Description

Canwest Global Communications Corp (CGS) is one of Canada’s largest media companies which, at the current price, offers you Canada’s number two national broadcaster for nothing. All references to $ are to Canadian $.

Canwest is controlled by the Aster family which has 89% control and 45% ownership of CGS. The company has been undergoing a de-leveraging process for a couple of years. In the midst of this de-leveraging there has been a string of disappointing months for its wholly-owned Canadian broadcasting group as well as a partly owned Australian broadcast sub. The market is currently so distraught with these short term problems that on a sum-of the-parts basis composed of publicly traded subs, one receives the Canadian broadcast business for nothing. At the same time depressed prices for CGS’ publicly traded holdings provide a ‘double discount’ for CGS.

CGS has three main pieces: Canwest MediaWorks, MediaWorks Publications, and MediaWorks International.

MediaWorks is the company’s Canadian broadcast business. Beginning in 2004, CGS’ TV sub (Global) began losing the ratings game to CTV. EBITDA has virtually vanished from a run rate of almost $200mn in a few years ago. They are making the necessary adjustments by investing in programming, but it’ll take time to turn it around. The financials are about as bad as they get because the company is increasing costs even as revenues decline. I think though that by the end of this year we should see the beginnings of a rebound in revenues. Margins may have already troughed. Assuming they get back to $150mn EBITDA in three years, the present value of this business at 8x is about $850mn. The company also owns a money losing but highly influential paper called the National Post. Their cost is $25mn but I think the value is close to $100mn or 1x sales.

“Publications” owns 31 regional papers in Canada. CGS owns 74% of this business while the remainder is owned by a publicly listed income fund (Canwest MediaWorks Income fund; CWM-U). The paper business is growing and faces many of the issues faced by US papers. However, the threat from the internet has not been as severe for them to date as they have been pretty aggressive in launching their own sites to capture the audience shifts from print to on-line. The income fund currently yields 12% and implies a 9x EBITDA multiple on the newspaper business. At market value CGS’s ownership is worth $1.3bn.

“International” owns 56% of Ten Networks in Australia, 70% of CanWest New Zealand and various other businesses. The ownership in Ten is complicated by Australian ownership limitations. Publicly traded Ten Networks is a shell company which has a 43% economic interest on a fully diluted basis in Ten Group. CGS has a combined 56.4% interest on a fully diluted basis in Ten Group. This translates to roughly 523 million shares of Ten Group, which is worth about C$1.2bn at current FX rates and at yesterday’s price for Ten Networks. Ten has seen an explosion in revenues and EBITDA over the past decade. The margins are very healthy but we are seeing the first signs of a slow down for the Australian market. Thankfully the stock market has been discounting this scenario over the past 18 months with the stock down by a third. In addition recently legislation passed by the government essentially allows for foreign ownership of media properties in Australia. I think that the price of Ten may be cushioned from further operating weakness by the prospect of a full offer by either Canwest or another party. New Zealand is worth $200mn at market.

Other assets include an Irish broadcaster (recently sold) and radio operations in various countries which total at least $200mn.

So, to sum up

Newspaper $1.3bn
Ten $1.2
NZ $.2
Post $.1
Other $.2
Corp at 7x ($.2)
HC Debt ($1.3)

NAV x/Bcast $1.5bn
Mkt Cap $1.5bn

Bcast $830mn

Total NAV $2.3bn
Discount 35%

I haven’t tried to do the obvious which is to create the broadcast business at an 85% discount to intrinsic value for a few reasons. Both Ten and CWM are high yielding securities so it would be expensive. In addition you’d have to worry about the currency as well.

Catalyst

further asset rationalizations, rebound for broadcast