Description

Note: All figures are in Canadian Dollars, fiscal year ending August
Summary:
CanWest Global (Ticker: CGS/SV) is a holding company for TV, newspaper and radio assets in Canada, Australia, New Zealand and Ireland. Its Australian operations, New Zealand operations, and Canadian newspaper operations all have publicly traded stubs. If you back out of CanWest Global’s stock the publicly attributed value to these segments and assume a 10% holdco discount, you find that the market is attributing a value of 2.8x EBITDA to its Canadian television broadcasting assets. Given a more appropriate valuation of 8x EBITDA for these assets, then CanWest stock should be valued at $13 per share ~ 35% premium to the current value.

The Company:
Like many media companies, CanWest is controlled by the original founding family ~ the Asper’s who have effective voting control. Numerous family members including the CEO and several officers are still actively involved in the company. While the structure of the firm may seem convoluted at first, the number of publicly traded entities gives us much more visibility upon the appropriate valuation of the holding company than many of their media peers. There are four main entities: Canadian TV Operations, CanWest MediaWorks Income Fund, TEN Network, and CanWest MediaWorks NZ. Given CanWest Media Works Income Fund, TEN Network and CanWest MediaWorks NZ are all publicly traded entities, I will limit by discussion about these subsidiaries

Canadian TV Operations: $134 mm in EBITDA in FY 2005
CanWest is one of the largest owners and operators of commercial broadcast television stations in Canada with estimated share of 18.8% of English Language broadcasting. They operate 16 television stations, reaching 97% of Canada’s English-language market. Four stations operate as independents under the “CH” brand, with the remainder belonging to CanWest’s Global Television Network. The Global Television Network is targeted at the 18-49 year old audience, while the CH stations target a more mature audience. The company’s ratings have been steadily slipping over the past couple of years as CTV, their main competitor, has locked up the most attractive programming from the US, including valuable franchises such as CSI and Law and Order. In comparison, CanWest has struggled since the end of Friends, and its lineup of shows such as Survivor or Will and Grace is weak in comparison. In order to regain some of its lost share, the company will be considerably increasing its programming spend by 10% in the upcoming fiscal year. However, it is unlikely to see revenue traction from this increased spend until FY 2007. Initial signs have been negative, with a high single digit ratings drop in the fall despite show purchases such as Prison Break and My Name is Earl. In addition to the conventional TV assets, CanWest also has one specialty TV asset, Prime TV which generated 13% of the EBITDA in FY 2005.

There is no fundamental reason for such a large valuation discrepancy between Canadian TV and American TV assets. There is some premium built into American TV assets on the option that media ownership rules will change in the next few years, which might argue for a 10-20% premium, not a 300%+ premium. Both markets have similar protections, with a limited number of licenses and a requirement for all cable operators to carry the signal. (However, unlike the US, the Canadian broadcasters are not facing a potential end to this requirement with the switch to digital transmission.) Canadian broadcasters also have a unique advantage. There is an odd media law in Canada creating a regulatory requirement known as “simulcasting”. Simulcasting requires Canadian cable TV systems to substitute the local Canadian signal (including the Canadian commercials) for the broadcast of the identical program by a US station when the two programs are broadcast at the same time. As CanWest purchases exclusive TV rights to American shows, it then gets credit by the advertisers for being viewed on both stations, increasing its revenue generation.

In addition, while in the early stages, there is lobbying pressures from the analog broadcasters in Ottawa for a change in the advertising rules. Unlike the US, the advertising market in Canada is still regulated, limiting the number of commercials in certain intervals, as well as the type of commercials which are allowed on TV. If regulations are eased, this could lead to substantial revenue increase for the Canadian broadcasters in the future.

CanWest MediaWorks Income Fund (Ticker: CWM-U, CanWest remaining ownership: 74.2%)
CanWest MediaWorks Income Fund began trading in October 2005 when CanWest completed the conversion of its newspaper assets. The newspaper assets include well known Canadian newspapers such as the Montreal Gazette, The Ottawa Citizen and the Vancouver Sun. These assets have been more stable than many of their peers, partly due slower Internet adoption in Canada. As a result, CanWest’s newspaper operations have also done a better job at transferring readership to their online sites, and migrating advertising dollars as well.

The trust conversion of Canada’s largest newspaper company was widely anticipated, but unfortunately came at an inopportune moment, just as the income trust market was dealing with Ottawa’s threats to eliminate the income trust structure. Given the size of the conversion and the challenges facing the newspaper industry, CanWest was forced to increase the expected yield range once, and ended up pricing the IPO at the high end of the yield range. Instead of being the value creation event anticipated, the launch of the income trust fell was largely ignored by a Street which became disenchanted with these structures. Even with Ottawa backing down on its income trust objections, CanWest’s stock has continued to languish.

TEN Network (Ticker: TEN AU, CanWest remaining ownership: 56.4%)
One of Australia’s five national networks, Network TEN is targeted towards the 18-30 year old audience. The network has gained share from its competitors in the past couple of years and now commands approximately 36.7% of the market. TEN Networks also owns Eye corp. which controls billboards in Australia. It is expected that revenue growth will slow for this company in the upcoming year as it facing daunting comparisons in the face of competitors having exclusive rights to the Olympic Winter Games and the Middlebury games. However, to counter these negatives, it is possible that the Australian media ownership rules are relaxed in the near future, which could lead to multiple appreciation.

CanWest MediaWorks NZ (Ticker: MWL NZ, CanWest remaining ownership: 70%)
TV Works and RadioWorks are the names of the New Zealand assets. CanWest IPO’d its New Zealand assets in July 2004. The television assets are again geared towards a younger demographic.

Other Assets:
The company also owns a 45% stake in an Ireland TV network, The National Post (a poorly performing newspaper asset), several Canadian radio assets, and several Canadian digital specialty channels. I estimate the value of these remaining assets to be approximately C$200 Canadian, largely driven by the value of the Irish assets.

Valuation:
Current stock Price: $9.63
Diluted Shares: 177.3
Equity Value: $1,705 mm
Holdco Debt (PF for Income Trust payout): $1,347 mm
Swaps liability (From Q4 call) : $200 mm
Holdco EV: $3,254 mm

Plus:
Corporate Expense costs ($30 mm at 6.5x EBITDA): $195 mm

Less:
Network TEN (56.4%, A$3.20, currency = 0.85) = $1,423
New Zealand TV assets (70%, NZ$1.69, currency=0.793) = $213
Newspaper Income Trust (74.2%, $9.15) = $1,448
Other Assets: $172
Irish TV ($14 mm in EBITDA at 8x) : $112
Canadian Radio/Digital TV assets (Street estimate) : $60
National Post (Book Value) $0

Implied EV of Canadian TV assets: $193
Implied EV assuming a holdco discount of 10%: $380 mm
EV/EBITDA multiple Canadian TV Assets (EBITDA: 134) = 2.8x

Stock price Given Canadian TV assets at 8x EBITDA:
Canadian TV Assets (EBITDA: 134, 8x EBITDA) = $1,072

Total Value prior to debt: $4,328
Less: corporate costs (30 mm at 6.5x EBITDA): ($195)
Less: Holding Company Net Debt: ($1,347)
Less: Swap liability ($200)
Equity Value: $2,586
Shares: 177.3
Value/share: $14.59
Holding company discount: 10%
Valuation per share: $13.13

While one can argue the appropriate valuation of each of the other segments, I have chosen the simple option of simply taking the market valuation, largely as any sophisticated investor could effectively short out the risk of any of the parts in order to “create” the TV asset for a mere 2.7x EBITDA. My rational for a holding company discount of 10% (which I admit to being on the low end) is that the large number of publicly traded entities has dramatically simplified CanWest’s structure. In addition, CanWest maintains controlling stakes in all of these entities.

To be fair, fourth quarter earnings which were reported in November were deemed disappointing by the Street. For some reason Canadian analysts didn’t realize that Newsprint costs had been increasing? In addition, despite management comments with regards to programming cost expenses, they seemed surprised when they actually saw the Canadian broadcast TV numbers. If you read the research, there are also numerous concerns with regards to the Australian networks, and an apparent lack of faith in the Australian market’s ability to perceive these difficulties. None of these seem to explain why the company’s TV assets are now being valued in the market at an absurdly low multiple, especially when you consider comparable US assets are being picked up by private equity players at 10-11x EBITDA.


Risks:
1) Exposure to Canadian conventional TV given shift towards other advertising medium
2) Holding company discount could end up being larger than expected given entities trade in foreign markets
3) Disappointing results for 2006 ~ largely anticipated at this point.
4) Family control of the Asper’s

Catalyst

1) Market starting to focus on FY 2007 results, so the company can leave behind its disappointing FY 2006 results.
2) Change in Canadian advertising regulation
3) Canadian political elections