AMC Networks long pitch via Elevation Capital
Reputed short-seller Spruce Point Capital Management released its latest short report this week. The firm is shorting Canadian dairy and grocery manufacturer Saputo. Spruce Point chief Ben Axler believes the company is entering a phase of declining growth and highlights the financial stress and growing challenges he sees it facing, not only in Canada but Read More
PRODUCING QUALITY CONTENT FOR MORE THAN 30 YEARS AMC Networks (AMCX: US, Market Capitalisation US53.54B) is a premier US media and entertainment company. The Company operates cable networks: AMC, WE tv, IFC, The Sundance Channel, and a —50% stake in BBC America. In addition, the Company owns IFC Entertainment, an independent film distribution company, and AMC Networks International, the Company's global programming business. Propelled by their flagship channel, the network has asserted itself as a preeminent provider of high-quality content, enjoying strong brand equity and an accelerating market presence. The past ten years has seen AMC shift progressively toward original productions, distinguishing itself as a market leader for scripted series dramas while benefiting from increased ownership rights over its content. In 2016, AMC generated approximately US$ 2.7613 in revenues.
COMPETITIVE EDGE IN ORIGINAL CONTENT AMCs focus on original content is unique in an industry which has traditionally relied on content acquired from third-party studios. Original programming is produced both in-house and externally alongside larger production companies. Ownership and control over created content enables AMC to diversify revenue streams with content licensed to third parties in both linear and over-the-top formats (across all geographies), in addition to distribution within its operating segments. For this reason, content is the engine that drives the relative success of AMC enabling the Company to generate some US3435M in free cash flows in 2016 (representing an impressive free cash flow yield of 7.7%). We note that other businesses have also identified content ownership as a potential "life raft" against the backdrop of a transitioning industry, and we expect competition to increase as players seek to avoid being caught as price takers, in a market where content is trading at a premium. As it stands, Time Warner (through HBO), Netflix and Amazon have all made significant investments in original content.
AWARD WINNING CONTENT AMCs has an established reputation as a producer of award winning content with numerous shows receiving critical acclaim. The Company is the only cable network in history to win the Emmy Award for Outstanding Drama Series four years in a row (Mad Men: 2008 to 2011). in addition to winning the award six out of the last eight years (Breaking Bad: 2013 6- 2014). AMC's zombie thriller The Walking Dead is the highest•rated drama series in basic cable history and was ranked as the number one show on television among adults 1849 for 2015. Market commentators are quick to cite the limitation of AMC's current programming suite which is nearing maturity with current flagship series facing declining viewership. We acknowledge that an inability to replace current programming will have significant adverse effects on AMCs business, however, we maintain that such fears are overemphasised. For example, Fear the Walking Dead viewership has declined from 10M viewers on debut to averaging approximately 4M per episode, yet the show remains one of the most viewed shows on cable TV for the night and AMC's second top•performing show ever. Meanwhile, new series such as Preacher (the second most popular new show on cable this year among adults 1849 and 25-54) and The Night Managerhave also been received with critical acclaim.
CAPTURING A GLOBAL. MARKET International expansion is a fundamental component of AMC's long-term growth strategy. With all of AMC's brands carried by major multichannel distributors in the US. the Company is able to shift its focus toward underpenetrated global markets. In 2014, AMC purchased Chellomedia (now AMC Networks International) from Liberty Global, significantly enhancing the Company's global reach. AMC content is now delivered to more than 140 countries and territories, including Africa, Asia, Europe, Latin America, and the Middle East. We expect AMCs international operations to strengthen over time as the integration of Chellomedia is completed and business partnerships are established in new regions.
The media industry is currently going through a transitional period - the advent of subscription video on demand (SVOD) services is questioning the role of traditional media outlets as consumption behaviours adapt to new technologies. Threatened by declining revenues and profitability, leading industry players have identified consolidation as means of protecting their competitive advantage. In this regard, we view AMC as an attractive acquisition target with its strong portfolio of original content, proven track-record and substantial free cash flow generation. AMC is controlled by the Dolan Family through supervoting stock. The Family, which has a vast portfolio of media assets, recently sold its crown jewel, Cablevision. (Note that both AMC and Madison Square Garden are both companies spun out of Cablevision). The Dolan's sale of Cablevision suggests that the Family may look favourably toward a potential sale of AMC in the future.
STOCK PRICE WEAKNESS PRESENTS LONG-TERM OPPORTUNITY
Subscriber losses from cord cutting, rising costs of content and an over-reliance on The Walking Dead have been primary contributors to AMC's stock price underperforming While these fears have merit, we suggest they have now been fully priced into AMC's current stock price. In June 2016, AMC's stock traded below our pessimistic intrinsic value estimate of US$58A1 (following our initial coverage in December 2015) reaching a 52-week low of US$55.24. This represents a 36.0% from its all-time high of US$86.27 in July 2015. In July 2016, the Elevation Capital Value Fund began to establish a position in AMC at an average cost of US$55.70 per share (as at May 2017).
AMC Networks - SUMMARY
Emerging technologies, shifts in consumer behaviour and proliferation of over-the-top distributors represent a considerable threat to traditional media suppliers and distributors. As a content provider, we believe AMC's strong brand equity, rich history in creating award-winning dramas and high appeal of programming can transcend multiple platforms mitigating associated risk. We further suggest that the Company's ability to consistently generate a high qualitycontent, considerable brand equity and rapidly expanding distribution network make it an extremely desirable acquisition target. We currently value AMC Networks in normal trading conditions with an Intrinsic Value Estimate range of US$72.30 - USS88.61 (with the upper range based on a 'take-out' scenario). From the Elevation Capital Value Fund's cost basis of US$ 55.70 per share, our valuation's represent upside potential between +29.80% to +59.09%.