Description

I am recommending a long investment in Entravision (“EVC” of the “Company”) based on a potential return of 50% or more in two years or less.  The investment thesis is premised on better-than-expected FCF generation from the Company’s TV and radio businesses coupled with attractive growth being generated from the digital media businesses, including some market recognition of the “hidden value” within EVC’s demand-side platform.  Inclusive of the substantial Q4 EBITDA and FCF I expect to be reported, thereby further improving one of the better balance sheets (net leverage at less than 1.5x) in the broadcasting industry, EVC is currently trading at ~6x 2021E EBITDA and ~5.2x 2022E EBITDA.  This valuation and the ~9% EFCF yield coupled with the ~3% dividend yield is a source of some “downside protection.”  

The source of potential upside, assuming an undemanding EBITDA valuation multiple of 6x being ascribed to the Company in 2022, is predicated on unlocking some of the “hidden value” within Smadex, which is EVC’s demand-side platform.  The slight expansion to the EBITDA multiple is premised on the recognition by the market of the Company’s improving margin in its legacy broadcasting businesses coupled with the substantial growth in EVC’s digital media mix. 

Based in Los Angeles, Entravision conducts business in more than twenty countries but its main source of profitability is driven from advertising tailored to the Hispanic population in the U.S.  The Spanish-speaking audience of television viewers, radio listeners, and mobile app users in the U.S. is one that marketers cannot ignore.  It’s an audience growing in population, spending power, and political importance.  Hispanics represent nearly 20% of the U.S. population and are the fastest growing demographic, expanding 8x faster than the general population in the U.S.  According to AdAge, in 2018, over $9.4B of total advertising expenditures in the U.S. were placed with Spanish-language television, radio and digital advertising.  There is a belief that once Hispanics learn to speak English well and become bilingual, they become “acculturated” and use English as their primary language.  However, acculturation is a process rather than an absolute classification whereby Hispanics adopt American customs while still guarding their culture, heritage, and traditions. While over 75% of U.S. Hispanics speak English well, over 60% of Hispanics prefer speaking Spanish in their homes and the language spoken at home rather than English ability tends to be a better indicator of TV viewing behavior.   

Entravision is Univision’s largest TV station affiliate, accounting for ~25% of its audience.  The Company owns and/or operates 55 TV stations in 24 markets located in CA, CO, CT, FL, KS, MA, NV, NM, TX, and Washington, D.C.  Ten of these markets are in the top 25 Hispanic markets (as ranked by number of Hispanic households) and 19 are in the top 50 Hispanic markets.  The ten markets across top 25 Hispanic markets are in McAllen, TX; Orlando; Tampa; Albuquerque; San Diego; Washington, D.C., Denver; El Paso; Boston; and Las Vegas.  Fifteen of the 24 markets are comprised of Hispanic households representing at least 20% of that market’s total households; six of the 24 markets are comprised of Hispanic households representing at least 50%.  Those most densely-populated Hispanic household markets for EVC are located primarily within Texas in McAllen, El Paso, Corpus Christi, Odessa-Midland, and Laredo; the sixth is located in Yuma, Arizona-El Centro, California.  Several of these and other EVC markets suffered economic setbacks during the Trump administration but management anticipates these markets should improve during the current Biden administration from increased mobility across the U.S./Mexican border.

Through its affiliation with Univision, which expires in 2026 (except in Orlando, Tampa, and Washington, D.C. which expires at the end of 2021), EVC benefits from Univision’s programming which has ranked first in prime-time Spanish language TV programming for twenty-seven years.  During 2020, more than half of all U.S. soccer viewing was on Univision networks.  Although the magnitude of Univision’s dominance has eroded against improvements at Telemundo, its 56% share (including UniMas) of the Spanish language viewing in EVC markets is a notable advantage.  Revenue generated from retransmission consent represented ~25% of the TV segment’s total revenue in 2019.  Management envisions this mix of revenue will grow at a low-single digit rate based on the benefit of higher price but offset by anticipated cord-cutting.  The Company supplements the content provided by Univision with its own news programming.  In addition to its affiliation with Univision across all of its markets, EVC is affiliated with FOX and CW in McAllen, with FOX in Monterey and in Laredo, and with NBC in Palm Springs.  The Company acquired the NBC/My Network TV stations in Palm Springs for $21M during 2017.  

EVC produces early and late newscasts in twenty-one local markets.  In its TV markets, the Company’s local TV news ranks #1 or #2 across ten of its markets (in early news) regardless of language.  Those markets (shown parenthetically is that market’s percentage of Hispanic households) are Orlando (20%), McAllen (92%), El Paso (78%), Las Vegas (24%), Monterey (38%), Odessa-Midland (50%), Yuma-El Centro (67%), Laredo (99%), Santa Barbara (27%), and Palm Springs (39%).  It’s worth noting, according to Nielsen, that news consumption by Hispanics outpaces news consumption by non-Hispanics.  During Q2 2020, news consumption by Hispanics grew at more than 40% the rate of growth of non-Hispanics.  It’s also worth noting that EVC’s online news destination site Noticiasya.com has an audience of 18M which exceeds the number of Hispanic households covered by EVC’s TV stations.  As will be described below in the risk factors, there is indeed a risk to EVC with Univision’s recent change in ownership/management and their focus on a Univision streaming platform called PrendeTV.  I think in the near-term, the risk is mitigated by EVC’s importance to Univision in representing 25% of their audience which includes the importance of EVC’s local news content.  

The increasing importance of the political process cannot be understated.  Hispanic voter turnout has roughly tripled since 2014.  Entravision’s TV and radio properties reach 14 of the 20 highest-density Hispanic markets and 10 of the fastest-growth Hispanics markets in the U.S.  The Company’s markets include Texas, Florida, and Nevada and it’s notable that in Texas, ~40% of new registered voters were Hispanic, and in Florida and Nevada, it was ~33% and 25%, respectively.  During 2020, EVC generated over $28M of political advertising revenue; this is almost 250% more than in 2008, over 70% more than in 2012, and almost 165% than in 2016.  It should be noted that during 2016, the Trump campaign spent much less overall for political advertising than generally expected but that was not the case during the recent campaign.  Although mid-term election years do not generate the same magnitude of political advertising as during Presidential election years, EVC garners a higher percentage of the political advertising during mid-term election years (as a percentage of the preceding Presidential election year) relative to non-Hispanic broadcasters.  During the past three mid-term elections, EVC generated growth ranging from 28-33% from the preceding mid-term election year.  For modeling purposes, I assume that 2022 political advertising will grow by 20% from 2018.  

As is typical of broadcasting companies, there is a substantial “political ad hole” in the year that follows a Presidential election year.  This should already be discounted by the market of course but one can never be certain.  For EVC, political advertising comprised the largest percentage of its total revenue, at 9%, in the past fifteen years and therefore it is a large amount to anniversary in 2021.  Nevertheless, based on a substantial headcount reduction in 2020 coupled with some additional contractual savings and the incremental EBITDA to be generated from the recent Cisneros Interactive acquisition (all described in more detail below), I estimate that EVC will come close to making up for the “political ad hole.”  During a recent investment conference, the CFO addressed a question pertaining to this issue and while acknowledging the substantial political advertising in 2020 would be a large “hole” to fill, he was confident that the Company would get close and possibly exceed 2020 during 2021.  I would have preferred that he not mention possibly exceeding 2020 as to avoid raising such expectations but I agree that EBITDA in 2021 will likely be close to 2020 at ~5-10% less, and this would be an accomplishment given the magnitude of the flow-through on the $28M of political advertising in 2020.  For conservative purposes, since I am not assuming non-political revenue growth in the core broadcasting businesses in 2021 from the virus-induced challenges of 2020, I do understand why the CFO is confident that EVC could possibly exceed 2020.

Although EVC’s television segment comprised 52% of 2019 revenue, the segment comprised more than 100% of EBITDA and EBIT in 2019 but I believe the Company’s other two segments—radio and digital—will contribute positively to EBITDA and EBIT in 2021 and beyond although the television segment will still remain the largest contributor of EBITDA and EBIT in the near-term.  That said, the market is unlikely ascribing much value to either the radio or the digital businesses since neither have been contributing much to EBITDA or EBIT in the past three years but those are the two segments which are likely to raise EVC’s valuation profile in the near-term.  In fact, this year, primarily because of the recent Cisneros Interactive acquisition, the digital segment will generate the largest mix of revenue to the Company although at a low margin so television will still be the largest contributor to profitability.  Nevertheless, I believe as the digital segment’s revenue mix grows in importance, the visibility of EVC’s digital businesses will also garner more visibility and especially its most valuable component—Smadex, the demand-side platform which is described in more detail below.

Entravision’s radio segment achieves over 95% Latino coverage through almost 50 owned-and-operated stations across AZ, CA, CO, FL, NV, NM, and TX, and ~360 network affiliates.  Sixteen of its stations are located among the top ten markets ranked by Hispanic households.  Thirty-eight of its stations are located among the top twenty-five Hispanic markets.  EVC owns six stations in the largest Hispanic market, specifically across Los Angeles-San Diego-Ventura.  Part of the Company’s recent challenges stem from its consolidation of these stations into a “Superstation” and with some hiccups with the execution came a lack of ratings clarity to effectively sell ad inventory.  This is no longer considered an issue and management expects that its advertising sales in this critical market will improve with the “normalization” of a post-virus recovery.  

During 2019, EVC’s radio segment generated negative $1.7M of EBITDA from $55M of revenue.  This is absolutely pathetic as was the ~$3.6-4.6M of EBITDA generated from ~$64-67M of revenue during 2017 and 2018.  Although I am not envisioning best-of-breed performance from EVC’s radio business, one should note that this is a business segment that has and should generate a double-digital EBITDA margin as the Company has demonstrated in the past.  During 2014-2016, EVC’s radio business generated a margin of 13.8-18.6%.  Some of this can be ascribed to the inherent operating leverage of radio on higher revenue (e.g., ~$76M in 2015 and 2016 versus just $55M in 2019) but it’s notable that the Company was able to generate ~17% margin in 2014 but only 5.4% in 2017 despite just 4.5% more revenue during 2014 versus 2017.  As noted, part of this degradation has to do with some issues ascribed to management consolidating its Southern CA stations into a “Superstation” but these challenges are perceived to have passed.  

A very significant uplift to the radio segment margin will come from the change by EVC’s management pertaining to its contractual obligations with certain media research and ratings providers (more specifically Nielsen ratings).  As described in the Company’s 2019 annual report, the Company is obligated to pay a total of $18.6M inclusive of annual commitments in 2020 and 2021 amounting to ~$11.5M and $6M, respectively, and then ~$1.1M in 2022.  This is a significant amount of savings for the radio segment in 2021 and 2022.  On an LTM basis, the radio segment generated ~$44M of revenue and negative $0.9M of EBITDA.  If the Company were to generate this same revenue during 2022, all else being equal except for the substantial reduction to the media research and ratings provider expense, that would lead to ~$9.5M of EBITDA and a 21.6% margin.  I know the magnitude of change might seem unlikely and especially when the Total EBITDA for 2017-2019 was just $6.5M.  However, those expenses relate to Nielsen ratings and management has determined that their national sales effort for radio was not garnering the relevant benefits from Nielsen and this is also notably because of EVC’s decision to consolidate its Southern CA stations into a “Superstation” which Nielsen was not effectively measuring.  It remains to be seen how effective EVC will be with its national sales effort without the magnitude of Nielsen ratings but it is clearly a substantial expense savings that will benefit the Company by $5.5M in 2021 and by $10.4M in 2022 relative to the payment made in 2020.  

In regards to national radio sales, the Company shut down its national spot radio sales and marketing organization—Entravision Solutions—at the end of 2019 when it signed with Katz Media to provide national spot advertising services to EVC’s owned and operated stations as well for the national spot for the ~250 radio stations to which EVC syndicates content as part of its radio network business.  The success of EVC’s transition of national to Katz is difficult to effectively measure during 2020 because of the virus-related setbacks but from my primary research insights, the longer-term opportunity is perceived to be attractive once the environment “normalizes” for radio advertising.  “Because of the disarray caused by the virus, Katz has yet been able to demonstrate the effectiveness for selling the consolidated LA signals over one format.”  Furthermore, pertaining to national sales for TV and radio/digital audio, the Company hired Chris Munoz to oversee National Sales which largely means working closely with Katz in radio and with Univision (which sells EVC’s inventory on a national basis) in TV.  Chris previously was SVP for Univision National Sales and already worked closely with Katz Media when he oversaw Univision Network radio sales and their national spot radio revenue for Univision’s radio stations with Katz Media’s representation.  Chris reports to the Chief Revenue and Product Officer Karl Meyer who returned to EVC in mid-2019 from Univision where he was VP, Director of Sales at Univision. In other words, Karl hired someone he already knew from Univision to join him with the turnaround of radio sales at EVC.  Prior to leaving for Univision, Karl spent ten years with Entravision including as VP/GM of its Los Angeles radio cluster and EVP of Integrated Marketing Solutions for all of the Company’s businesses in the Western Region.  From primary research insights, Karl is lauded for his insights, salesmanship and leadership to motivate.  It was perceived as a “real coup” to bring him back to EVC given his historical impact with the Company and the success he was having within Univision.  The Company’s radio segment has been nothing short of abysmal in recent years and in the absence of much EBITDA contribution, the market is ascribing little value to this segment.  However, based on the aforementioned savings that will accrue to EVC from a substantial reduction in its ratings and measurement obligation, it is not a leap of faith to envision a much higher margin.       

In navigating though the pandemic, management sought to eliminate what it viewed as “secondary expenses” at the operating and corporate levels.  As discussed during their Q2 2020 earnings call, this led to the reduction of the Company’s headcount by ~18%.  From my research of EVC, I did not discern the highest regard for management with respect to its optimizing headcount and the expense structure to adapt to the well-documented challenges that confronted the broadcasting industry in recent years.  However, the virus served as the catalyst to reconcile this issue as evidenced by management’s intensified focus on reducing its cost structure.  During Q3, EVC benefitted from $11M of lower fixed and variable expenses, a 21% reduction from the prior year quarter, and at least half of this is expected to be sustained.  Some of the variable costs return with incremental revenue.  For modeling purposes, I assume 2021 will benefit by $10M of incremental cost savings that did not flow through in 2020.    

NOLs provide the Company with a tax shield limiting cash outlay for taxes.  At year-end 2019, the Company had federal, state and foreign net operating loss carryforwards of ~$89M, $60M, and $6M, respectively, available to offset future taxable income.  The federal NOLs will expire during the years 2031-2033.  During Q3 of 2020, the Company had an unusually large cash tax payment, at $5.1M, as they ran out of NOL balances in some of the states where they operate and so they had to true up and make those payments but, as management said, “now going forward, you should see the cash taxes be de minimis.”  For my modeling purposes, I have assumed the tax shield will limit cash outlay for taxes to $3M per year in 2021 and in 2022.

Investors who are familiar with the broadcasting industry know that among the positive industry attributes is the attractive FCF generation from the business model and EVC is no exception in that regard.  During 2018 and 2019, CFFO as a percentage of EBITDA was ~63-76% and on an LTM basis this figure was 86%.  During 2018 and 2019, the Company spent more for capital expenditures, based on some non-recurring project-related and FCC-related spending requirements, than is expected going-forward and so for modeling purposes I assume $10M of capital spending during 2021 and 2022 which is at the top of the range of management’s guidance.  During 2012-2017, EVC’s capital spending was “normalized” at $9.1-13.5M, a median $9.8M, and capital spending for 2020 was ~$8M.

The TV and radio broadcasting industries each confront numerous challenges but the issues are relatively well-documented and I believe generally discounted by the valuations across the industry primarily at ~6-7x 2022E EBITDA.  When investing across the broadcast industry, the appeal to me has historically been when the market was offering an attractive implied EFCF yield predicated on the substantial FCF generation from these high operating leverage businesses coupled with an optimized capital structure and especially with a longer-term debt maturity schedule.  That framework still applies for me but in light of some of the industry challenges, I am increasingly focused on the investment opportunities where the management team is harvesting some of that attractive FCF to effectively pivot their business mix to adjacent businesses that exhibit strong long-term growth potential.  That is the case with Entravision which has been diversifying into digital media through tuck-ins for the last few years, and some have not worked as one might expect as is often the case with some acquisitions (in hindsight). However, I think management seized the secular growth trajectory of programmatic advertising through the acquisition of the demand-side platform Smadex in mid-2018 and the market has yet to ascribe much value, if any, to it but this provides EVC investors an opportunity to benefit from this absence of recognition that I think will be reconciled through increased visibility within two years.

Management understands the changing media landscape “where viewers can freely migrate away from traditional, linear media” and therefore has sought to position the Company towards being better equipped to serve advertisers with more digitally-focused solutions that are both performance-based and transparent.  Most of the Company’s recent acquisitions have been focused towards bolstering its digital media position.  For the first nine months of 2020, the digital business comprised ~22% of total revenue but none of the profitability; the digital segment comprised over 26% of the Company’s revenue in 2019 (excluding spectrum usage rights).  During 2021, largely by the recently-acquired Cisneros Interactive, the digital segment will become the largest segment for EVC on a reported revenue basis although not nearly on an EBITDA basis.  From 2015-2019, EBITDA for the digital segment has ranged from negative $110K (in 2019) to $2.8M (in 2018).  I do not believe the market is ascribing much value to EVC’s digital segment given the insignificant EBITDA and FCF being generated from this segment within an equity that has yet to garner any meaningful research coverage for its growing digital business.  There are only two sell-side firms that issue any research on EVC and it was not until the recent Noble conference when I asked the Company’s CFO a question pertaining to the digital businesses and specifically Smadex that Noble included Smadex and the importance of the digital segment in a research note.      

Smadex represented over 30% of EVC’s digital revenue in 2019 after growing by over 90% during the previous two years.  The Smadex platform has generated attractive growth since its acquisition, generating revenue of ~$6M in 2017, $11M in 2018, and $22M in 2019.  Although the pandemic moderated the growth rate for Smadex in 2020 (as was the case for most advertising-driven businesses), I believe Smadex will resume a high-growth trajectory in 2021 and that EVC’s management will highlight this business more effectively so it gets recognized accordingly by the public market and/or validated by a partial monetization.  As some evidence for the ongoing growth at Smadex, they are currently looking to increase full-time staff by 15%.  Entravision’s management is not oblivious of the values being ascribed to the ad tech sector and they are especially focused on elevating the value of Smadex given the recent transaction for Smadex’s closest peer.   

The accelerated shift towards programmatic advertising within the fast-growing digital advertising arena is likely to drive strong growth at Smadex.  Several trends in the advertising industry have driven a shift to programmatic advertising—the selling and buying of advertising inventory electronically.  The growing digitization of media and fragmentation of audiences has increased the complexity of advertising, and therefore driven a need for automation in ad buying.  Smadex is a leading mobile-first programmatic solutions provider and demand-side platform (“DSP”) applying proprietary technology to enable advertisers to execute performance campaigns on mobile devices, using machine learning-assisted bidding algorithms to identify the best combination of creative assets, audience targeting and pricing.  A DSP is a web server-based software system that enables brands, agencies, app developers that buy advertising inventory from publishers to manage multiple ad exchange and data exchange accounts through a single unified interface.  With a DSP advertising solution, advertisers can bid on ads to optimize ad performance based on “effective cost per click.”  

According to BusinessofApps, the value of the best DSP platforms lies in its transparency, the capacity to empower advertisers to manage lots of ads, bid real-time, track and optimize ad performance.  Smadex was conceptualized by Smadex CEO Jordi de los Pinos while working as a cell phone and airplane chip engineer at Qualcomm.  Based in Spain, Smadex is built over a cloud-based infrastructure, connecting mobile-first ad exchanges, including Mopub, Ironsource, Adcolony, Rubicon, and Pubmatic.  Some publishers include Estadao, Snap, UOL, Rolling Stones, Catraca Livre, Vogue, Forbes, BBC News, and CNN.  The platform reaches millions of users and handles over 1M bid requests queries per second.  Management has positioned Smadex to focus on both transparency and performance.  “At Smadex, there’s one rule when it comes to programmatic:  no black boxes.  All the data is accessible to Smadex clients to evaluate performance.”

Smadex’s technology works on the OpenRTB (Real-Time Bidding) protocol.  RTB is a means by which advertising inventory is bought and sold on a per-impression basis, via programmatic instantaneous auction.  To show ads, Smadex participates in auctions deciding in real-time which ad to show and how much to bid to optimize the cost of every impression.  Smadex customers include Nike, American Express, Samsung, American Airlines, Audi, and BMW.

Smadex was added to the global top twenty traffic index in 2019 by Kochava while being specifically recognized for its excellent high-value user acquisition and long-term retention scoring.  Smadex was also recognized by Analytics Insight magazine as being one of the top ten machine learning companies in 2018.  During 2018, the Financial Times listed Smadex as the 50^th fastest growing company in Europe.  More recently, Digiday recognized Smadex among the top six buy-side programmatic platforms along with DeepIntent, Cognitiv, Xandr, Verizon Media, and Liftoff.  

It is noteworthy that Smadex’s peer Liftoff received a ~$400M investment from Blackstone at the end of 2020 for a majority of the business.  Based on an industry source, Blackstone’s investment represents ~10x revenue.  This was perceived to be an attractive valuation relative to selected publicly-traded peers (PUBM, RAMP, CDLX, MGNI, TTD) which currently are trading at a median 16x 2021E revenue (average of 18x).  For one valuation scenario, I assume Smadex’s substantial growth and attractive longer-term business potential leads to more attention from the public market and is therefore ascribed a value of 2x revenue which is a significant discount to the aforementioned peer group.  A prominent VC firm which has invested in the ad tech sector told me they would most likely underwrite a growth investment like Smadex at this stage at 3-5x revenue.  In my “best case” scenario, in which I ascribe a 10% probability, I assume that Smadex is ascribed a value of 4x revenue.  It remains to be seen whether EVC can effectively drive Smadex longer-term but the business has a strong perception in its marketplace and the equity market is currently ascribing little value to it.  In framing the 50% upside in two years or less, I assume that it’s 50% likely that some of the “hidden value” of Smadex is elevated within the public market and this could materialize by the recognition of such “value” as management fosters increased clarity regarding this well-positioned, high-growth business or a partial monetization by a third party that gives Smadex some of the validation it deserves.  Based on the Liftoff transaction and the increasing attention of demand-side platforms to the ad tech industry, I believe management will drive more clarity for Smadex’s “hidden value” accordingly.

During the recent investment conference hosted by Noble, in response to my question regarding the “hidden value” of Smadex based on peer multiples, EVC’s CFO said that based on the multiple paid by Blackstone for a majority investment of Liftoff, “there is certainly no value factored into our overall valuation” for Smadex which he cited would likely generate $30M in revenue this year.

Another significant component to the Company’s digital media business mix is Cisneros Interactive (“CI”).  EVC acquired 51% of this business during October 2020 for $29M which represented ~6x EBITDA.  Through the terms of the Put and Call Agreement, EVC has the right, during 2024, to purchase the remaining 49% of CI at a purchase price based on 6x CI’s EBITDA in 2023.  The Cisneros family preserves a Put Option to cause EVC to acquire the remaining 49% at 6x EBITDA from the preceding calendar year, starting in April 2022.  Cisneros Interactive was founded in 2010 and conducts business through seventeen offices across Latin America and the Caribbean.  CI’s primary business is acting as the exclusive reseller of digital advertising inventory for Facebook, Spotify, and LinkedIn across numerous countries in South America.  Both the Spotify and LinkedIn contracts began in 2020 and therefore Facebook was over 90% of CI’s revenue mix.  CI serves over 2,000 brands and agencies each month but the margin structure is only 5-6%.  Among the responsibilities of CI and now therefore EVC is collections for these advertising sales and consequently the Company’s account receivables will increase substantially and this deserves increased monitoring for any working capital challenges that result from selling digital advertising for Facebook, Spotify, and LinkedIn in less-developed Latin American markets.  CI’s results will consolidate to EVC at the top-line and consequently this acquisition will increase EVC’s revenues substantially and make the digital revenue mix the Company’s largest.  CI will likely generate at least $200M in revenue this year but at a 5.5% margin, the implied EBITDA contribution to EVC will be ~$5.5M and this will flow-through after deducting the 49% minority interest retained by the Cisneros family.  It is possible that the headline top-line growth from this acquisition causes the market to appreciate the growth prospects for the Company as a whole and the digital media segment more specifically.  I am not focused on the optics of the top-line growth that will get reported but instead the attractive platform that EVC’s management has seized upon at a reasonable valuation of 6x EBITDA for driving EBITDA and FCF growth from an adjacent business.  As evidence for the potential growth at CI, employee headcount has grown by 30% in the past six months as the business ramped its hiring to drive the advertising relationships recently contracted with Spotify and LinkedIn.  The acquisition of Cisneros Interactive was nurtured by one of EVC’s Board members over three years.  Although there are many risks that come with any acquisition, I like that the CI sellers are retaining a substantial interest, thereby demonstrating an ongoing expression of confidence to preserve some upside to the growth of the business, and that this acquisition was not dictated by the “winner’s curse” from an auction but a proprietary path of relationship-building with the gradual accumulation of increasing insights to determine strategic and cultural “fit.”  Furthermore, as described below, the Board member who identified this acquisition three years ago and championed the idea is now overseeing all of EVC’s digital businesses including CI.

During November, pursuant to the Cisneros Interactive acquisition, Juan Saldivar was named EVC’s Chief Digital Officer.   Saldivar has been a Board member of the Company since 2015 and his appointment to the new role of Chief Digital Officer serves as additional evidence of the increased importance that the EVC is ascribing to its growing digital business mix.  Among his past experiences, Saldivar led the interactive businesses for Televisa which incidentally is a large Univision investor.  After leaving Televisa, Saldivar founded/led a consulting firm focused on digital transformation.  Based on some primary research, Saldivar has been a critical ingredient to EVC’s expanding digital media businesses and in this active management role that reports to the CEO, he is thought of being the “right person” to drive a cohesive strategy of top-line growth and longer-term profitability.

As described some above, EVC has confronted its set of challenges.  One can see that from the decline to revenue in both TV and radio which declined by ~8% and 18%, respectively, between 2017-2019.  I am not asserting that the TV or the radio businesses will exhibit strong top-line growth nor have I included that in my EBITDA estimates but I do think that these businesses, in aggregate, will deliver a higher margin than is currently anticipated by the market coupled with ongoing attractive FCF generation.  I also believe the Company will deliver strong digital media growth which I think will arouse increased attention for components of “hidden value” within Entravision.  

I have not discussed the potential spectrum value, some of which the Company monetized several years ago, that could serve as an additional catalyst for value creation as that possibility is more likely 3-5 years from now.  However, another component of potential value, which I do not integrate into my 50% upside target is the option that management preserves to monetize its tower portfolio.  Cumulus recently did so at a multiple of 14x and it’s likely that EVC could do so in a very accretive transaction.  From my discussion of this potential avenue with EVC’s CFO, he is quite aware of the opportunity to monetize the towers but it doesn’t appear to be a near-term priority given EVC’s low leverage ratios.      

One Director has asserted his confidence with the investment opportunity through his accumulation of 275,000 shares at an average $2.75 since Q2 of 2019 including his 115,000 shares purchased during May of 2019 at an average $3.09 (roughly where the stock closed at the time of this idea being submitted to VIC).  Insider ownership is ~21% which is inclusive of Walter Ulloa, the Founder/Chairman and CEO, owning ~14.5% of the Company.  Through non-voting shares, Univision owns ~11% of the Company.  The Company suspended its repurchase plan due to COVID-19 during March of last year but had repurchased over $32M of stock at an average $3.77 during the preceding 2.5 years.  

Each of the top six executive officers, other than Saldivar who recently assumed his leadership role but has been on the Board for six years, has worked together at Entravision for at least 15 years.  CFO Christopher Young has been with the Company for twenty years and I think those wanting to conduct more research will find him to be accessible.  It is clear to me that management seeks to be more pro-active to elevate the attractive investment prospects to the market.  This is evidenced by their recent hiring of an IR firm, their attendance at a CITI conference after more than a decade, and getting a second research firm, Singular Research, to pick up coverage.  I envision that Chris will look to attend other conferences to raise the Company’s profile with investors and particularly seek to emphasize the digital business mix.

As with any investment, there are numerous risk considerations and one can review the 2019 10K of risk factors to factor such into one’s analysis but I will highlight some below:

·      The Univision affiliation agreement expires in 2026 but actually at the end of 2021 for Orlando, Tampa, and Washington D.C.  The affiliation status for those markets could be renewed but I have assumed they will not.  Given the size of the Orlando and Tampa markets and their political importance during mid-term and Presidential election years, the loss of their EBITDA contribution could be significant.

·      Univision’s market share has eroded in recent years against Telemundo and the recent change to ownership and management at Univision could cause additional near-term disruption of market share.

·      Univision’s OTT platform PrendeTV is a cord-cutting alternative which could marginalize both retransmission consent revenue (for which historically has been a 60/40 split in Univision’s favor) and advertising revenue.  think this risk is mitigated by the importance of EVC to Univision in representing 25% of their audience which is driven partially from EVC’s local news content that has the #1 or #2 share (regardless of language) in most of its markets.   

·      Numerous (well-documented) challenges to linear TV and radio as audiences cut the cord and pursue digital alternatives.

·      Majority of revenue is driven from advertising which is inherently a cyclical source of revenue.

·      The increasing emphasis towards digital media including the evolving ad tech industry comes with an increasing need to innovate to avoid being marginalized by better solutions.

·      Cisneros Interactive contractual terms provide exclusive status but for terms of 2-3 years.

·      Univision’s 11% equity stake lingers as an overhang although EVC’s management is not concerned given the importance that EVC’s audience represents to Univision.  EVC could change its network affiliation partnership if Univision were to exit its equity position.

·      Trading an average of ~285,000 shares per day (i.e., less than $1M) has the potential to create dislocations to the downside if any large shareholder were to assert a path to exit its equity.  Note that American Century owns over 10M shares (over 35 days volume if they represented all of the 3 month average volume) but they have been accumulating stock every quarter since Q1’19.   

·      Foreign exchange risks.

·      Chairman/CEO holds super-voting shares which, in combination with stockholders affiliated with him, collectively gives him almost 60% of the voting power of the stock and therefore empowers him to elect all the Directors and determine the outcome of most matters.  This is indeed a risk but one that I think is mitigated by the substantial economic alignment associated with Walter’s equity stake.

Catalyst

·      Ongoing FCF generation from core broadcasting businesses that is applied to prudent capital allocation (i.e., a combination of the attractive dividend, tuck-in acquisitions across digital media, repurchase of stock again, and some debt paydown)

·      Radio business returns to double-digit EBITDA margin

·      Programmatic advertising growth that benefits Smadex and is recognized by the equity market as the Smadex business scales and EVC gains visibility for its digital media businesses

·      Partial monetization of Smadex that accelerates market recognition of this “hidden value”

·      Ongoing political advertising strength is evidenced during 2022 mid-term elections

·      Beneficiary of economic recovery that propels advertising growth across EVC’s markets

·      Monetization of non-essential real estate including tower portfolio

·      Pro-active investor relations efforts