Description

Note: EBIT at the top is actually EBITDA.

Hemisphere Media (HMTV) is a fast growing Spanish-language media company whose operations include five U.S. based cable networks; WAPA (a broadcast network in Puerto Rico); and two Spanish language international cable networks.  HMTV is particularly well positioned in the dynamic media market as it is levered to the rapidly growing Hispanic population in the U.S. as well as significant subscriber, advertising, and retransmission consent revenue growth driving accelerating earnings across all business lines.  In addition, as the owner to the digital rights of almost every Spanish-language film to come out in the past several years, HMTV is essentially a gatekeeper to any Hispanic Over-the-Top offering, and will reap the economics whenever a Hispanic OTT offering becomes more mainstream (whether owned by HMTV and/or others).  HMTV trades at a very reasonable 8X 2016 EBITDA, while growing EBITDA organically in the low double digits-mid teens over the coming years.  There are also numerous inorganic opportunities with HMTV a likely acquirer of other Spanish-language media assets which will drive further earnings acceleration.  Finally, I believe there are some technical factors at play with HMTV’s warrants and potentially with the Company’s sponsor which could drive further upside beyond fundamental reasons.

U.S. Cable Networks

HMTV owns five cable networks in the U.S.: Cinelatino (Spanish-language movie network), WAPA America (airs content primarily shown on WAPA in Puerto Rico), Pasiones (Telenovelas), CentroAmerica TV (Central American news, entertainment, and sports), and Television Dominicana (Dominican Republic news, entertainment, and sports).  Pasiones, CentroAmerica TV, and TV Dominicana were acquired by HMTV in April 2014.

Fundamentally, I am not bullish on the U.S. Cable network industry, but HMTV’s assets are much better positioned than fully-distributed U.S. networks (e.g., Viacom or Scripps).  I will try and lay out the reasons below.

• Skinny Bundles/Cord shaving helps HMTV and HMTV is growing subscribers domestically.  Currently, HMTV’s networks are generally only available on Hispanic tiers that cable providers offer (the only area where this is not the case is in certain Florida markets where WAPA is on basic cable because of the large number of Puerto Ricans living there).  Currently, “Hispanic-tier” subscribers are around 5mm homes compared to 12.5mm Hispanic pay-TV households and almost 15mm total Hispanic households.  One reason for this discrepancy is because most cable providers have historically forced any household wishing to subscribe to the Hispanic tier to get basic cable and treating the Hispanic tier as premium, significantly driving up the costs to get most Spanish-language cable networks.  In addition, cable providers have not historically marketed the Hispanic-tier very well (note that DISH, a terrific marketer to Hispanics, way over-indexes, capturing about 1/3 of all Hispanic-tier subscribers due to effective marketing and pricing).  As more customized and a-la-carte offerings proliferate within the TV industry, the costs to get Spanish-language cable networks will decline giving a much higher percentage of the population access to HMTV’s networks.  Importantly, even without better alternatives in the market today, HMTV’s domestic subs grew 8% during the first nine months of 2015 from higher subscriptions to Hispanic tiers and better penetration for the Company’s networks. 

• The Hispanic Market is an area of secular growth in households and media spend. In the U.S., Hispanics are the largest minority group and growing rapidly.  From 2000-2013, U.S. Hispanic growth contributed half of the total U.S. population growth and by 2020, Hispanics are estimated to account for approximately 20% of the entire U.S. (versus <10% in 1990).  Despite this growth, and compared to over 10% of U.S. buying power, Hispanics only represent 5% of total media spend.  SNL Kagan predicts that Hispanic-targeted cable TV advertising revenue will grow at an 11% CAGR from 2014-2017 as this gap inevitably narrows.   In addition, as the Hispanic population grows, more Hispanic households will be formed, more households will subscribe to TV and more households will subscribe to the Hispanic-tier.  So there will be subscriber growth even for “fully distributed” Hispanic-tier networks.

• Cinelatino Position and Advertising Opportunity.  Cinelatino is a dominant distributer of Spanish-language films in the U.S.  It is, essentially, the only U.S. buyer of Spanish-language films and has acquired virtually all rights historically (digital and linear) to every Spanish-language film (that Cinelatino wanted) giving them a current library of over 600 Spanish-language films.  Because most Spanish-language films do not get a theatrical release, Cinelatino can air the movies during the theatrical window (unlike HBO or Showtime).  Given its dominant position, Cinelatino is the second highest rated Spanish-language cable network (behind Discovery en Español,).  This year, Cinelatino announced that it had converted to an advertising-supported model with limited commercial breaks (about 1/3 of a normal ad-load).  I estimate that Discovery en Español generates over $30mm in advertising revenue, and as Cinelatino ramps up its advertising inventory, there is a $10mm+ opportunity for very high margin advertising revenue at Cinelatino (Note that HMTV’s 2015 EBITDA is approximately $60mm and has essentially no advertising revenue from Cinelatino in this number, so the conversion of Cinelatino will be very meaningful to HMTV).

• OTT upside.  As mentioned above, Cinelatino has digital rights to virtually all films in its library, yet revenue from the exploitation of these rights has not occurred as HMTV has resisted taking money from the usual OTT providers.  I believe over time, HMTV will monetize these rights via a Hispanic OTT offering in concert with other Hispanic media providers or through significantly higher fees from MVPDs getting VOD rights.  In any case, this is a very large potential source of upside that is completely untapped.  As CEO Alan Sokol said recently at a conference (emphasis added is mine): “But it's front of mind for us. We have resisted the fast dollars of licensing to the Netflixs and Hulus of the world. We have been -- all those suspects have approached us about licensing a product because in the areas that we participate in, we really are the gatekeepers in those spaces, but I think we've learned from what some of our general market -- some of the general networks have done or producers have done, and we've resisted that temptation. We don't see any reason to empower Netflix and Hulu and others to compete with us in our space. I would rather compete with them in their space. And so we've maintained control of our product, and when we do proceed into the SVOD or over-the-top space, I think it will be as an extension of what we're doing now and as an owner as opposed to just a pure licensor”

• WAPA America Advertising Upside.  There are a lot of Puerto Ricans living in the NYC area (Almost 1mm, compared to the ~3.5mm that live in Puerto Rico).  It is a no-brainer to have WAPA on basic cable in NYC, where MVPDs can pay the same dollars (essentially keeping sub fees paid to WAPA flat by lowering the per subscriber rate, but increasing the subscribers to get the channel), but WAPA will have the ability to sell advertising to a much larger population (which would also benefit MVPDs as they get some ad inventory).  I believe that because of the acquisitions of Cablevision and Time Warner, this has not been front of mind for these providers, but I also believe it is only a matter of time before WAPA is offered on the basic tier in NYC.  This could increase WAPA America’s subscriber base by 60% (even while keeping affiliate fees flat), significantly expanding the advertising base of the network.  In addition, before a TV network is Nielson rated, the advertising inventory is lower quality (typically direct response or similar advertisements).  Most national ad-buyers won’t advertise without buying the Nielson currency.  In 2015, WAPA America became Nielson rated and as a result has been able to start selling much higher quality advertisements (at significantly higher prices) and the ratings have been higher than previously thought (WAPA America is the #1 Spanish-language cable network from 5-7PM, Monday-Friday).  At this year’s upfront, I expect significantly more dollars to be allocated to Cinelatino and WAPA America as a result of these shifts.

• Acquired networks still have some holes in distribution.  When Pasiones, CentroAmerica TV, and TV Dominicana were purchased by HMTV, they were not as fully distributed on certain MVPD’s Hispanic tiers as WAPA America and Cinelatino.   We believe there is (in aggregate) almost 4mm additional subscribers for these three networks as HMTV closes the penetration gap during contract renewals, representing >$10mm of affiliate fee and advertising upside (~17% of 2015 EBITDA).

Puerto Rico Broadcast

HMTV owns WAPA, the highest rated Puerto Rican broadcast network.  I know that “Puerto Rico” and “Broadcast Network” are not typically associated with growth, but I will try and expand a little bit on why I am bullish on this asset.  The positive retransmission consent dynamics that exist in the U.S. for networks like CBS and FOX exist, although to a much larger extent, in Puerto Rico.  WAPA is the highest rated network in Puerto Rico and captures approximately 30% of the television ratings, on average, every night.   This is higher than the ratings for CBS, NBC, FOX, and ABC combined.  It’s hard to overstate how important WAPA is to the Puerto Rican broadcast ecosystem.  Importantly, Puerto Rico is i) a market that has multiple video providers (DirecTV, DISH, Telcos, Liberty Global), so competition exists for subscribers; ii) the cable bill is similar in Puerto Rico to the U.S. as networks like ESPN are several dollars a month in Puerto Rico as networks get Puerto Rico with all of their deals with U.S. MVPDs; and iii) TV penetration is only at ~50%, so there is no huge cord cutting/fraying happening.  WAPA just started negotiating for retransmission consent revenue a couple of years back, and we believe that the network is still getting <$1/subscriber on average.

As WAPA continues to renegotiate its retransmission consent agreements (WAPA renegotiated one major deal at the end of 2014 and I believe the other major deals are coming up at the end of 2015 and 2016), the network will get significantly higher rates (WAPA could with a very straight face ask for $10/month per subscriber given the dominance in its viewership).  Each incremental dollar in retransmission consent revenue is approximately $8-9mm in EBITDA (~13-15% of 2015 EBITDA). 

Finally, despite the terrible Puerto Rican economy, I expect ad revenue at WAPA to grow in 2015 despite a total advertising market that is in decline.  I view this result as a bullish indicator for continued advertising revenue growth in 2016 and beyond despite a bad local economy.  Importantly, 2016 is a political year in Puerto Rico, and given the debt restructuring difficulties, I am expecting a robust primary and general election leading to record political revenue on WAPA.  

International Cable Networks

In addition to operating in the U.S., Cinelatino and Pasiones are also distributed throughout Mexico, Central and South America.  The growth dynamics for these networks are similar to other LatAm cable networks--as television penetration increases, there is significant subscriber and advertising growth.  SNL Kagan expects Latin American Pay-TV subscribers to increase from 45 million in 2014 to 56 million in 2018.  However, HMTV also has a couple of significant holes in its distribution, which could be quite meaningful on its own should it get carriage.  For example, in Mexico, on the DISH platform, Cinelatino is the third highest-rated cable network.  However, due to some legacy competitive concerns with Cinelatino’s previous owners, Televisa (the dominant Mexican pay-tv provider with over 60% share) has previously not carried Cinelatino.  Now that Cinelatino has been under new ownership for a couple of years, I believe the prospect of HMTV getting carriage for Cinelatino (and Pasiones) over the next 12 months is very high.  Over time, I expect Televisa carriage for these two networks to be worth more than $10mm in EBITDA annually (~17% of 2015 EBITDA).  In addition, there are other holes in Argentina, Peru, Chile, and other Latin American countries which will lead to robust subscriber growth in excess of Pay-TV household formation (subscriber growth for HMTV’s international networks was over 10% during the first nine months of 2015).

M&A optionality

HMTV went public with the goal of acquiring Spanish-language television and production assets that had been mismanaged or that could strategically add to the Company’s portfolio.  The first acquisition (Pasiones, CentroAmerica TV, and TV Dominicana) was completed in early 2014 for a bit more than $100mm.  Currently, HMTV has $170mm of cash on its balance sheet, which I estimate will be used to acquire $20+mm in EBITDA over the next 12 months.  As the CEO said this month:

“Well, we're sitting on a significant amount of cash, and we intend to deploy that cash in acquisitions. We think we're a natural aggregator in our space. We look at a lot of deals, and we've passed on a lot of deals. We're not going to do a deal just to do a deal. That said, I think, there are some really interesting opportunities out there, and I feel very confident that we'll get a deal done, one or more deals done in the near term, which we would -- which would -- I think would be accretive and positive and strategic for us.”

Warrants/InterMedia

Part of the technical reasons that an investment in HMTV is interesting lie in the warrant structure and InterMedia’s ownership stake.  When HMTV went public, it did so as a SPAC and issued warrants to the initial SPAC sponsors.  Currently, there are 14.7mm warrants which are exercisable into 7.3mm shares of HMTV (2 warrants per 1 share; strike price for 2 warrants is $12/share).  InterMedia and other founding shareholders own 4.7mm of these warrants and the other 10mm warrants trade freely.    The warrants expire in April 2018 and the 10mm warrants that trade freely are callable by the company if the stock price hits $18/share for a 20 day period. 

Currently, there are approximately 1.4mm shares sold short (>40 days to cover) and I believe that the vast majority of the short interest in the stock is from Warrant holders looking to hedge their position.  As the stock price rises to $18 or as we get closer to expiry, I believe a significant amount of stock will need to be covered regardless of price.

InerMedia, the very well-respected media PE firm, is the controlling shareholder in HMTV and initially entered this business by purchasing WAPA from LIN Media in 2006.  InterMedia has not raised a new fund and thus I believe the time to harvest investments from InterMedia Partners VII (the fund that owns HMTV) is coming close to an end.   Basically, I think that InterMedia is incentivized to maximize the value of HMTV stock in the coming 1-2 years which may include a sale, merger, or other value maximizing transactions.

Valuation:

HMTV currently trades at 8X 2016 EBITDA, which is much too low a multiple for a company growing EBITDA organically in the double digits with many opportunities for significant upside, both organically and inorganically.  If HMTV is able to utilize its balance sheet and execute on M&A, I expect EBITDA in 2017 to be well north of $100mm and growing at a still robust rate leading to a stock price into the $20s.

DISCLAIMER:
Nothing contained in this analysis shall be deemed to constitute investment advice or a recommendation to purchase, sell or otherwise transact in any security.  This analysis contains information from sources the author believes to be reliable, but the author cannot guarantee the accuracy of any such information.  The author undertakes no obligation to update or revise this analysis, whether as a result of new information, future events or otherwise.  The author owns shares of the company, and may buy additional shares or sell shares at any time.

Catalyst

·       OTT offering

·       New retrans contracts in Puerto Rico

·       Televisa Carriage for Cinelatino and Pasiones

·       Cinelatino converting to advertising supported network

·       Advertising growth for WAPA America post Nielson ratings

·       Full distribution on Hispanic tiers the for acquired networks

·       WAPA moving to basic cable in NYC

·       Univision IPO

·       Further consolidation

·       Warrants expiring/being called

·       InterMedia transaction