Grupo Prisa (PRIS.B) is a diversified media conglomerate with an excellent collection of assets but a weak balance sheet and the misfortune of doing most of its business in a troubled part of the world. Spain, which accounts for 61% of Prisa’s revenues, is going through a crisis that is even more severe than the one the U.S. went through in late 2008, so as the news has gotten worse and worse, Prisa’s stock has gotten clobbered. The B shares, which comprise the bulk of our position, closed last Friday at $2.65, down 45% year to date and down 75% in the past 12 months. The stock rose sharply yesterday, however, after the company announced a deal (discussed further below) that will significantly strengthen its balance sheet and demonstrates that the true value of the company is far higher than the current price. When things stabilize in Spain, we think the stock will likely be a multi-bagger from today’s depressed levels.
In light of the dire state of the Spanish economy, Prisa’s business is holding up remarkably well thanks to the quality of both its assets and management team: in Q1, revenues and adjusted EBITDA were only down 5.7% and 8.0% year-over-year, respectively (the earnings release is posted here.
“Ah,” you might say, “but what about the balance sheet, which is burdened with 3.5 billion euros of net debt? If Spain’s economy deteriorates further, might the company default, wiping out the equity?” We’ve thought about this question a great deal and are confident that the answer is no, for four primary reasons:
- The company has high-quality assets that continue to produce positive cash flows; in addition, many of them are salable (we expect progress on this front over the course of this year)
- The management and board are excellent operators and capital allocators, and have substantial skin in the game;
- Last December, Prisa announced that it refinanced and extended all of its debt through 2014-2015; and
- Finally, yesterday Prisa announced an important deal. It’s complex and the press release didn’t have many details, so we contacted the company and want to provide clarification here.
This is the key paragraph from the press release: "The request wishes to add to the agenda (i) the necessary agreements to allow the payment of the preferred Class B share dividend to take place in cash, in Class A shares or in a combination of both. If it is paid in shares, the price will be of 1.00 Euro/share. The annual minimum dividend corresponding to the year 2011 is expected to be paid in Class A shares; (ii) an agreement to issue mandatory convertible bonds, with a 2 year maturity, convertible into Class A shares of PRISA, which are addressed to be subscribed by institutional investors for an amount of 100 million Euros in cash, and by the company’s creditor banks for an amount of 334 million Euros, through the partial capitalization of their credits with the Company. The conversion price of the bonds into shares would be of 1.03 Euros. The agreement would include the approval of a capital increase of the underlying shares."
Allow us to clarify. The deal has three components, all of which are contingent upon one another:
- Class B shareholders (like us) agree to receive the dividends we are owed in Class A stock at 1 euro/share rather than cash; this will save the company approximately 230 million euros over the next two years;
- 334 million euros of debt will convert to equity at 1.03 euros/share (vs. Friday’s closing price of 29 euro cents) via two-year mandatory convertible preferred stock, with a coupon that will adjust monthly equal to the Euro LIBOR rate plus 4.15%, which today equates to 4.65%;
- One or more investors (we’re hoping it includes Carlos Slim, who bought 3.2% of the company late last year) have agreed to invest 100 million euros of new equity into Prisa under the same terms as the banks. This is key because, while one might dismiss the banks converting at a high price to protect their loans, the fact that one or more sophisticated institutional investors are willing to buy equity in the company at this price underscores how insanely cheap the stock is right now (the Class A shares that trade in Madrid rose 36% yesterday from 29 to 40 euro cents, still far below the 1.03 price the banks and others are investing at).
The deal requires approval by 75% of the B shareholders, which might appear to be a high bar, but actually isn’t, as the four largest shareholders, accounting for 55% of the stock, have indicated support for it (and we will vote our 1% stake in favor as well). In addition, 2/3 of the senior lenders and all of the bridge lenders must approve it, which management is confident will occur. The deal should be finalized and approved at the annual shareholders meeting at the end of this month.
In short, this is an incredible deal for Prisa: it gets 434 million of new equity and saves 230 million euros of dividend payments over the next two years, meaning the company will have nearly 700 million euros less debt at that time. In light of this, the Class A and B ADRs that trade on the NYSE jumped 24% and 23%, respectively, yesterday, but in our view this is an underreaction, as we see substantially more upside once the panic surrounding Spain passes.
For further reading on Prisa, we recommend:
- Our presentation at the Value Investing Congress on October 13, 2010
- A Barron’s article on May 7, 2011 entitled Read All About It: A Solid Spanish Media Play
- An article in the Wall Street Journal on November 18, 2011 about Mexican billionaire Carlos Slim acquiring a 3.2% stake entitled Slim Buys Stake in Spain's El Pais
- An article in Seeking Alpha on December 20, 2011 entitled Grupo Prisa SA: An Introduction To A Special Situation Investment
Here are links to Prisa’s releases:
- Q1 2012 earnings release
- Corporate presentation (dated 12/11, with financial data through Q3 11)
- 2011 results
- 2010 20-F