Promotora de Informaciones, S.A (NYSE:PRIS) ("PRISA"), was founded in 1972 by Jesus de Polanco, and is now a media powerhouse operating in Spain, Portugal, and Latin America. Its investments include some of the largest media companies in these markets, including substantial print media, cable television, original television and movie content, radio, and an education/textbook business.
Despite the recent and continuing decline in traditional print-media and advertising, those channels, although substantial, represent only a small fraction of PRISA's business. The bulk of the company's revenues and profits are generated in the highly lucrative cable and educational segments which generate substantial free-cash-flow and provide direct access to rapidly growing emerging markets such as Brazil and other Latin American countries.
Due to an unbridled acquisition spree, PRISA found itself excessively leveraged in late 2010, with debt of approximately 8x earnings. Enter Liberty Acquisitions Holdings Corp. (LIA), a publicly traded Special Purpose Acquisition company ("SPAC"), or a "blank check" organization, which injected much needed capital and installed its two founders on the Board, as well as a controlling number of independent Board members.
Liberty's investment triggered the trading of PRISA American Depository Receipts ("ADRs") on the New York Stock Exchange.[i] This newly created access to the U.S. stock exchange immediately created a highly valuable liquidity in the underlying PRISA shares, and attracted the attention of such stock pros as Whitney Tilson, who's T2 Partners, holds a significant portion of its assets in PRISA ADRs; David Marcus of Evermore Global Advisors; and most recently, Carlos Slim, the billionaire Mexican businessman.[ii]
In May 2011, PRISA installed a new Executive management team and continued an aggressive de-leveraging plan using free cash-flow, proceeds from the exercise of warrants at above-market strike prices by Liberty and the Polanco family, and the sale of non-core assets to place the company on more solid financial footing. By the end of 2011, it is expected that PRISA's debt may be reduced nearly 50% from its high in 2010.
The Class A ADRs (PRIS) and the Class B ADRs (PRIS.B) each consist of four shares of the underlying class types. For that reason, they trade at roughly 4x's the price of the shares traded on the Madrid stock exchange. The Class A shares possess voting rights, while the Class B shares are non-voting, cumulative, convertible counterparts to their Class A siblings. In addition, the Class B shares possess highly valuable traits, such as the roughly €0.70 cumulative annual dividend on the ADRs (roughly $0.98, or nearly a 20% yield on $5 per share), payable June 30, 2014.
In addition to the cumulative dividend, additional protection measures against principal-loss are built into the Class-B ADRs via a conversion preference. The Class-B shares/ADRS convert automatically into Class-A shares on June 30, 2014. Provided the Class-A shares trade in excess of €2.00 per share (reminder: this equates to €8.00 per ADR, or approximately $11 per ADR in U.S. dollars), the conversion ratio is a simple one-to-one (1:1). However, if the Class-A shares trade at less than €2.00 on or before the conversion date, the conversion ratio will be a fraction, the numerator of which will be €2.00, and the denominator of which will be equivalent to the 20-day trailing average price; but in no case will the conversion ratio exceed 1.33 Class-A shares for each Class-B share. Alternatively, the conversion ratio will be one-to-one (1:1) with an amount of cash equal to the difference between A) €2.00 and B) the 20-day trailing average price; not to exceed €0.50 per Class-B converted share. Thus, if the shares have not appreciated by approximately 100% just prior to June 30, 2014, the discerning investor in PRIS-B ADRs will receive a significant stock/cash kicker.
In addition, as Evermore's David Marcus has repeatedly stated, PRISA is a relatively inexpensive back-door play on rapidly growing emerging markets. With the added protection of a roughly 50% cumulative dividend over the next 30 months, and the significant preferences on the class-conversion of shares in 2014, there exists a significant margin of safety inherent in what would otherwise be a risky bet on a Spanish media company. Fortunately, it is our view that the market is viewing PRISA as almost exclusively a heavily-leveraged Spanish Media company, and has not yet recognized the recent benefits resulting from the Liberty merger and the positive subsequent events. It is this which has created a large discrepancy between share price and fair value.
Despite all this, PRIS and PRIS-B hit recent lows below $4 per ADR. Axinite believes that a deliberate continuation of Management's deleveraging and efficiency strategy, the continued investment by the Polanco family and the Liberty founders in the form of the exercise of Warrants, and all but an Armageddon-like outcome to Spain's sovereign debt crisis will result in PRISA shares at least doubling over the next three years.
[i] American Depository Receipts (ADRs) are the preferred mechanism for U.S. persons to invest in the securities of international entities without incurring unwelcome tax liabilities such as foreign withholding taxes on dividends and capital gains.
[ii] T2 Partners purchased PRISA class-B ADRs at upwards of $10 per, and the author agrees the shares represented potentially significant value at that price. Carso SA de CV, a company controlled by Carlos Slim, established its stake more recently per regulatory filings in November 2011, and as reported in The Wall Street Journal.
Disclosure: I am long PRIS.B. Axinite's Managing Member began buying PRIS.B at approximately $5 and continued buying until the ADRs traded below $4, for a combined weighted average position of roughly $4.50 per ADR.