Pixar's Earnings Give Disney A Boost

Disney (DIS) continues to act better than any other mega cap media stock. I think there are three reasons behind the good action. First, Bob Iger has clearly laid out a content driven strategy and acted to make it happen by divesting radio and acquiring Pixar (PIXR). Second, all of DIS's divisions will be growing in sync beginning in the June quarter driving the fourth consecutive year of double digit growth. Third, the halo effect of bringing PIXR and Steve Jobs aboard is exciting investors. The strategic coherence implied by these factors is not evident at any other large cap media company at the moment. I expect DIS to continue to be the best performing stock in the large cap group.

Speaking of PIXR, yesterday the company reported better than expected December quarter earnings. I did not listen to the conference call but numerous analyst reports indicated that Steve Jobs said this would be the company's last earnings report as an independent company. DIS has talked of a summer closing to the deal. I guess late June must be the target now, probably June 30th to make the financial reporting easier to digest....

PIXR beat estimates across the board with higher than expected revenue and lower than expected costs. While the variance was only in the millions of dollars, DIS investors can take heart, especially in the revenue performance. PIXR is still able to drive revenue from its library long after its films have left theatres and well past the initial DVD sales and rentals. In the most recent quarter, Finding Nemo outperformed in TV licensing and DVD sales, The Incredibles outperformed in consumer products and DVD sales, and Toy Story and Toy Story 2 outperformed in DVD sales. As a DIS long, it is nice to see that the library I am acquiring has enduring value.

I remain long DIS in all client and personal accounts with a target in the low $30s.

SBS Broadcasting Shareholders Approve Sale of Company

On Monday, SBS Broadcasting (SBTV) shareholders approved the deal to sell the company to private equity investors for 46 euros per share. According to the press release issued by the company, the deal is expected to close in late October. Sometime later this month, before final closing, the company will establish a record date for the liquidation distribution. The Euro-U.S. dollar exchange rate on this date will determine the ultimate price that U.S.-based investors who participate in the tender offer will receive....

...As of this morning the exchange rate is $1.2124 per euro. This equates to a deal value of $55.77. The latest quote on SBTV is $54.71, providing 1.9% upside assuming exchange rate are unchanged until closing.

I plan to accept the exchange rate risk and participate in the tender offer for all client holdings. I'm not a currency expert so don’t read anything into that choice. I am cautious near-term on the market so having a cash like position where the current 2% discount provides downside protection against a weak euro feels comfortable.

I don’t plan to post again on SBTV other than a brief note on the final exchange rate. It's been a great run and although I still feel a higher deal price was appropriate, Chairman Harry Sloan and CEO Markus Tellenbach have done a great job on behalf of shareholders. If Harry moves onto another public company, I'll be paying very close attention.

Anatomy of SBS Broadcasting Buyout -- Why I Hope For A Higher Offer

I received the circular on the buyout of SBS Broadcasting (SBTV) earlier this week and based on my reading I am continuing to hold the shares owned by clients hoping for another bidder to emerge. As a reminder, SBTV has agreed to a buyout offer from private equity investors led by European group Permira and supported by KKR. The buyout is structured as an asset sale and will pay SBTV shareholders €46. The price is in euros so exchange rate fluctuations impact the stock price on a daily basis. As of this morning, the euro is at $1.2419 equating to a buyout price of $57.13 per SBTV share. SBTV closed yesterday at $57.85, a premium of slightly over 1% indicating that investors either believe a sweetened bid could be in the future or that they are betting on a stronger Euro. The shareholder vote is October 3rd and with 25-30% of the shares lined up behind the deal (Liberty Global and management insiders) passage is assured. The breakup fee is €50 million against a deal value of about €2 billion. Management insiders, excluding SBS founder Harry Sloan, will get about 3% of the equity in the new SBS entity. I don’t think this small amount will raise the ire of institutional shareholders....

....According to the circular, SBS was approached by several industry participants over the course of 2004 but no firm proposal was made. Offer prices discussed at that time were lower than other offers that followed in 2005. Permira initially approached SBS in late 2004 about a transaction that involved two other companies and was designed "to create a large integrated European media company." SBS considered this proposal but decided not to pursue it. I believe any number of European companies could have been involved with the most likely suspects being German Pan-European broadcaster RTL, Scandinavian based Modern Times Group, and Liberty Global controlled United Globalcom. Other possible players might have included Central European Media Enterprises and Dutch company Talpa controlled by TV mogul John DeMol.

In March 2005, SBS management received an overture from an industry participant and expected a formal offer to be forthcoming. About the same time another private equity investor (not Permira) approached SBS and discussions ultimately led SBS management to believe a formal offer was forthcoming. SBS entered into a confidentiality agreement with this potential acquirer.

By May 2005, discussions with the unidentified private equity investor had advanced and on May 25th, the investor submitted financial projections and a model which were discussed with SBS management on June 2nd. While these discussions were ongoing, on May 31st, SBS CEO Markus Tellenbach met with Permira and informed them if they would need to sign a confidentiality agreement. At the same time, Harry Sloan was contacted by the strategic investor who indicated a bid above $50 was likely but could not confirm higher levels and regulatory obstacles needed to be overcome.

During June, Permira indicated it would make an offer at $55 per share while the other private investor indicated it might pay $50 to $55 per share. There is no further information in the circular about the strategic investor. The Board of SBS created a special committee to consider the various proposals and ultimately the deal for €46 was agreed to with Permira.

I recap all this information because I believe it shows that there is broad interest in acquiring SBS among numerous potential acquirers. The circular clearly stresses that other entities were hesitant to pay above the price that Permira ultimately agreed to. However, now that a deal price has been established and the breakup fee is modest, I think the possibility of a higher bid is real. The Permira deal appears to be well financed and on fast rack for approval. Therefore, the only downside I see relates to the Euro-U.S. dollar exchange rate. With a premium of only 1% at current prices, I think SBTV shares are a low risk speculation on a higher bid emerging.

On 2005 estimates, the deal price appears full at 15 times EBITDA but 2006 is projected to be a big growth year for the company and the multiple falls to around 12 times which I think is too cheap. I won’t be disappointed if a higher bid does not emerge as SBTV has been a big winner in 2005. However, if a new bid is out there, it should be known within the next couple of weeks, so I plan to hold the shares for now.

SBS Broadcasting Accepts Buyout Offer

SBS Broadcasting confirmed recent market rumors and announced this morning that it was accepting an unsolicited 46 Euro ($56) buyout offer from a European private equity firm. Below please find my comments as I was conducting my analysis beginning with my thoughts prior to the open of trading and finishing up with my conclusions after listening to management discuss the deal on a conference call. The bottom line is that I think there is hope for a higher bid and near-term downside is minimal. Therefore, I plan to hold all client positions for now to see if another bidder emerges....

Pre-Open and Pre-Conference Call Comments:

SBS Broadcasting (SBTV) has agreed to be bought for 46 Euros by European buyout firm Permira and U.S. buyout firm KKR. The transaction is expected to close in November 2005 and is priced in Euros. At today's exchange rate, the deal works out to about $56 per share.

As outlined last week, this is not a surprising development but I think the price is too low. Unfortunately, Liberty Global, which owns about 20% of SBTV shares has agreed to the deal. Ideally, Liberty would have been the agitator for a higher price. I don’t plan to do any selling this morning. I want to review my spreadsheet, talk to my contacts, and think things over. With a deal on the table, it strikes me as possible that other interested parties might step up. News Corporation is the most obvious buyer given the company's interest in Pay TV and Central European broadcasting.

Permira appears to be a major European buyout firm with limited history in media. However, according to their website, they were financial backers for German Pay TV firm Premiere which came public in the past year. Permira and KKR should have no issue financing this deal so I see no significant downside risk as I complete my research.

Post Conference Call Comments:

I just got off the SBS Broadcasting (SBTV) conference call where management discussed the sale of the company to Permira and KKR for 46 Euros per share. Management is saying the deal is for 15 times their 2005 EBITDA guidance of 137 million euros. My own spreadsheet and several sell side analysts feel that management guidance is low by about 5%. 15 times current year EBITDA is a fair price but given double digit growth for the next few years and considerable free cash flow, it strikes me as too low. Most of the questions on the call were along the lines of valuation and virtually everyone agreed.

SBTV has been a great stock over the past several years and most of the shareholders who spoke on the call today had been with the company for entire time. There was a sense of melancholy on the call as shareholders are happy with their investment and pleased to see management rewarded, particularly Chairman of the Board Harry Sloan. However, virtually every caller agreed with my analysis that the company was being sold too cheaply.

Management did not shop SBTV. They received an unsolicited offer from the buyout firms. A special committee was formed and a fairness opinion received from Deutsche Bank. The gist of the questioning was that the company should have put itself up for sale via auction to maximize shareholder value. Of course, there is no guarantee a higher price would have been achieved but at least there would be no lingering question as to value. Several shareholders asked for someone else to step up and bid for SBTV. I still think that is possible so I am going to take the dual risk of currency and time value and risk a few dollars downside to see if another buyer emerges.

More Takeover Rumors for SBS Broadcasting

SBS Broadcasting (SBTV) shares jumped about 8% on Monday after a website reported that the company had held "informal discussions" with an unnamed suitor. The story said that a spokesman for SBS had no comment on rumors or speculation.

I think a takeover of SBTV is plausible and while the primary reason behind my bullish view of SBTV being has been based on fundamentals, I have noted that a sale of the company was possible. Rumors of a possible sale of SBTV first surfaced a month ago when a European analyst noted in a research report local media reports about takeover speculation. Here is what I posted on the blog at that time....

Interestingly, a research report out of Europe today references other news stories that say SBTV held discussions with de Mol and powerhouse European broadcaster RTL Group. RTL management is quoted as saying that they think SBTV is too small to survive but that they aren't interested in acquiring SBTV since their acquisition of CMore. The story mentions De Mol prominently as a potential suitor....

RTL is controlled by Bertlesman and is the largest broadcaster in Europe. De Mol refers to John De Mol, an independent TV producer who has made millions in reality TV and just launched a new TV channel is the Netherlands, SBTVs largest market. Two weeks ago Germany's other major broadcaster, ProSieben, was sold to Axel Springer AG which is the dominant print media company in Germany. ProSieben was controlled by Haim Saban and private equity investors who saved the company from financial difficulties several years ago.
Besides, de Mol and RTL, Saban and private equity folks are potential bidders for SBTV. Rupert Murdoch's News Corporation might also be interested, particularly following SBTV's expansion into Pay TV in Scandinavia. John Malone also could stir the pot as his Liberty Media International (LBTYA) owns about 20% of SBTV and has publicly stated it is open to a variety of options concerning the stake including just hanging on to it. Another possible bidder is Modern Times Group, SBTV's primary competitor in Scandinavia. Finally, many companies could be interested in certain assets of SBTV such as the Hungarian TV business that is likely on the radar screen of Central European Media Enterprises.

Insider ownership at SBTV is low and there is only one class stock. The company was founded and built by Harry Sloan, a U.S. citizen. Sloan is now Chairman of the Board. Some investors feel that after more than ten years at the helm Sloan would be open to a deal and he has never denied the attractiveness of SBTV as a takeover candidate when analysts questioned him about the Liberty stake. According to the company's 2004 annual report, management and directors controlled only 13.6% of SBTV shares, with Sloan himself representing 10.9%. The only other significant insider is Markus Tellenbach, President and CEO of SBTV, who owns 1.4%. At year end 2004, besides Liberty, other major shareholders included Fidelity (9.7%), Reed Conner and Birdwell (7.3%), Capital Research and Management (6.1%) and Janus (11.7% total split between two funds).

I am sitting tight with SBTV and not selling into takeover rumor related strength. First, I think the shares can reach the $60s on fundamentals alone in 2006. Second, I think the company could be sold at any time and recent M&A activity in European media markets increases the chances something happens sooner rather than later.

Looking out to 2006, assuming SBTV's EBITDA grows 11%, adding $70 million in free cash flow to the company's 6/30/05 balance sheet, and using a takeout multiple of 12 times EBITDA, I get a private market value of $63. I'd expect that to be the minimum price in any deal. With fundamental and takeover value both supporting a price 20% above the latest quote, I see no reason to take profits yet.

SBS Broadcasting Reports Another Good Quarter

I had to jump in a car to head East on some college visits with my son and didn't get a chance to provide some color on the SBS Broadcasting (SBTV) conference call that took place on July 28th. As the call started at 10 a.m. ET, the shares were down sharply by almost $3. I thought the quarter was fine but SBTV is a complicated company operating several different media business in about a dozen Northern and Eastern European countries, so I could have missed something.

I was pretty certain, however, that whoever was selling was making a mistake and shortly into the call I put in bids for the shares slightly below the market. Northlake clients have full positions in SBTV so I didn't bid aggressively, which I now regret as my initial impressions were correct: By the end of trading on Friday, SBTV shares were down only $1, where they remain today despite recent weakness in the broad market...

....I think the seller was probably worried about either the top-line revenue number or the EPS figure. The revenue number did in fact miss published estimates. However, as management explained right off the bat on the conference call, they are reporting revenues at the newly acquired CMore pay TV operation on a net basis after "deducting service fees paid to the cable, satellite and other operators for carriage, marketing and subscriber handling services." The deduction was worth over 16 million euros and, when added back, the revenue figure was in line to slightly ahead of analyst estimates.

On EPS, SBTV reported 44 cents against analyst estimates that were in the upper 50-cent range. This figure also missed published estimates, but once again management addressed the issue on the conference call right at the start. Analyst estimates did not include an 8-million-euro charge for the early call of the company's 12% debt (which was replaced by a revolver at 3%). Management also noted that another 8-million-euro charge was taken due to foreign currency losses related to the company's new facility. It is not clear to me whether analysts anticipated this but I don't believe the forex loss was fully included in estimates. After adding both of these amounts back to pretax income and applying a 30% tax rate, EPS would have matched or exceeded estimates.

The only issues that came up on the conference call that seemed to cause concern were weakness in the TV markets in Holland and Belgium and the fact that CMore is a seasonal business weighted toward the late 3Q and 4Q. SBTV is outperforming the weak TV markets in Holland and Belgium, as they are in virtually every country where they operate, so I am not overly worried about this fact. At CMore, the seasonal argument is a fair one. TV watching picks up considerably in Scandinavia as the days grow short and slacks off in the summer like the rest of the world. Management remains very confident in their language when they discuss CMore, and given their track record I see no reason to second guess at this point.

I remain very optimistic on SBTV shares on the basis of their excellent operating momentum, the shareholder oriented management, and potentially realizable asset value well above the current quote. The second quarter was just fine. The third quarter will be seasonally weak but the seasonally strong fourth quarter is shaping up very well on the back of ratings gains across almost every station SBTV owns. If Northlake clients weren't filled on their SBTV positions, I'd be bidding for shares at current price.

SBS Broadcasting Reports on 7/28

SBS Broadcasting (SBTV) reports after the close tomorrow followed by a Friday morning conference call. I remain long SBTV and expect another strong earnings report. The shares look very attractive and are my #1 pick in media at the moment.

SBTV's 1Q05 earnings report was very strong. However, despite repeated leading questions from analysts the company refused to raise its full year guidance. I except the 2Q05 results to firmly indicate guidance is too low. Whether management continues to play it conservative is impossible to know. Current guidance calls for 138 million euro in EBITDA while my spreadsheet and 1Q05 results indicate mid-140s is more likely....

...2Q results should be strong with strength in TV in Sweden, Belgium, and Hungary, while Denmark should show solid growth. The Netherlands is the company's largest market and showed surprising strength in 1Q05. A newly launched channel by a competitor could slow growth in the Netherlands but 1Q trends of mid-single digit growth should generally hold. TV represents over 80% of the company's revenues so the organic growth rate across the segment will be key to watch. The stock has minimal coverage (which is one reason I am so bullish) but the analysts will be looking for organic growth in TV of about 10% in 2Q.

The other key items of focus in the report will be progress at the newly acquired CMore, any balance sheet updates, and currency concerns. This is the first full quarter of ownership for CMore. Management has been very optimistic about this acquisition particularly when the seasonally strong 4Q arrives. With a full quarter under its belt, commentary about CMore will be critical. SBTV also has a very strong balance sheet and generates free cash flow. Using more leverage to boost shareholder value via acquisitions or share buybacks also deserves comment from management. Finally, the drop in the Euro vs. the dollar will pressure dollar based growth rates. I think most investors in SBTV analyze the company in Euros but this is also an area that deserves exploration.

Another strong quarter will get investors to look ahead to 2006 where SBTV trades at under 10 times EBITDA and around 18 times EPS. Given double digit growth rates, free cash flow, a shareholder oriented management, and asset value that might attract suitors, SBTV shares look cheap to me.

Takeover Rumors for SBS Broadcasting

Several recent news stories have noted that SBS Broadcasting's (SBTV) TV stations in the Netherlands are facing a new competitor as Dutch media mogul Jon de Mol launches his own channel. The Netherlands is 20% of SBTV so this is something to watch.

Interestingly, a research report out of Europe today references other news stories that say SBTV held discussions with de Mol and powerhouse European broadcaster RTL Group. RTL management is quoted as saying that they think SBTV is too small to survive but that they aren't interested in acquiring SBTV since their acquisition of CMore. The story mentions De Mol prominently as a potential suitor....

SBTV shares are extremely cheap in a takeover scenario. The company is vulnerable because Liberty Media International owns 22% of SBTV's shares and is on record as saying that they might be willing to sell them to a third party or buy more. The de Mol angle is interesting because he would likely only want the operations in Netherlands and Scandinavia. Liberty faces anti-trust issues in the Netherlands if it bought SBTV because it is already the dominant cable company. So, a de Mol/Liberty partnership makes a lot of sense.

This is all pure fantasy at this point but it supports the underlying value of SBTV. Current operations are very strong as evidenced by the first quarter report. The shares should be in the upper $50s and a taekover would have at least a $60 handle.

SBS Broadcasting Starts 2005 In Fine Form

SBS Broadcasting(SBTV) reported excellent first quarter earnings on Monday. Driven by better than expected organic revenue growth in the company's television operations, EBITDA exceeded estimates coming in at 8.1 million euros. Management affirmed prior guidance for 138 million euros EBITDA for 2005. On the call analysts asked many questions that tried to get management to admit guidance was low. Management did not bite despite noting that the strength in TV is continuing, as they believe it is still too early in the year to raise guidance given limited visibility. I continue to think guidance is low and stick by the 145 million euro figure in my spreadsheet. I added to holdings in SBTV on Monday for new clients or to build positions for those who already owned SBTV.....

....Strength in the quarter on revenues was virtually across the board. Organic growth in TV was 13% against 6-7% full year guidance. Northern and Central Europe led the charge with Norway, Sweden, and Denmark all growing ahead of their markets. Holland, which is 33% of the television segment, grew a better than expected 5%, as that market showed signs of recovery. Hungary grew in line with its market starting from a market share in the upper 30s. I find the strength in Northern Europe and Netherlands surprising given all the negative commentary I read about Western European economies and ad markets. Management was confident on the call when asked if this strength was likely to continue. The only risk they saw was to Holland because of a new station launch that could prove disruptive.

Radio and Print, which are each one-tenth the size of TV, also had good quarters. Radio has been a trouble spot so renewed growth and better margins in this segment are a welcome development. SBTV's newly acquired radio stations in Romania were EBITDA positive and are tracking on plan.

Commentary about the newly acquired CMore PayTV operation in Scandinavia was very encouraging. Management said the integration was ahead of schedule and affirmed its CMore guidance for 2005. Cost savings are on target and optimism for a strong fourth quarter for subscriber growth and ad sales was noted . Enthusiasm for this acquisition came though very clearly on the call. CMore is diversifying SBTV away from its reliance on advertising markets. Non-advertising revenue grew to 32% in the first quarter versus 24% a year ago. CMore also makes SBTV the dominant TV operator in Scandinavia bringing economies of scale in programming purchases and expense control and providing a superior platform for advertisers.

The company's balance sheet is in the process of being restructured to pay for the recent acquisitions and refinance $100 million in 12% debt that has been called. The company is using a bit more cash and a little less bank lines than I thought they might but the net debt position for year end looks right on track.

SBTV shares look very attractive. The company has made smart acquisitions and now appears to be gaining market share in ad markets showing decent growth. Management is shareholder friendly and the balance sheet is strong. Liberty Media (L) controlled United GlobalCom (UCOMA) owns 22% of SBTV and although both sides say no deals are imminent, I like this holding as a possible catalyst one day given

Lightening Up On SBS Broadcasting But Long-Term Thesis Intact

SBS Broadcasting (SBTV) shares have been acting very well recently, making a 52-week closing high on Monday. On Friday, Bear Stearns wrote about SBTV for the first time in many months, updating estimates and raising the price target to $51. Bear Stearns issued a 56-page report, so essentially this is new coverage. There is virtually no coverage of SBTV shares despite projected 2005 sales of over 900 million euros, so the new sponsorship is welcome and certainly helps the stock. Client holdings in SBTV were slightly reduced into Monday's strength. This was purely risk management as positions had grown large given the excellent performance of the shares. I remain bullish on SBTV shares...

My latest posting on SBTV covers all the key points in the Bear Stearns report. I do want to point out that my analysis suggested that EPS in 2005 could reach $2.59, while Bear Stearns is at $2.00 (both assuming 1.30 exchange rate). The difference is that I assumed about 5 million euros in higher operating income given what I thought was conservative guidance. I also added back 10 million euros in one-time new station start-up costs and ignored 6 million euros in one-time costs for the early call of the company's high cost debt this June.

In 2006, Bear Stearns is using an estimate of 2.20 euros, or $2.86 at the 1.30 exchange rate, up 40%. Although my spreadsheet does not go out to 2006, I'll be assuming a much lower growth rate than Bear Stearns off my higher pro forma 2005 base.

The Long-Term Thesis Remains Intact

I believe the shares can trade to the upper $50s over the balance of this year as visibility on 2006 EPS emerges. Given the company's historical growth rate, good record of accretive acquisitions, and the possibility that SBTV itself could be a target, a multiple of 20 times year ahead earnings in late 2005 seems fair.

SBS Broadcasting Reports Excellent 2004 Results and Provides Solid 2005 Outlook

SBS Broadcasting (SBTV) reported very solid 4Q04 and 2004 results after the close on Monday. Monday's conference call confirmed the solid numbers apparent in the press release and laid out an encouraging outlook for 2005 that is conservative in my opinion. For 4Q04, SBTV reported €211.2 million in revenue, up 7.8%, and €47.8 million in EBITDA, up 31.7%. For the year, SBTV had revenue of €678.3 million, up 16.6%, and EBITDA of €104.3, up 42.8%. Fully diluted EPS for 2004 was €1.49 vs. €1.04 in 2003. Based on the 2004 results, strong projected growth in 2005, a high likelihood of double digit annual growth in 2005 though 2007, and a reasonable valuation, SBTV shares should move at least another 20% higher in the next twelve months....

SBTV's results are dominated by its television operations in the Netherlands, Hungary, Sweden, Belgium, Norway, Denmark, and Romania, in decreasing order of revenue contribution. Television represented 82% of 2004 revenue with the balance split fairly evenly between radio and magazines.

SBTV has been quite active in acquisitions in the past month paying €270 million for Scandinavian pay TV company CMore Canal Plus and €30 million to raise its ownership in Prima TV in Romania to 86% and acquire two leading radio stations in Romania. Besides these investments, SBTV also said on its conference call that it would invest another €10-11 million in its startup TV networks in the Netherlands, Belgium, and Hungary.

After adjusting for the start-up costs and partial years for the new acquisitions, it appears that underlying EBITDA growth of legacy operations will be over 10% in 2005 driven by 5-6% growth in television advertising. Including the acquisitions and adding back the start-up costs, EBITDA should grow 40% in 2005. EPS should rise from €1.49 to €1.87 or $2.59 using a 1.30 exchange rate.

Even better, the acquisitions of CMore and Romania should sustain very good growth rates beyond 2005 as subscribers and margins expand at CMore, and as Prima rides a projected 12% CAGR for Romania's television advertising market while the country awaits its 2007 entrance into the European Union. When combined with mid-single digit growth in the mature Northern European markets and the elimination of start-up losses on the new networks, SBTV looks set to sustain double-digit EBTIDA and EPS growth over the next three years.

Best of all, investors pay a very reasonable price for this growth at 8.5 times 2005 estimated EBITDA and 18 times earnings. Those multiples are computed using the numbers in my spreadsheet which call for EBITDA of €145 million, €7 million ahead of management's conservative guidance.

I see no reason the shares can't trade in line with the valuation accorded slower growing U.S. television broadcasters. At 10 times 2005 estimated EBITDA and/or 22 times 2005 estimated EPS, SBTV should reach $57 later this year. Against Tuesday's close of $46.65, that leaves upside of 22%, even after the shares have risen 16% already in 2005.

SBS Broadcasting Makes Another Acquistion and Speaks to The Street

SBS Broadcasting (SBTV) presented at a Bear Stearns conference on Tuesday after the close. Besides providing an overview, the company used the occasion to announce the acquisition of the #3 TV station/network in Romania and the top two radio stations (Central European Media Enterprises is #1 and #2 in TV). The acquisition price was €30.3 million euro allocated as €22.5 million for the radio stations, or 10 times their 2004 EBITDA of €2.25 million, and €7.8 million for the TV assets which lost €2 million in 2004 and are projected to breakeven in 2005. When added to a leading television station in Hungary and radio assets in Greece, the acquisition will bring Central European exposure at SBTV to over 20% against a long-term goal of 30%. The balance of SBTV's assets are in Scandinavia and the Benelux countries with the largest concentration in Scandinavia. This acquisition comes on the heels of a larger acquisition of the pay TV operations of CMore Canal Plus in Scandinavia. CMore brings subscriptions up to 30% of total revenue (the balance is advertising) against a long-term goal of 50%. I like both deals as each has good near-term growth potential and helps to diversify away from reliance on advertising. The acquisition prices appear reasonable as well...

SBTV reports on Tuesday, March 8, so comments on financial results and guidance were off limits at the Bear Stearns conference. CEO Harry Sloane did reiterate long-term goals of raising EBITDA margins from 15% in 2004 to 20% over 2 to 3 years on a base of €1 billion in revenue. The only other new info from the presentation was a comment that United Globalcom (UCOMA) has decided not to sell its 22% stake in SBTV for the time being. Sloane said he offered UCOMA current prices when the shares were recently in the low $40s.

For 4Q04, estimates call for revenue, EBITDA, and EPS of about €215 million, €46 million, and 84 cents, respectively. For 2005, pro forma EBITDA looks like €155 million, equaling of growth of 19%. EPS for 2005 should be around $1.95, although the euro has strengthened about 5% versus the exchange rate in my spreadsheet. At current prices the P-E is about 23. On an EBITDA basis, SBTV trades at 9-10 times 2005 estimates depending on how minority interests and operating loss carryforwards are accounted for.

The shares have been strong recently but I think upside remains to the low $50s on 2005 estimates. Further, I think those estimates may be a bit low and the growing presence in Central Europe and lesser reliance on advertising could lead to a higher multiple. Finally, this management team has delivered big-time in the last several years and maintains a strong a balance sheet that can further enhance shareholder value. To account for the intangible value I place on management, I add 10% or so to my target to prevent me from exiting too early or cutting off my buying too soon.

I'll post another update after the company reports its results next Tuesday.

Good Results for SBS Broadcasting

Northlake's latest purchase on behalf of clients, SBS Broadcasting, reported third quarter EPS yesterday. The results were basically in line with estimates and the company reiterated its 2004 guidance....

Revenue growth was a little better than expected with TV operations (over 80% of the company) leading the way. Revenue in the smaller Radio and Print divisions was as expected. EBITDA fell slightly short of estimates as the company moved the launch of its fall TV season forward shifting some fourth quarter expenses into the third quarter. Adjusting for these expenditures, the top line outperformance would have flowed through to EBITDA. Management suggested on the conference call that the vast majority of these expenses will not repeat in 4Q and reiteration of guidance confirms this fact. Initial audience reaction to the new fall season shows rising ratings in seven of nine stations, which means that the shifting of costs may have paid dividends.

Radio results are still lagging and will be a point of contention given issues in the U.S. radio industry. However, radio in Europe is early in its consolidation phase and has a much lower share of advertising expenditures, meaning that the parallels with the U.S. may not be accurate.

Overall, the quarter, the conference call, and discussion of the 4Q04 and 2005 outlook reinforced my enthusiasm for the SBTV shares. Trading at less than 7 times 2005 estimated EBITDA with prospects for mid single digit organic revenue growth and margin expansion, SBTV shares look very cheap. A strong balance sheet and a good track record on acquisitions reinforce my confidence.

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.