Description

Recommendation

Long Ascent Media Corporation, ticker:  ASCMA.  This is a now simplified yet still undiscovered spinoff.  The upshot is that Ascent has traded largely in the $24 range, has $22.50 of net cash, and has a real (albeit average at best) business being given away.

Background

The “old” Discover Holding Company (DISCA) owned 2/3 of Discovery Communications, as well as 100% of Ascent Media and AccentHealth.  DISCA and their partner in Discovery Communications, Advance/Newhouse, decided to combine their interests to form a new public company.

DISCA is now Discovery Communications, which is a pure-play owned by the former Discovery Holding shareholders and Advance/Newhouse.  DISCA and Advance/Newhouse could not come to an agreement on the value of Ascent, so the cleanest way to handle the situation was to spin it off.

AccentHealth was sold on 8/8/08, and the Information Statement filed with the SEC displays the most recent financials as of 6/30/08.  As with most spin-off documents, there are all kinds of pro forma presentations that frankly don’t clearly spell things out, namely the pro forma doesn’t match pieces of the MD&A, as the business units’ EBITDA is presented without corporate SG&A.  Further complicating matters, one must be careful to only pay attention to the financials that exclude the AccentHealth business.  Finally, the most recent balance sheet does not include the cash proceeds received from the sale of AccentHealth, which is the key to this idea.  There is only one line from the Information Statement that clearly spells out the situation (page 35, Liquidity and Capital Resources section):

At the effective time of the spin-off we have cash and cash equivalents of approximately $340 million, including cash received from the sale of AccentHealth.

Elsewhere in the document it says that the pre-tax gain on the AccentHealth sale was $63M – I have chosen to assume they owe but have not yet paid taxes of $25M (assuming a 40% tax rate). On 14M shares we come to $22.50/share of net cash.  So for $2/share or $28M you can buy what I believe should be a normalized EBITDA number of $60M.  To be clear, this is not a peach of a business.  It is competitive (more on that below) and capital intensive; however they do state that 2008 CapEx is expected to be $45M – given the D&A shield, I assume EBITDA – CapEx = free cash flow, which I think is fair.  I believe these assumptions are reasonably conservative, and while it is a tough business to award even a market multiple, it doesn’t take much of a multiple to earn an attractive risk-adjusted return here.

With respect to the cash, I do not claim to know what they will do with it, which is of course a risk.  I could see them repurchasing shares, and/or waiting for a cheap acquisition.  This is slightly uncomfortable, however I feel better about it given that John Malone owns over 700k shares and controls 31% of the vote – part of my attraction is Malone, who despite recent news stories on his personal margin calls, I trust and admire.  It is a small position for him, but he has never been one to fritter away money, and historically it has been prudent and lucrative to buy him while he’s “down” (which I believe is a common misperception at the moment).  Finally, management appears competent, engaged, and incentivized by the right things (namely EBITDA and free cash flow targets).

There is a section from the Information Statement that does a nice, succinct job of explaining what they do, their customer base, and what the recent environment has looked like:

Ascent Media provides creative and network services to the media and entertainment industries in the United States, the United Kingdom (“UK”) and Singapore. Ascent Media’s clients include major motion picture studios, independent producers, broadcast networks, programming networks, advertising agencies and other companies that produce, own and/or distribute entertainment, news, sports, corporate, educational, industrial and advertising content. Ascent Media’s operations are organized into the following two groups: the creative services group and the network services group.

On November 5, 2007, the Writers Guild declared a strike affecting the script writing for television shows and films. The strike, which lasted until February 12, 2008, had a significant adverse effect on the revenue generated by Ascent Media’s creative services business for services provided on new entertainment projects utilizing scripted content and the production of new television commercials. The 2007-2008 television season was significantly affected by the strike. Networks and producers resumed production of some scripted television programming interrupted by the strike. However, some programming never resumed production this season.

The contract between the Screen Actors Guild and the Alliance of Motion Picture and Television Producers (“AMPTP”) for theatrical motion picture and television performances expired on June 30, 2008. A failure by the Screen Actors Guild to finalize and ratify a new agreement with the AMPTP within a reasonable period of time after expiration of the prior contract could lead to a strike or other job action. Any such labor dispute could have an adverse effect on the television and motion picture production industries, including Ascent Media’s business, and in the case of a severe or prolonged work stoppage, the adverse effect on Ascent Media’s business, operations, results of operations and/or financial condition could be material.

In recent years, Ascent Media has been challenged by increasing competition and resulting downward rate pressure for certain of its networks services. Such factors have caused some margin compression and lower operating income. Ascent Media believes that while its networks margins in 2007 and 2008 are lower than in some previous years, they have stabilized for the time being, and Ascent Media is continuing to focus on leveraging its broad array of traditional media and file-based services to be a full service provider to new and existing customers within the feature film, television production and advertising industries. Its strategy focuses on providing a unified portfolio of business-to-business services intended to enable media companies to realize increasing benefits from digital distribution. With facilities in the U.S., the U.K. and Singapore, Ascent Media hopes to increase its services to multinational companies on a worldwide basis. The challenges that it faces include continued development of end to end file-based solutions, increased competition in both its creative and network services, differentiation of products and services to help maintain or increase operating margins and financing capital expenditures for equipment and other items to meet customers’ requirements for integrated and file-based workflows.

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