Description

Claxon Interactive Group (“Claxson”) is a small, forgotten about, Ibero American media company.

The company has 10 mln (Dec 2002) paying subscriber households that subscribe to one of the company’s 14 pay per view channels throughout Latin America, Spain and Portugal. Additionally the company owns the number one radio broadcaster and number 4 TV broadcaster in Chile, licenses several radio broadcasters in Uruguay and owns the El Sitio (www.elsitio.com) internet page. The company also has the exclusive distribution rights for Playboy programming in Latin America, Spain and Portugal. Importantly, the company has recently begun to offer its programming to the US Hispanic market, an important and fast growing demographic.

Claxson’s offers programming including: dubbed global Blockbusters (Gladiator, Matrix, things like that). Movies and series designed for the 18-35 year old urban market. Latin American classics; series regarding the occult/unknown; Fashion TV; a music channel and as previously mentioned Playboy TV and other “adult content” channels. Additionally the Company offers news programing. The Company also has its own production company based in Miami dedicated to dubbing films.

Claxson’s owners will be a big part of its success going forward. The Company is owned by the Cisneros family and Hicks Muse. The Cisneros are one of the largest holders of Univision as well as major producers of Hispanic language programming. They will be instrumental in the Company’s success going forward. The CEO is Roberto Vivo, a survivor who has avoided bankruptcy, restructured the company and nursed it back to health. Roberto Vivo was the founder of El Sitio, which he merged with Claxson in order to have the company survive.

Claxson was formed by the merger of the assets contained in Ibero American Media Partners II Ltd, a fund controlled by the Cisneros Group and subsidiaries of Hicks Muse, and other assets contributed by the Cisneros Group and El Sitio Inc. Since its creation the Company has spent the entire time working to stave off bankruptcy. A substantial amount of debt was renegotiated in 2002; hundreds of employees in the internet and other divisions were laid off, the Company had to navigate through the Chapter 11 filing of its biggest distributor (Direct TV Latin America) and generally make its way through a highly treacherous environment. Claxson did this successfully and has emerged as a competitive regional player with low costs, poised for growth.

What is particularly interesting about the Company is the recent operating performance highlighted in the company’s third quarter earnings release. For the 3 months ended September 2003 Claxson generated 3 mln in operating profits which was the result of revenue growth and aggressive cost controls. Several things have helped the Company achieve these results; in particular: aggressive cost cutting, the stabilization and turnaround of the Argentine economy where the company derives 19% of revenues, the general improvement in Latin American economies due to the rise of commodity prices and lowering of interest rates; two items to which these economies are highly levered, and the overall improvement in capital markets.

All of these things have combined to allow the company to start growing revenues and more importantly generate profits from a small base which should allow Claxson to continue growing at accelerated rates for the foreseeable future.

Claxson’s valuation tells you that as a media company, it is one of the cheapest ones around at 5.8 times annualized EBITDA. Q3 EBIT annualized was 12 mln dollars which should be increases by 6 mln dollars of depreciation and amortization to get an annualized run rate EBITDA of 18 mln dollars. Average EBITDA multiple for media companies is approximately 12 times. Applying an 8.4 x multiple (30% discount to major international media companies) to the Company’s annualized EBITDA gives you a TEV of 151 mln dollars less the 57 mln in net debt implies an equity value of 94 mln or approximately 2 times the current market capitalization of Claxson or a price per share of 5.00. Claxson should trade at a higher multiple given the fact the company is now on a rapid growth trajectory, has exactly the type of programming US companies are clamoring for i.e. Hispanic programming and although a tiny piece of the business is internet based these businesses are trading once again for very large multiples.

Assuming that the company can squeeze between 500,000 to one million worth of additional profits on the same level of revenues, this would have the company generating between 19.6 and 21.6 mln in EBITDA in 2004 without any revenue growth. This would imply an equity value at 10x EBITDA of 158 mln or 8 dollars per share by the end of 2004 or 3 times the current share price.

Catalyst

Continued economic improvement in Latin American economies resulting in increased advertising.

Continue operating performance at the Company

Growing interest in Hispanic programming by North American broadcasters

Renewed interest in the Latin American Internet