Description

Note: it is not super liquid, trading appr. 60K shares per day.

Key Points:

• Growing revenue and subscriber base with positive secular trends and very high incremental margins.

• Valuable assets with dominant market positons.

• Ability to invest along-side a great management team and a who’s who of media private equity investors and Hispanic media heavyweights.

• Note: Searchlight has invested in one of HMTV’s largest distributors in Puerto Rico (Liberty of PR) since 2011.  Given that familiarity, its investment is a strong vote of confidence.

• Insiders have roughly $24mm of shares that expire in April 2018 if the stock does not hit $15 per share.

• Low 0.7x net leverage and the ability to lever up to 5x for accretive M&A.  Management has a track record of acquiring and improving underperforming assets.

• Optionality for significant upside from JV’s.  A new OTT service could be worth $4+ per share.  A new channel in Columbia could be worth $2+ per share.   And, there is optionality for additional attractive JVs.

• Eventual take-out target because the size is digestible and private equity will be looking for an exit.

Description:

I would also refer you to two prior write-ups.  HMTV is a Spanish language television company with the dominant broadcast TV network in Puerto Rico (PR), five cable channels in the US, and two cable channels in Latin America.  It also has new JVs in a Columbian broadcaster and in an OTT movie service.

Revenue mix (estimated):

o   47% cable affiliate fees for its five US and two international cable channels.  This is growing mid to high single digits due growth in subscribers and fees/sub.

o   44% advertising which is should be roughly flat overall (declines in PR and growth in the US).

o   10% retrans revenue (from cable operators in PR for the rights to rebroadcast WAPA PR).  This is growing high teens.

o   Blended revenue should grow ~5%.

Puerto Rican Broadcast Network: WAPA

o   43% of revenue: 34% from advertising and 10% from retrans (estimated).

o   WAPA (Channel 4) has been the top ranked network each year since 2009. Current management took it from #3 in two years.  It currently has 33% share of the prime time audience in PR.  Its primetime ratings are greater than the top four networks in the US combined.

o   WAPA is not affiliated with a major network, so it does not have to share its ad inventory or its retrans fees like typical broadcasters.  It is responsible for its own content, producing over 70 hours per week of news and entertainment programming.

o   For context, there are 1.3mm TV households in PR (3.5mm population) which is comparable to the #20 US TV market (similar to Sacramento, St Louis or Charlotte).  It is the third largest US Hispanic market behind LA and NY.

o   I think the ~34% of revenue from advertising in PR will decline at a low rate in perpetuity.   Management is guiding to a mid-single digit decline in ad revenue in 2017.  PR has serious macros issues including a long term population decline.  It has defaulted on its debt and is facing ongoing fiscal austerity.  That said, while ad revenue is declining, overall PR revenue is growing because of the rapid growth in retrans.

Cable Networks

o   57% of revenue: 47% from affiliate fees and 10% from advertising (estimated).

o   HMTV’s cable networks are primarily distributed on Hispanic programming packages which are generally sold as a premium tier and consist of 20+ channels.

o   The five networks in order of size are list below:

Cinelatino:

o   ~29% of revenue (estimated).

o   4.6mm US subs growing ~3% p.a; 15.4mm Latin American subs which grew 30% in 2016

o   #1-Nielsen rated U.S. Hispanic cable movie network; #2-Nielsen rated Spanish-language cable television network in the U.S. overall based on “content rating” (i.e. % of subscribers that watch the channel).  It is distributed by most cable/satellite operators in the US.

o   It is the leading buyer of TV rights for Spanish-language movies from Mexico and other Latam countries.  It has exclusive rights to over 600 titles, including the vast majority of highest-grossing Spanish-language films released in last 5 years. Produces 5 – 10 original movies per year.

o   It migrated from being commercial free to selling ads in July 2015.

o   It is distributed to only 30% of all pay-TV subs in Latin America excluding Brazil (which is not a Spanish speaking country) which represents an additional growth opportunity.

WAPA America

o   ~13% of revenue (estimated); 5.3mm US subs growing ~1% p.a.

o   Distributed by all major operators on Hispanic programming packages nationally, and on basic packages in Orlando/Tampa.  #1 rated Spanish-language cable network M-F 5-7pm.

o   Targets Puerto Ricans in the US and “Caribbean Hispanics” more broadly which is the 2nd largest Hispanic population in the US at 18% of Hispanics.

o   Its programming is mostly repurposed from WAPA TV and so is essentially costless.

o   WAPA America became Nielsen rated in August 2014 and is increasingly attracting national advertisers.

Pasiones

o   ~8% of revenue (estimated); 4.6mm US subs growing ~5% p.a. and 13.5mm subs in Latin America which grew 30% in 2016.

o   Features the top rated novelas from around the world (Latam, Turkry, Korea) which are the most popular Hispanic programming genre.

o   Currently distributed to only 25% of all pay-TV subs in Latin America excluding Brazil.

Centroamerica

o   ~4% of revenue; 4.1mm US subs growing ~2-3% p.a.

o   Leading network targeting 6mm Central Americans living in the US.  This is the fastest growing segment of the US Hispanic population.

Television Dominicana

o   ~3% of revenue; 3.3mm US subs growing ~9% p.a.

o   Targets 2.4mm Dominicans in the US.

Corporate Timeline:

• The CEO and CFO were partners at Intermedia, the well regarded media private equity firm.

• Intermedia Parners VII acquired WAPA in 2007 from LIN Television and current management made it #1 in two years.

• Came public when InterMedia sold WAPA and its 47.5% interest in Cinelatino to a SPAC in early 2013.  The SPAC was sponsored by Gabriel Brener who ran a family investment firm with diversified investments in the US/Mexico.

• In March 2013 HMTV acquired three cable networks for $102mm in cash: Pasiones, Centroamerica TV and TV Dominicana.

• In October 2016 InterMedia offered liquidity options to its LPs for its ~60% stake in HMTV including a distribution of shares, or the option to sell shares to an entity funded by the PE firm Searchlight.  Searchlight’s offer price was $9.75 vs the share price of $12.84 at the time, so a healthy 24% discount.  Searchlight acquired a 40% stake.

• The Searchlight vehicle is called Gato Investments and is controlled by HMTV’s Chairman Peter Kern, who is Managing Partner of InterMedia.  Peter Kern has 75% voting control through the super-voting B shares held by Searchlight.

Thesis Points:

Multiple Growth Drivers

o   Growing Hispanic Cable Market

o   Growth in Affiliate Fee Revenue

o   WAPA Retrans Growth

o   Advertising Growth

o   Latam Growth

(each of these is described in more detail below)

Growing Hispanic Cable Market

o   U.S. Hispanics are the largest minority group (18% of population) and growing rapidly with ~2.4% p.a. growth in recent years, and contributing more than half of total population growth since 2000.  The population is expected to grow 24% from 57mm to 70mm between 2015 and 2025.

o   Note: Most of the Hispanic population is Mexican while 3/5 of HMTV’s networks target Caribean Hispanics which are 18% of the population.

o   The number of Hispanic Pay TV subscribers (12.2mm) is expected to grow driven by growth in Hispanic households and increased penetration of Pay TV among Hispanic households.  In addition, the number of Hispanic Package subs (4.9mm) should grow faster than overall Hispanic Pay TV subs.

o   Hispanics enjoy movies. They are 18% of the population, but 23% of movie ticket sales.

o   Hispanics prefer TV in Spanish: Spanish-dominant or “English-equal” bilingual homes are 64% of Hispanic households.  Spanish-dominant households view 56% of TV in Spanish.  Bilingual homes view 36% of TV in Spanish.

Growing Affiliate Fee Revenue

o   While cable subs are declining -0.5% to -1.0% across the industry due to cord cutting, subs on HMTV’s cable networks are growing mid-single digits due to growth in Spanish-language packages, and due to increased penetration of HTMV’s networks on these packages.  Note: Charter’s acquisition of Time Warner is a positive because Charter has been more aggressive pushing Spanish-language packages and is expected to improve TW which is located in the key Hispanic markets of NY and LA.

o   There are an estimated 4.9mm Hispanic programming package subs in the US vs HMTV’s networks have between 3.2-4.6mm subs which implies some room to close the gap and achieve equal levels of carriage.

o   HMTV is insulated from the cord cutting trend because most of its subs have already had to subscribe to a premium channel tier to get expanded Spanish-language programming.  

o   The trend toward skinny bundles should expand distribution by making it cheaper to access Spanish channels versus paying for a premium package on top of basic cable.

WAPA Retrans

o   Retrans (contractual payments from PR cable providers for re-broadcasting the WAPA station) is 9% of revenue and is growing ~20% per year.  This is a 100% margin revenue stream.

o   HMTV’s current retrans rates are believed to be ~$1.50/sub vs the top US networks US are now getting $2-2.50.  HMTV believes its can exceed US levels because of its relatively dominant position.

o   CEO in December 2016: “Our ratings in Puerto Rico are the equivalent of ABC, CBS, NBC and Fox combined in the U.S. So it's really an unprecedented situation and a unique situation. And if those guys are each getting $1.50 or $2, then we should be getting $6 or $8. We're not getting anywhere near that, nor do we anticipate getting that anywhere in the near future, but I think just it's indicative of the kind of upside that I think we have.”

o   WAPA receives retrans from all distributors.  The top cable providers are Liberty Cablevision (39% share), DirecTV (32%) and DISH (28%).  Retrans deals are typically for three years and are believed to be staggered.  (Note: Searchlight has been a 40% owner of Liberty in PR since 2011.)

US Advertising Growth

o   HMTV is growing advertising high single digits in the US.  Cinelatino, the leading Spanish-language movie channel, migrated from being commercial free to selling ads in July 2015.  In addition WAPA America became Nielsen rated in August 2014 and is increasingly attracting advertisers.

o   Hispanics are an estimated 10% of US buying power but only 7% of media spend.  SNL Kagan predicts that Hispanic-targeted cable TV advertising revenue will grow at an 11% CAGR from 2016-2019 as this gap narrows.  

Latin America Growth

o   Industry-wide pay TV households in Latam are growing 6% CAGR with an estimated penetration of 55% of TV households, implying a long runway for growth.  Penetration of HMTV's networks is low and growing rapidly.  Cinelatino is distributed to only 30% of all pay-TV subs in Latin America ex-Brazil and grew subs 30% in 2016.  Pasiones is currently distributed to only 25% of all pay-TV subs in Latin America excluding Brazil and grew subs 30% in 2016.

o   The biggest expansion opportunity is in Mexico where Cinelatino and Pasiones have 2.8mm and 0.1mm subs, respectively, out of 1a market of 7.8mm.

New Ventures

o   HMTV is pursing two new JVs which could be valuable.

OTT Movie Service called “PantaYA”

o   This August, HMTV launched a Spanish language OTT service in conjunction with Lionsgate and Univision.  It will combine HMTV’s movie library with Lionsgate’s, and Univision will handle marketing and distribution.  It will be the first OTT Spanish-language movie service in the US.

o   PantaYA is targeting the 7mm Hispanic Pay-TV subs who don’t subscribe to a Spanish language package with an attractive $5.99/month price.

o   While not disclosed, my working assumption is that the ownership split is 50/50 between HMTV and Lionsgate.  HMTV also gets value from licensing content to the JV.

o   Initial feedback is that the launch has been very strong with better than expected subscribers.   While it is tough to handicap the value precisely, it is easy to play with some assumptions and see big upside.  If you assume 1mm subs at $5.99/mo, that’s $72mm of revenue.  Assume 30% EBITDA margins and 50% ownership, and that’s $11mm of EBITDA. Further, assume HMTV gets 40c/sub of license fees for its content (similar to Cinelatino’s fee with the cable networks), and that’s another $4mm of EBITDA (using a 90% margin).   That’s $15mm of EBITDA.  Using 12x, that’s $4 per share of incremental value.  There is upside from higher subscriber numbers.

Canal Uno in Columbia

o   In November 2016 HMTV bought a 40% interest in the third national broadcast channel in Columbia, Canal Uno, which has only 2% share.  It began operating in May 2017.

o   It is an attractive opportunity for HMTV to replicate its success growing WAPA in PR.  Columbia has only two main national broadcast channels which is unusually low, and it is the #2 advertising market in Spanish-speaking South America.

o   To size the potential opportunity, the market is $400mm.  Assume Canal Uno gets a modest 15% share.  That’s $60mm of revenue and $18mm of EBITDA at a 30% margin.  HTMV owns 40%, so $7mm EBITDA.  At 12x it could be worth $2 per share.  There is upside from a modest 15% market share estimate.

M&A Optionality

o   I believe most of management’s focus is on M&A, and it is a big source of upside for HMTV.

o   Given its private equity background, HMTV has always had a strategy of expanding by acquisition.  Its focus is on underperforming assets that it can improve.  Target areas include Latam broadcast/cable networks, US Spanish-language cable networks, production companies, content libraries and digital assets.

o   CEO at a conference in Dec-16: “And when we bought WAPA TV in Puerto Rico, it was the #3, traditional #3 TV station… We had a clear strategy, within 2 years, we had made it #1… I think we are confident in our ability to grow and improve the assets that we acquire… We're only interested where we can go and actually add value… We like Latin America a lot…. we believe there are many assets that are underperforming… And we think there are opportunities to go in and acquire those assets and make them better and perform better.”

o   HMTV has $156mm of cash which is waiting to deploy for M&A.  To hypothetically size the the value creation opportunity, if HMTV levered up to a reasonable 3.0x net debt pro forma and paid 6x synergized/optimized EBITDA, a deal could create $4 per share of value (assuming HMTV trades at 9x EBITDA).

Strong Management/Shareholder Base

o   Both the CEO and CFO of HMTV were partners at InterMedia.

o   The Managing Partner of InterMedia, Peter Kern, is HMTV’s Chairman.

o   The PE firm Searchlight (founded by a partner from KKR and a partner from Apollo) bought a 40% stake in October 2016 with a 5 year agreement not to sell.  Interestingly, Searchlight has also been the 40% owner of largest cable operator in PR, Liberty Cablevision, since 2011.  Searchlight’s investment is a strong vote of confidence given its involvement as a major HMTV distributor long prior its investment.  It has two board seats.

o   The CEO of a Mexican media conglomerate, and the former owner of Cinelatino, owns 15% and is on the board.

o   The former CEO of Telemundo/current chairman of Pantelion Films (the Lionsgate/Televisa JV which is part of the OTT JV) owns 4% and is the Vice Chairman of the board.

Clock Ticking on Expiring Shares/Warrants

o   As part of the SPAC transaction, HMTV has warrants for 6.1mm shares with a strike price of $12.00 that expire in April 2018.  In addition, there are 1.6mm shares subject to forfeiture if the closing price does not exceed $15.00 for any 20 day period within a 30 day period by April 4, 2018.  These shares would be worth $24mm at $15.00 per share, I believe the majority of these shares are held by Searchlight, InterMedia and board members.

o   I think it is a safe bet that management and the board are focused on getting the stock over $15.00 by next April.

Valuation

o   HMTV trades at 8x 2018 EBITDA vs the broad peer group of media companies and broadcasters at 9x.  FCF yield is 6% with net debt of only 0.7x.

o   Built-in margin improvement:  HMTV’s 46% EBITDA margin should increase at least 100bps per year as a result of favorable margin mix shift because: 1) Retrans revenue is nearly all incremental margin.  2) The growing cable network business is higher margin than the declining PR advertising revenue.  For example, Scripts and Discovery have 50% and 58% EBITDA margins, respectively, in their US businesses vs broadcasters have a low 30% margins.

o   Upside: With EBITDA growing high single digits and potential for multiple expansion, I think the stock can get to $18 in a couple of years just from the base business.   Add to that, say, $6 of value for the JVs, and optionality for value creation from M&A and I think you have a stock in the mid to high $20’s for a double.            

This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.

Catalyst

Organic growth, accretive M&A, success of JV investments, and eventual take-out.