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October 27, 2004

New Purchase: SBS Broadcasting

Yesterday, Northlake purchased SBS Broadcasting (SBTV) for clients. SBTV is a U.S. company with an American CEO, although the company receives 100% of its revenue in Europe where it is one of the leading television and radio broadcasters. In 2004, revenue is estimated at €670 million with projected EBITDA of €100 million...

The company receives over 80% of its revenue from TV operations which include 10 stations in 7 countries. Including radio, SBTV reaches 9 countries with a population of 100 million people. The company operates predominately in Northern Europe with key operations in the Netherlands, Sweden, Belgium, Norway and Denmark. SBTV also has an important foothold in Central Europe in Hungary and Romania.

While extremely competitive, SBTV's markets remain underdeveloped compared to U.S. and Western European television advertising markets. The level of viewers, listeners, and advertising spending per capita in SBTV's markets grows faster because government owned stations are still losing market share to private broadcasters. Consequently, the markets still offer the opportunity for mid-single digit revenue growth with higher potential if SBTV can continue to outperform its markets. Since 1999, according to Zenith Optimedia, SBTV's television markets have grown at a 5.1% CAGR, while SBTV has had a CAGR of 9.4%.

SBTV has a good balance sheet with projected 2004 year end debt of €150 million. Free cash flow and a current cash balance of €250 million should allow the company to be debt-free in 2006 even with continued acquisitions.

SBTV trades at 19 times consensus 2005 EPS of $1.81 and at approximately 7 times EBITDA. I believe the shares can trade to the mid to upper $40s assuming a 9 times EBITDA multiple on 2005 estimates. Continued market share gains and improved growth in the company's served advertising economies in 2005 should drive the multiple expansion. Continuing improvement in the balance sheet and modest acquisition activity are also potential catalysts.

Risks include the highly competitive nature of the company's markets, the possibility of a larger acquisition, strengthening of the U.S. dollar vs. the Euro, and less than expected advertising growth in the Northern European markets.

Posted by Steve Birenberg at October 27, 2004 10:03 AM in SBTV