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February 09, 2005
SBS Broadcasting Makes Smart Acquisition
SBTV announced the acquisition of CMore Group AB today. Here is a description of CMore taken directly from the press release:
CMore Group is the leading Nordic pay entertainment provider with over 770,000 subscribers in Sweden, Norway, Finland and Denmark. The only provider of both premium sports and premium movies in the Nordic region under the Canal+ and CMore brands, CMore Group enjoys market leading positions in Sweden, Norway and Finland. The channels are distributed primarily by direct- to-home satellite (DTH), cable, broadband and increasingly by digital terrestrial transmission (DTT).
The market liked the deal and SBTV shares rose 8% today against a poor day for the major market indices.....
I like the deal as well. SBTV already operates traditional broadcast television, analog cable, and radio stations and networks throughout Scandinavia. Management knows this business well and should be able to gain synergies in terms of cross-platform advertising sales and subscriber growth through cross-promotion.
The deal appears attractively priced at 270 million euros. CMore has 20 million euros in cash, so the real cost is 250 million euros. On the conference call, management very confidently stated that 2005 operating cash flow for CMore would be in the "upper mid 20 million range." I take that to mean to 27 million which would mean the acquisition is for less than 10 times current year cash flow. This is a good price for any established media property based on comparable transactions.
SBTV management was very confident and knowledgeable about the deal on the conference call. The key takeaway is that penetration of pay TV services in Scandinavia is just 11% of the households. This compares to about 25% in France and the United Kingdom which have similar television industries. The Scandinavian countries are eliminating analog delivery of television signals and replacing them with digital signals over the next few years. This means that every home will need to have a set top box to receive TV signals. SBTV believes that once a set top box is in the home it will be much easier to sell a package of pay TV networks to customers. Households in the region have only five TV channels to choose from right now if they don't subscribe to cable or satellite TV. CMore has locked up key sports programming (including European soccer) and most of the major Hollywood studios for movies. Once set top boxes are in homes, SBTV will cross promote on its radio and TV stations to drive subscriber growth. Recent trends suggest that there is a multi-year opportunity for over 10% subscriber growth.
In summary, SBTV is buying a business that will enhance its growth rate at a reasonable price. The company knows the business they are acquiring well and appears able to hit the ground running when the deal closes in the second quarter of 2005. SBTV has 250 million euros of cash, 143 million euros of debt and should generate over 80 million euros of free cash flow in 2005 before the CMore deal. SBTV is wisely using its financial strength to enhance its growth profile and increase its long-term free cash flow production. At less than 8 times cash flow, SBTV shares have plenty of upside after today's moves as similar stocks trade for 10 to 12 times cash flow in the United States and Western Europe. Northlake remains long SBTV shares with a price target of at least $48 based on 2005 estimated financial results.
Posted by Steve Birenberg at February 9, 2005 04:00 PM
