRISA is the least cyclical Spanish media company in its peer group we are attracted to PRISA’s future prospects.
PRISA stands to benefit from 1) its exposure to higher growth areas in Latam such as Brazil and Argentina; 2) its exposure to education which is non-cyclical; 3) its ability to execute on its restructuring plan and delever; and 3) the solid track record of its new CFO and deputy CEO, Fernando Abril Martorell and the sponsors of Liberty, Nicolas Berggruen and Martin Franklin (both of whom are on the board and are large shareholders).
However, we feel PRISA’s large debt load and debt servicing costs will continue to put pressure on its stock price and restrict management from concentrating on improving the company’s operational performance.
For all of the reasons mentioned above, we recommend that investors buy shares of PRISA strictly as a turnaround play with a favorable risk to reward ratio.
Disclosure: The author is long both PRIS and PRIS.B (B class) shares.