Hewlett-Packard: A LEAPS Opportunity [View article]
Mike Apologize for the late response. I am somewhat embarrassed to say that I took advantage of the share price last spring/summer to close out my LEAPS Call position; not because of any lack of confidence in HP, but because it was up substantially at the time and I was becoming increasingly busy and wasn't keeping up on it. I can't say the nearly $9B write-down on the Autonomy acquisition was encouraging, but I haven't kept current on the Company, but I'll try to take a look at it soon. Mike
Content Is King, Distribution Is Queen: The Case For 3 Media Companies [View article]
Mike,
With respect to the possible sale of GVT, although that news is somewhat disappointing given the long-term growth potential of that asset and the market in Brazil, it is logical in that the Brazillian telecom will necessitate a premium, as opposed to the discounts which would inevitably attach to its EU-centric assets. Further, it is likely to be imminently more marketable than Vivendi's ATVI stake. Provided Management extracts a sufficient premium, this may prove to be an effective means of deleavering the Balance Sheet and perhaps, but not necessarily, effectively highlighting the intrinsic value of the remaining assets.
Content Is King, Distribution Is Queen: The Case For 3 Media Companies [View article]
Mike,
I've never looked at CTC Media in depth given I like to steer clear of Russian companies due to the pervasive corruption within which they must operate, but the growth prospects you've alluded to are intriguing. From where did you derive the relative industry growth rates of the Russian and European markets?
To you also. The limited trading volume has a very pronounced impact on the market price, to be sure.
I was fairly pleased by the outcome of the Annual Meeting (that the resolutions passed), the remarks from the Executives (fairly transparent and practical), and the subsequent bond closing.
Overall, I am quite happy with PRISA's Management and how they are addressing the challenges confronting the Company. [Note, I could do without the challenges, but...]
Yes. I wish I were a more disinterested observer, but I am very curious to see how the economic situation in Spain plays out. Note PRISA's EBITDA numbers out of LatAm relative to the sales turnover. If there is good news, it is that 85% of remaining EBITDA is derived from LatAm markets, which have the better growth prospects. Further, at least the regulatory environment in Spain appears to be softening, which should provide the Company with greater flexibility in seeking to improve its cost structure while it rides out what is likely to be a very protracted economic downturn.
Vivendi: Well Defined Strategy, History of Significant Dividends Make for a Bargain at Current Price [View article]
Yes, better lucky than good. That said, you saw I similarly purchased Grupo Prisa too early [you may correctly argue that "too early" should be replaced with "at all", but time will tell].
I would be curious to learn whether anybody "created" the B-share preferences (virtually for free) by shorting the A-shares and buying the B-shares when the two traded at similar levels last year, and so created a nearly riskless investment. Although, like many of you doubtless, I considered it, my own arrogance/confidence in the long position led me to believe such a course was unnecessary. Also, having never shorted a stock, I was reluctant to attempt to do so.
The economic environment and credit markets currently prevailing in the Iberian Peninsula raise substantial risk of permanent loss to those of us who may not have appreciated the extent to which conditions in Spain/Portugal/Europe would ultimately deteriorate. As such, the deal which is the subject of this article represents a creative and sound compromise. I applaud Management for their vigilance in safeguarding shareholders' interests while wisely allocating the Company's capital resources.
The following excerpt is taken from Seth Klarman's "Margin of Safety", and strikes me as particularly applicable.
"The focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make, and pay little attention to risk, how much they can lose.... Value investors, by contrast, have as a primary goal the preservation of their capital. It follows that value investors seek a margin of safety, allowing room for imprecision, bad luck, or analytical error in order to avoid sizable losses over time. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss."
I could have as easily quoted Mr. Tilson, but to do so here might be misinterpreted.
Vivendi: Undervalued French Media And Telecom Conglomerate [View article]
Clemens,
Thank you for the insights. I'm a big fan of your Michael Smith/Terra Nova/KHD articles. That one required 'active' investment vigilance to keep up over the years!
Vivendi: Undervalued French Media And Telecom Conglomerate [View article]
Mike,
Classic. I enjoyed this immensely, as well as the article by Lonely you linked to. Also, great threads on both articles. Several initial thoughts below.
Catalysts It seems there are a number of potential catalysts here (i.e. purchase of minority interests, possible spin-off separating Media and Telecom assets), and the patient investor stands to be amply rewarded for his or her vigilance.
Lagardère's 20% Stake in Canal+ Were Lagardère to eventually IPO its minority interest in Canal+ France, it may indeed make more expensive any ultimate purchase of that minority interest, but the end result might be a net positive in any case. Namely, an IPO of L's 20% stake may have an even greater positive impact in highlighting the current market value of Vivendi's 80% controlling interest. I suspect the result would be akin to that of a partial spin-off of a 100% interest in a private company whose value is not immediately apparent. Suddenly, the Market would have clarity on the value inherent in another piece of the pie.
Cash/Stock Dividend vs. Share Buy-Back My initial reaction is I tend agree with Hammer on the relative wisdom of dividends vs. share buy-backs, given my own aversion to withholding tax and the fact I don't depend on dividends for my income needs. If for no other reason than that the EU is an economic mess, and bargains for acquisitions abound. However, please allow me to offer one argument in favor of maintaining the dividend, and its possible reflection on company Management:
A company cannot be all things to all people, so I understand Management's providing for the share 'bonus' to off-set the one-time dividend cut (i.e. they made a habit of annual dividends the past several years, and they are attempting to deliver on that commitment, despite some compelling alternative uses for that cash via opportunistic acquisitions, share buy-backs, etc.). It strikes me that, far from being an indictment of management (as it might seem when viewed in a vacuum), this is actually an example of the Company's commitment to its previously settled strategy. There are certainly alternative, deserving strategies, but it is encouraging to see Management demonstrating discipline in following the strategy previously articulated. No Management ADD readily apparent here. I believe both you and Lonely alluded to this managerial discipline.
EMI Recording Division Acquisition EMI was purchased for $6.8B (£4.2B) by private equity group (PEG) Terra Firma in 2007. The recent combined EMI purchase price of $4.1B for the recorded music division ($1.9B by Vivendi) and publishing arms ($2.2B by Sony) is decidedly less than the PEG's purchase price only five years ago. Does anyone know if Citi is retaining any significant EMI assets, or are the two divisions being disposed of it? Citigroup, which foreclosed on the PEG in February 2012, is left on the hook for EMI's $600M pension plan. In addition, Vivendi Management pegged cost synergies between EMI and Universal Media Group (UMG) of £100M per year. As the purchase denominated in pounds sterling is £1.2B, the annual cost savings strike me as significant. I haven't analyzed EMI, so I can't yet determine whether this acquisition is made at a bargain or at a premium, but it certainly doesn't seem to be terrible.
Any thoughts on why Management is pursuing the $1.9B purchase of EMI's recorded music division rather than consolidating it's interest in Canal+ France? Presumably EMI presents the better value proposition.
Valuation Although the investment opportunity is compelling enough as it is, I'd like to drill down and better understand each of Vivendi's assets. Thank you for linking to several resources.
I think it was mentioned in either this or Lonely's article, but I wonder if the market-based, sum-of-the-parts, back-of-the-envelope valuations are yielding decidedly conservative results? I will go ahead and examine the available regulatory filings to see what information is available for each segment. I'll report back if I discover anything insightful.
Establishing the Position I see that in a separate article you offered several 'maxims to improve investment results'. Guideline #4, opening with just one-half of one's intended investment position, strikes me as especially prudent in investing in European equities, in that it will allow one to add to their position in the event the security experiences a further decline in 'market' value; thus reducing the average cost. Alternatively, dollar-cost-averaging, making a number of regular investments irrespective of the market price, may be another way to establish the position.
VIVHY vs. VIVEF I hesitate to get too deeply involved in this debate, so suffice it to say we all have different facts and circumstances affecting our preferred investment vehicles. Some of us invest via tax-deferred or tax-exempt retirement accounts, and some of us invest thru taxable accounts. Note there is an income tax treaty between the U.S. and France, and although I've only availed myself of treaty benefits for corporate purposes, it should still be possible for an individual to obtain a U.S. residency certificate, and to apply for a refund of any dividend withholding taxes in excess of the applicable treaty rate by filing with the French tax authorities claiming treaty benefits and being taxed at a lower 15% rate. (Article X, Paragraph 2(b)) This may be of particular interest to those whose effective tax rate in the U.S. is actually lower than the withholding tax rate in France, by means of having primarily investment income taxed at lower capital gains and qualified dividend rate, for those investing thru a tax-preferred account, lacking sufficient foreign sourced income resulting in the limitation of foreign tax credits, etc. Of course, this is administratively tiresome, and if I invested thru a taxable account, and had an effective tax rate of at least the French withholding tax rate, I personally wouldn’t give much thought to the withholding taxes except to credit them against my U.S. taxable income. However, for those who do ultimately incur the French withholding tax liability, and in cases where that liability is significant in absolute terms, this may be an avenue that makes sense to pursue. If anybody wishes to email me directly, I would be happy to provide detail on how one might go about this; accompanied of course by a formal Circular 230 disclosure statement.
Again, great contribution(s) to SA, and much appreciated!
Grupo Prisa SA: An Update On Refinancing Debt [View article]
Apologies for the delayed response as we are nearing a tax deadline and I am a tax accountant. :)
I agree. At first glance the 2011 financial results appear to be 'ho-hum', primarily because Spain and Portugal are experiencing an economic upheaval, consumer spending in those markets is therefore in the toilet, and this continues to depress advertising revenue. Also, any relief is likely to be a long-time coming.
As for myself, I found the roughly flat consolidated results to be greatly encouraging given the circumstances. In fact, the results confirm the overall investment thesis, and that is always comforting. Quite frankly, I see fantastic upside in the long-term, with continued volatility in the near-term. This one will require patience.
When I analyze the Company's financial statements, I don't focus on the current results. I focus on the future story/results the numbers suggest. Everything I see highlights the great potential for this company. Management is highly competent and is demonstrating astounding discipline. The raw materials exist for a great management team to accomplish extraordinary results. The Company is demonstrating remarkable resilience under extremely difficult circumstances.
With Media companies in general, and this one in particular, EBITDA and Cash are 'king', and by these metrics, the Company did remarkably well despite one of the worst economic environments in Spain/Portugal's recent history. This speaks to the Company's competetive advantages (LatAm, Education, Segment Diversity, Executive Management, Brand).
We know what drove the net loss (i.e. Interest Expense, Restructuring Charges, Portugal Asset Impairments, Tax Credit Provision) and other than the interest expense, the other items do not concern me. In fact, the financials indicate that Management is taking a conservative, long-view in their turn-around efforts by investing in the future, and availint itself of the opportunity to flush out some of the inevitable bad news.
Timeframe It occurs to me that the wisdom in this particular investment hinges on time-frame. This investment isn't as high-risk as is generally portrayed when taking a long view (i.e. 3-5 years), but is extremely risky, and I think to be avoided, for anyone taking a short-to-mid-view (i.e. 1-2 years). On the one hand, the Company's long-term viability, although not certain, is largely secure at present. The debt-load (more on that below), the general complexity in the business and capital structure, and the Spanish/EU economic crises have combined to create a very intriguing value proposition that has clouded the valuation (thus creating the current buying opportunity). Time will largely address the latter two factors, partly remedy the first; all of which should ultimately make the intrinsic value of the Company more readily apparent to the market.
Debt-Load I view the heavy debt load to be perhaps more a plus than a minus at this stage. Under normal circumstances, the current situation (great, undervalued assets; great management; strong competetive advantages; strong cash-flow; great investment complexity; down-side protection mechanisms for the b-shares in the conversion preference and dividend; etc.) would present a 'good' investment opportunity. It is the relatively high debt-load which has presented what I think is a 'great' investment opportunity.
This perspective is best illustrated by Joel Greenblatt's analysis of Host Marriott in his first book 'You Can Be a Stock Market Genius'. Namely, the relative debt-load greatly magnifies the share impact of any change in the fair value of the Company's assets. Basically, a slight increase in the value of the Company's assets will tend to have an out-sized impact on the increase in the price of the shares. Of course, all things being equal, the inverse is also true: a small decline in the value of the Company's assets will exert an equally disparate downward pressure on the share price.
However, in this case, not all things are equal. The Liberty transaction has, as you are well aware, provided for certain protection mechanisms on the downside, which although far from certain, do provide some comfort that there is a tentative 'floor' in the price of the shares. Considering the Company's strong cash-flow, LatAm growth hedging the weakness in Spain/Portugal, at current prices I see little permanent downside, but great likely upside.
Conclusion In conclusion, I very much liked what I saw. It is understood that Spain and Portugal are an economic mess, and for the Company to post the consolidated results it did speaks to its several enduring competetive advantages. I am not overly concerned about 'the noise' that is greatly off-putting to most, and I am growing ever more confident the value will become clear to the Market in the long-term.
Agreed. If Meg Whitman turns HP around within 2-4 years I will rate her in the class of CEO greats such as Jack Welch. Thus far, she seems to be taking a long-view on the turnaround, and appropriately setting expectations so that they may be met or exceeded.
I think you are absolutely correct. Mark Hurd not only neglected R&D, he intentionally starved it. Of course, a winning corporate strategy is paramount, and HP has certainly not presented a compelling strategy for a very long time, but R&D is the lifeblood of a technology company. Mr. Hurd's short-sightedness was eclipsed only by the Board's repeated failure to hold its CEOs accountable. The Board is responsible for incentivizing the correct behaviors in their Executives. The Company's present circumstances are a direct result of shortcomings in corporate governances. I certainly think there is a great deal of mid-to-long-term potential at HP.
Grupo Prisa SA: An Introduction To A Special Situation Investment [View article]
cfreischutz,
Very much appreciated, and I will certainly be interested to hear your thoughts when the 2011 annual results are published.
Relative to your comment on the weighting of the Company's Latin America business, why do you suggest it will become less and less of a factor? Are you referring to the sale of the 25% of PRISA's stake in Santillana, the education/textbook business? From information I have been able to gather the LatAm business appears to be growing considerably well, particularly in Brazil, and so the trends would seem to be that the LatAm results will be an increasing factor in the consolidated business; measured by both top-line revenues and bottom-line profits.
I can't argue the 'crown jewels' comment, and agree that hurts. Other than for the increased prospect of strict austerity measures which may depress the Spanish economy, I hadn't given much weight to the impact the new Conservative Govenment will have on PRISA, so I welcome your perspective on that point.
The cash-flow would appear to be sufficient to sustain the current debt-levels, though further restructuring will likely be necessary as you indicated, though I trust that will be limited to the future exercise of the remaining issued and outstanding warrants in due course, along with certain planned asset sales. Although all this was factored into my investment thesis (not published here), I am intrigued by your analysis and will specifically revisit the impact of the minority interest given the recent asset dispositions.
As you alluded to, the contrast of our relative perspectives is interesting. For instance, a sum-of-the parts comparison of PRISA to companies such as Liberty Media, The Washington Post, and McGraw-Hill is very favorable to PRISA, but I agree it isn't so straight-forward. Generally speaking, relative to U.S. stocks, shares of European businesses do appear remarkably 'inexpensive', and so what may appear 'rich' to you strikes me as 'cheap'. Whether the discount is justified due to the debt crises we will have to see. The complexity of the corporate structure and overall situation is alone enough to depress the share price in the short-to-mid-term while it all shakes out.
Hewlett-Packard: A LEAPS Opportunity [View article]
Apologize for the late response. I am somewhat embarrassed to say that I took advantage of the share price last spring/summer to close out my LEAPS Call position; not because of any lack of confidence in HP, but because it was up substantially at the time and I was becoming increasingly busy and wasn't keeping up on it. I can't say the nearly $9B write-down on the Autonomy acquisition was encouraging, but I haven't kept current on the Company, but I'll try to take a look at it soon.
Mike
Content Is King, Distribution Is Queen: The Case For 3 Media Companies [View article]
With respect to the possible sale of GVT, although that news is somewhat disappointing given the long-term growth potential of that asset and the market in Brazil, it is logical in that the Brazillian telecom will necessitate a premium, as opposed to the discounts which would inevitably attach to its EU-centric assets. Further, it is likely to be imminently more marketable than Vivendi's ATVI stake. Provided Management extracts a sufficient premium, this may prove to be an effective means of deleavering the Balance Sheet and perhaps, but not necessarily, effectively highlighting the intrinsic value of the remaining assets.
Content Is King, Distribution Is Queen: The Case For 3 Media Companies [View article]
I've never looked at CTC Media in depth given I like to steer clear of Russian companies due to the pervasive corruption within which they must operate, but the growth prospects you've alluded to are intriguing. From where did you derive the relative industry growth rates of the Russian and European markets?
Grupo Prisa's Important Deal [View article]
To you also. The limited trading volume has a very pronounced impact on the market price, to be sure.
I was fairly pleased by the outcome of the Annual Meeting (that the resolutions passed), the remarks from the Executives (fairly transparent and practical), and the subsequent bond closing.
Overall, I am quite happy with PRISA's Management and how they are addressing the challenges confronting the Company. [Note, I could do without the challenges, but...]
Mike
Grupo Prisa's Important Deal [View article]
Yes. I wish I were a more disinterested observer, but I am very curious to see how the economic situation in Spain plays out. Note PRISA's EBITDA numbers out of LatAm relative to the sales turnover. If there is good news, it is that 85% of remaining EBITDA is derived from LatAm markets, which have the better growth prospects. Further, at least the regulatory environment in Spain appears to be softening, which should provide the Company with greater flexibility in seeking to improve its cost structure while it rides out what is likely to be a very protracted economic downturn.
Vivendi: Well Defined Strategy, History of Significant Dividends Make for a Bargain at Current Price [View article]
Grupo Prisa's Important Deal [View article]
Grupo Prisa's Important Deal [View article]
The economic environment and credit markets currently prevailing in the Iberian Peninsula raise substantial risk of permanent loss to those of us who may not have appreciated the extent to which conditions in Spain/Portugal/Europe would ultimately deteriorate. As such, the deal which is the subject of this article represents a creative and sound compromise. I applaud Management for their vigilance in safeguarding shareholders' interests while wisely allocating the Company's capital resources.
The following excerpt is taken from Seth Klarman's "Margin of Safety", and strikes me as particularly applicable.
"The focus of most investors differs from that of value
investors. Most investors are primarily oriented toward return,
how much they can make, and pay little attention to risk, how
much they can lose.... Value investors, by contrast, have as a primary goal the preservation of their capital. It follows that value investors seek a margin of safety, allowing room for imprecision, bad luck, or
analytical error in order to avoid sizable losses over time. A
margin of safety is necessary because valuation is an imprecise
art, the future is unpredictable, and investors are human and do
make mistakes. It is adherence to the concept of a margin of
safety that best distinguishes value investors from all others,
who are not as concerned about loss."
I could have as easily quoted Mr. Tilson, but to do so here might be misinterpreted.
Vivendi: Undervalued French Media And Telecom Conglomerate [View article]
Thank you for the insights. I'm a big fan of your Michael Smith/Terra Nova/KHD articles. That one required 'active' investment vigilance to keep up over the years!
Vivendi: Well Defined Strategy, History of Significant Dividends Make for a Bargain at Current Price [View article]
Vivendi: Undervalued French Media And Telecom Conglomerate [View article]
Classic. I enjoyed this immensely, as well as the article by Lonely you linked to. Also, great threads on both articles. Several initial thoughts below.
Catalysts
It seems there are a number of potential catalysts here (i.e. purchase of minority interests, possible spin-off separating Media and Telecom assets), and the patient investor stands to be amply rewarded for his or her vigilance.
Lagardère's 20% Stake in Canal+
Were Lagardère to eventually IPO its minority interest in Canal+ France, it may indeed make more expensive any ultimate purchase of that minority interest, but the end result might be a net positive in any case. Namely, an IPO of L's 20% stake may have an even greater positive impact in highlighting the current market value of Vivendi's 80% controlling interest. I suspect the result would be akin to that of a partial spin-off of a 100% interest in a private company whose value is not immediately apparent. Suddenly, the Market would have clarity on the value inherent in another piece of the pie.
Cash/Stock Dividend vs. Share Buy-Back
My initial reaction is I tend agree with Hammer on the relative wisdom of dividends vs. share buy-backs, given my own aversion to withholding tax and the fact I don't depend on dividends for my income needs. If for no other reason than that the EU is an economic mess, and bargains for acquisitions abound. However, please allow me to offer one argument in favor of maintaining the dividend, and its possible reflection on company Management:
A company cannot be all things to all people, so I understand Management's providing for the share 'bonus' to off-set the one-time dividend cut (i.e. they made a habit of annual dividends the past several years, and they are attempting to deliver on that commitment, despite some compelling alternative uses for that cash via opportunistic acquisitions, share buy-backs, etc.). It strikes me that, far from being an indictment of management (as it might seem when viewed in a vacuum), this is actually an example of the Company's commitment to its previously settled strategy. There are certainly alternative, deserving strategies, but it is encouraging to see Management demonstrating discipline in following the strategy previously articulated. No Management ADD readily apparent here. I believe both you and Lonely alluded to this managerial discipline.
EMI Recording Division Acquisition
EMI was purchased for $6.8B (£4.2B) by private equity group (PEG) Terra Firma in 2007. The recent combined EMI purchase price of $4.1B for the recorded music division ($1.9B by Vivendi) and publishing arms ($2.2B by Sony) is decidedly less than the PEG's purchase price only five years ago. Does anyone know if Citi is retaining any significant EMI assets, or are the two divisions being disposed of it? Citigroup, which foreclosed on the PEG in February 2012, is left on the hook for EMI's $600M pension plan. In addition, Vivendi Management pegged cost synergies between EMI and Universal Media Group (UMG) of £100M per year. As the purchase denominated in pounds sterling is £1.2B, the annual cost savings strike me as significant. I haven't analyzed EMI, so I can't yet determine whether this acquisition is made at a bargain or at a premium, but it certainly doesn't seem to be terrible.
Any thoughts on why Management is pursuing the $1.9B purchase of EMI's recorded music division rather than consolidating it's interest in Canal+ France? Presumably EMI presents the better value proposition.
Valuation
Although the investment opportunity is compelling enough as it is, I'd like to drill down and better understand each of Vivendi's assets. Thank you for linking to several resources.
I think it was mentioned in either this or Lonely's article, but I wonder if the market-based, sum-of-the-parts, back-of-the-envelope valuations are yielding decidedly conservative results? I will go ahead and examine the available regulatory filings to see what information is available for each segment. I'll report back if I discover anything insightful.
Establishing the Position
I see that in a separate article you offered several 'maxims to improve investment results'. Guideline #4, opening with just one-half of one's intended investment position, strikes me as especially prudent in investing in European equities, in that it will allow one to add to their position in the event the security experiences a further decline in 'market' value; thus reducing the average cost. Alternatively, dollar-cost-averaging, making a number of regular investments irrespective of the market price, may be another way to establish the position.
VIVHY vs. VIVEF
I hesitate to get too deeply involved in this debate, so suffice it to say we all have different facts and circumstances affecting our preferred investment vehicles. Some of us invest via tax-deferred or tax-exempt retirement accounts, and some of us invest thru taxable accounts. Note there is an income tax treaty between the U.S. and France, and although I've only availed myself of treaty benefits for corporate purposes, it should still be possible for an individual to obtain a U.S. residency certificate, and to apply for a refund of any dividend withholding taxes in excess of the applicable treaty rate by filing with the French tax authorities claiming treaty benefits and being taxed at a lower 15% rate. (Article X, Paragraph 2(b))
This may be of particular interest to those whose effective tax rate in the U.S. is actually lower than the withholding tax rate in France, by means of having primarily investment income taxed at lower capital gains and qualified dividend rate, for those investing thru a tax-preferred account, lacking sufficient foreign sourced income resulting in the limitation of foreign tax credits, etc. Of course, this is administratively tiresome, and if I invested thru a taxable account, and had an effective tax rate of at least the French withholding tax rate, I personally wouldn’t give much thought to the withholding taxes except to credit them against my U.S. taxable income. However, for those who do ultimately incur the French withholding tax liability, and in cases where that liability is significant in absolute terms, this may be an avenue that makes sense to pursue. If anybody wishes to email me directly, I would be happy to provide detail on how one might go about this; accompanied of course by a formal Circular 230 disclosure statement.
Again, great contribution(s) to SA, and much appreciated!
Mike
Grupo Prisa SA: An Update On Refinancing Debt [View article]
I agree. At first glance the 2011 financial results appear to be 'ho-hum', primarily because Spain and Portugal are experiencing an economic upheaval, consumer spending in those markets is therefore in the toilet, and this continues to depress advertising revenue. Also, any relief is likely to be a long-time coming.
As for myself, I found the roughly flat consolidated results to be greatly encouraging given the circumstances. In fact, the results confirm the overall investment thesis, and that is always comforting. Quite frankly, I see fantastic upside in the long-term, with continued volatility in the near-term. This one will require patience.
When I analyze the Company's financial statements, I don't focus on the current results. I focus on the future story/results the numbers suggest. Everything I see highlights the great potential for this company. Management is highly competent and is demonstrating astounding discipline. The raw materials exist for a great management team to accomplish extraordinary results. The Company is demonstrating remarkable resilience under extremely difficult circumstances.
With Media companies in general, and this one in particular, EBITDA and Cash are 'king', and by these metrics, the Company did remarkably well despite one of the worst economic environments in Spain/Portugal's recent history. This speaks to the Company's competetive advantages (LatAm, Education, Segment Diversity, Executive Management, Brand).
We know what drove the net loss (i.e. Interest Expense, Restructuring Charges, Portugal Asset Impairments, Tax Credit Provision) and other than the interest expense, the other items do not concern me. In fact, the financials indicate that Management is taking a conservative, long-view in their turn-around efforts by investing in the future, and availint itself of the opportunity to flush out some of the inevitable bad news.
Timeframe
It occurs to me that the wisdom in this particular investment hinges on time-frame. This investment isn't as high-risk as is generally portrayed when taking a long view (i.e. 3-5 years), but is extremely risky, and I think to be avoided, for anyone taking a short-to-mid-view (i.e. 1-2 years). On the one hand, the Company's long-term viability, although not certain, is largely secure at present. The debt-load (more on that below), the general complexity in the business and capital structure, and the Spanish/EU economic crises have combined to create a very intriguing value proposition that has clouded the valuation (thus creating the current buying opportunity). Time will largely address the latter two factors, partly remedy the first; all of which should ultimately make the intrinsic value of the Company more readily apparent to the market.
Debt-Load
I view the heavy debt load to be perhaps more a plus than a minus at this stage. Under normal circumstances, the current situation (great, undervalued assets; great management; strong competetive advantages; strong cash-flow; great investment complexity; down-side protection mechanisms for the b-shares in the conversion preference and dividend; etc.) would present a 'good' investment opportunity. It is the relatively high debt-load which has presented what I think is a 'great' investment opportunity.
This perspective is best illustrated by Joel Greenblatt's analysis of Host Marriott in his first book 'You Can Be a Stock Market Genius'. Namely, the relative debt-load greatly magnifies the share impact of any change in the fair value of the Company's assets. Basically, a slight increase in the value of the Company's assets will tend to have an out-sized impact on the increase in the price of the shares. Of course, all things being equal, the inverse is also true: a small decline in the value of the Company's assets will exert an equally disparate downward pressure on the share price.
However, in this case, not all things are equal. The Liberty transaction has, as you are well aware, provided for certain protection mechanisms on the downside, which although far from certain, do provide some comfort that there is a tentative 'floor' in the price of the shares. Considering the Company's strong cash-flow, LatAm growth hedging the weakness in Spain/Portugal, at current prices I see little permanent downside, but great likely upside.
Conclusion
In conclusion, I very much liked what I saw. It is understood that Spain and Portugal are an economic mess, and for the Company to post the consolidated results it did speaks to its several enduring competetive advantages. I am not overly concerned about 'the noise' that is greatly off-putting to most, and I am growing ever more confident the value will become clear to the Market in the long-term.
Hewlett-Packard: Ready To Double [View article]
Agreed. If Meg Whitman turns HP around within 2-4 years I will rate her in the class of CEO greats such as Jack Welch. Thus far, she seems to be taking a long-view on the turnaround, and appropriately setting expectations so that they may be met or exceeded.
Hewlett-Packard: Ready To Double [View article]
I think you are absolutely correct. Mark Hurd not only neglected R&D, he intentionally starved it. Of course, a winning corporate strategy is paramount, and HP has certainly not presented a compelling strategy for a very long time, but R&D is the lifeblood of a technology company. Mr. Hurd's short-sightedness was eclipsed only by the Board's repeated failure to hold its CEOs accountable. The Board is responsible for incentivizing the correct behaviors in their Executives. The Company's present circumstances are a direct result of shortcomings in corporate governances. I certainly think there is a great deal of mid-to-long-term potential at HP.
Grupo Prisa SA: An Introduction To A Special Situation Investment [View article]
Very much appreciated, and I will certainly be interested to hear your thoughts when the 2011 annual results are published.
Relative to your comment on the weighting of the Company's Latin America business, why do you suggest it will become less and less of a factor? Are you referring to the sale of the 25% of PRISA's stake in Santillana, the education/textbook business? From information I have been able to gather the LatAm business appears to be growing considerably well, particularly in Brazil, and so the trends would seem to be that the LatAm results will be an increasing factor in the consolidated business; measured by both top-line revenues and bottom-line profits.
I can't argue the 'crown jewels' comment, and agree that hurts. Other than for the increased prospect of strict austerity measures which may depress the Spanish economy, I hadn't given much weight to the impact the new Conservative Govenment will have on PRISA, so I welcome your perspective on that point.
The cash-flow would appear to be sufficient to sustain the current debt-levels, though further restructuring will likely be necessary as you indicated, though I trust that will be limited to the future exercise of the remaining issued and outstanding warrants in due course, along with certain planned asset sales. Although all this was factored into my investment thesis (not published here), I am intrigued by your analysis and will specifically revisit the impact of the minority interest given the recent asset dispositions.
As you alluded to, the contrast of our relative perspectives is interesting. For instance, a sum-of-the parts comparison of PRISA to companies such as Liberty Media, The Washington Post, and McGraw-Hill is very favorable to PRISA, but I agree it isn't so straight-forward. Generally speaking, relative to U.S. stocks, shares of European businesses do appear remarkably 'inexpensive', and so what may appear 'rich' to you strikes me as 'cheap'. Whether the discount is justified due to the debt crises we will have to see. The complexity of the corporate structure and overall situation is alone enough to depress the share price in the short-to-mid-term while it all shakes out.