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February 16, 2006

The Univision Buyout and Central European Media Enterprises

Based on news reports, it appears that Univision (UVN) wants to sell itself for $13 billion. Along with about $1.5 billion in debt that would work out to 18 times projected 2006 EBITDA of $800 million. It is a rich price, especially given that major media companies generally trade at 8-10 times EBITDA. UVN is a high growth asset that can’t be duplicated so a big premium is in order. I am certain there will be plenty of companies and private equity shops that will take a close look. By the way, those same things apply to Central European Media Enterprises (CETV). See the end of tis article for details

So far, speculation about buyers for UVN has centered on the usual suspects: Viacom, News Corporation, Time Warner, Disney, and CBS. Grupo Televisa, which owns 9% of UVN already and is its primary programming supplier under a long-term agreement thru 2017, has also received prominent mention. Private equity is clearly a potential buyer on its own or in partnership with a media company, although a high growth, high multiple asset doesn’t fit the private equity deal profile....

Although it hasn’t stopped UVN from ramping, all of the buyers mentioned face significant obstacles. CBS and News Corporation will be restricted by the federal cap on TV ownership. Disney doesn’t own enough TV stations now to bump up against the cap but the company is already in the process of completing the $7 billion Pixar deal and just divested its radio distribution assets. Time Warner seems like a logical buyer to me as it owns no TV stations and owns only the soon-to-be merged WB Network within the broadcast TV realm. Of course, the controversy surrounding TWX probably means a UVN acquisition would have to be part of a larger corporate restructuring. Viacom could make a run and views itself as a growth company but I think Sumner Redstone would have to resign his CEO role at CBS and maybe even give up his equity stake. Additionally, Viacom just slimmed down by exiting broadcast TV so a big deal right out of the chute at a 50% plus premium to its own shares seems unlikely. Televisa is probably the most logical buyer but a foreign entity can’t control the TV licenses so they would need a local partner or their controlling shareholder would have to become a U.S. citizen. As for private equity, they seem to have unlimited access to cash but as mentioned above they are value buyers not growth buyers.

Despite all those obstacles, a deal seems likely to get done. As David Faber noted on CNBC this morning, investments bankers can become awfully creative when a big deal is on the line. The second day of gains on UVN shares on Thursday in light of news reports about the obstacles bidders suggests the market is not concerned a deal won’t get done. By the way, Faber knows his stuff on media and seems to have good contacts.

I'd like to toss out another couple of ideas for buyers: Gannett and Tribune. Gannett already is successfully involved in TV and has a great reputation as an acquirer. In the past, Gannett owned cable so a history as a more diversified company exists. The company could clearly use the growth boost given concerns over its stagnating newspaper business. UVN would bring heavy dilution though as GCI trades at only 8 times EBITDA itself.

A very similar argument could be made about TRB. In fact, TRB has a much bigger stake in TV and has a lot of experience running Spanish language newspapers in larger cities. On the other hand, TRB shares are really depressed and the company's financials results have been much worse than their peers. This is not exactly the environment from which management has strength to make a major dilutive acquisition.

I've never owned UVN don’t plan to buy it in here. I don't play takeovers after they are announced and the multiple is not my style. Also, I think I own a growth company in media with a lot more upside: Central European Media Enterprises. I've always compared CETV to UVN from a valuation perspective and have always preferred to own CETV shares rather than pay a premium for UVN.

CETV offers higher growth than UVN, with 20% growth in EBITDA sustainable for several more years. CETV is also less impacted by cyclical forces that impact advertising in industrialized markets. CETV is a lot smaller with a market cap of just $2.2 billion and pro forma revenues of $540 million, leaving it more room to grow. Granted, CETV operates in emerging markets which adds a significant element of risk.

CETV trades at 13 times my estimate of 2006 EBITDA, a sharp discount to UVN's likely takeout multiple. Ronald Lauder controls CETV and is not a seller but there would be no shortage of bidders if the company were for sale. Each point of multiple expansion for CETV adds over $5 to the stock price. I think the company's growth profile comfortably justifies the current multiple so it is easy to see why I continue to prefer it to UVN.

Posted by Steve Birenberg at February 16, 2006 02:24 PM in CETV