Business Description

• Nielsen Holdings NV (NLSN) is an international measurement and analytics company operating globally in its Buy segment and primarily in the U.S. in its Watch segment.
• The Watch segment ($2.0bn revenue, $818mm Adj. EBITDA, 42% margin) is the monopoly provider of TV ratings in U.S. national and top local markets.  NLSN’s impressions data is the currency for buying and selling ads, determining the unit of volume for the negotiated price (CPM) and used for guaranteeing reach and frequency.  NLSN has more recently moved into measuring second (computer) and third (tablet/mobile) screens with its digital measurement products and services.
• The Buy segment ($3.4bn revenue, $686mm Adj. EBITDA, 20% margin) is the largest retail measurement provider based on revenue and global retail coverage footprint.  NLSN receives point-of-sale data from a global network of retailers which it sells to CPG clients in the form of near real-time customizable reports (“Info” represents 76% of Buy revenue).  The secondary monetization method for NLSN’s data is through the provision of consulting services (“Insights” 24% of Buy revenue).
• Both business segments have pricing power based on network effects, high customer switching costs, and sell critically important inputs that comprise a relatively small portion of customer spending (Watch revenues <3% of US TV ad revenues, retail measurement industry revenue <1% of measured CPG categories).
• Significant barriers to entry and benefits of scale have led to limited competition, with a winner-take-all / monopoly in TV Measurement and a duopoly in retail measurement.
• NLSN was taken private by a PE consortium in 2006 (leveraged at nearly 10x EBITDA!) and IPO’d in early 2011.
• Further background presentations on NLSN can be found on the IR site at: http://ir.nielsen.com/GenPage.aspx?IID=4260029&GKP=206936

Thesis

• NLSN is an attractive business with the necessary ingredients to be a compounder.
  • Both Watch and Buy businesses have very high market shares, long contracts, high visibility recurring revenue, and powerful network effects.  In addition, the combination of high customer switching costs and nature of NLSN’s product (critical part of customer’s business but a small relative cost) is reflected in the ability to extract annual price increases.
  • NLSN is a steady grower with potential acceleration on new Watch initiatives (cross-platform ratings products) and a cyclical rebound in Insights and European Info businesses.  The Company generates steady mid-single digit growth in core businesses, with higher revenue growth in emerging markets, Ad Solutions (combination of Watch + Buy data), and digital measurement.
  • The syndicated nature of NLSN’s data (collected once and sold many times) and its critical role in customer operations translates into very high incremental margins in the Watch business.  Buy margins are structurally lower given higher people intensity and the continued investment by management in building out NLSN’s retail measurement capabilities in emerging markets.
• Since the IPO, NLSN has been subject to various sources of uncertainty/overhangs, all of which we believe are overstated and/or receding.
  • Lingering obsolescence threat on TV ratings – NLSN’s sustained growth through decades of technological change and the repeated failure of new entrants into the market highlights the high barriers to entry and natural monopoly characteristics of NLSN’s TV ratings business.
  • Competitive positioning in cross-platform and digital measurement – NLSN should be best positioned in cross-platform given unique position in largest media category (TV ratings) and recent partnerships with online players (e.g., Facebook deal for online user data, Twitter social TV measurement partnership, etc.).
  • Short-term growth slowdown – We do not believe the short-term growth slowdown reflects a fundamental change in NLSN’s competitive positioning, but rather cyclical headwinds primarily in Europe.  Over the long-term, the emerging markets Buy business, cross-platform measurement, and Ad Solutions should driver higher growth.
  • Stagnating Buy margins – Management is reinvesting much of its incremental margin in building out new markets in the developing world.  The return on this investment should be very high on strong demand for NLSN data from global CPG companies looking to tap the emerging middle class in these markets. 
  • Capital deployment – To date, management has primarily been focused on balance sheet deleveraging.  A shift in cash flow deployment from debt paydown to returns to shareholders (dividends and share repurchases) will help drive returns and is underappreciated by the sell-side. 
  • Arbitron – Until it closed on 9/30/13, uncertainty around FTC approval was an overhang on NLSN shares.  Arbitron acquisition makes strategic and financial sense and will be accretive to earnings out of the box.  Additional information on the deal can be found here: http://ir.nielsen.com/Cache/1001178919.PDF?Y=&O=PDF&D=&fid=1001178919&T=&iid=4260029
  • PE overhang – Sponsor ownership (~35% of shares outstanding) and leverage (should end 2013 at ~3.5x net debt/EBITDA, down from 6x in 2010 and approaching 2016 target of 2.75-3.0x).

Valuation

• ~15x 2014 P/E for a high visibility/quality, long-runway mid-teens EPS grower with options on acceleration from capital deployment and growth initiatives appears very reasonable.
  • Given NLSN’s strong market position and its recurring revenue model, we see an asymmetric risk/reward profile with limited downside in terms of both financial performance and valuation.
• Looking forward to 2015, if NLSN can accelerate top-line growth by 200-300bps, expand margins consistent with guidance, and deploy capital for share repurchases, earnings should approach $3.
  • We would highlight that this represents the core earnings power of the business.  Our analysis layers on top of this a number of potential upside options that reflect potential value-creating alternatives for the significant cash flow that NLSN will generate over the coming years (e.g., more aggressive share repurchases, accretive M&A, recap and special dividend).
• Resolution of the aforementioned uncertainties in combination with re-accelerating growth should also drive multiple expansion to levels more consistent with the underlying business quality, implying a NLSN share price closer to $50 (+38% from current levels).
  • Other companies that have similar “monopolistic” characteristics in their respective markets (e.g., VRSK, IHS) trade at forward earnings multiples well north of NLSN (high teens/low twenties).  While NLSN’s higher leverage, slower growth, and some competition in the Buy segment likely warrant a discount, we believe the current spread is too wide.

Risks

• Disruption of TV ratings – The “currency” nature of NLSN’s TV ratings, as well as a high degree of familiarity and comfort on the part of media buyers suggests that NLSN’s TV ratings will remain the dominant form of TV measurement going forward.
• Buy margin declines – We expect investments in emerging market expansion have and will keep margins flat, but that this is the appropriate strategy and will yield high returns down the road.
• Sluggish growth continues – Growth is likely to remain sluggish for the remainder of 2013.  We expect to see some acceleration later in 2014 from the aforementioned growth areas (emerging markets Buy, cross-platform measurement, Ad Solutions), with potential upside from Arbitron synergies and cyclical rebound in Insights business (which is lapping increasingly easy comps).

Catalyst

• Recent Arbitron closing
• More aggressive capital allocation strategy
• Accelerating growth on traction in cross-platform and/or Ad Solutions

Disclaimer: We and our affiliates are long NLSN.  We may buy or sell shares without notification. This is not a recommendation to buy or sell shares.