Description

SBSA write up Oct 3, 2016

We believe that the impending result of the one-time FCC Spectrum broadcaster auction could make SBSA a 5X return from today’s price of ~$4.00/share.

Spanish Broadcasting System, Inc. (SBSA) operates as a Spanish-language media and entertainment company in the United States. The Alarcon family owns the company and holds on to the majority of voting rights (approximately 83%) – they have deep roots in Spanish-language broadcasting since 1950. It operates in two segments, Radio and Television with Radio being the predominant division with revenues of 133mm vs 13mm in 2015, respectively; the radio stations serve markets representing approximately 35% of the U.S. Hispanic population, and their television operations serve markets representing over 3.5 million Hispanic households.

The company produces and distributes Spanish-language content, including radio programs, television shows, and music and live entertainment. It owns and operates 20 radio stations in the Los Angeles, New York, Puerto Rico, Chicago, Miami, and San Francisco markets; AIRE radio networks (launched in 2014) with over 103 affiliate radio stations; and 3 television stations under the MegaTV brand, as well as has various MegaTV broadcasting outlets under affiliation or programming agreements. The company also produces live concerts and events; and owns bilingual Websites, including LaMusica.com, Mega.tv, and various station Websites that provide content related to Latin music, entertainment, news, and culture, as well as operates the LaMusica mobile app. Its radio station programming formats include Spanish Tropical, Regional Mexican, Spanish Adult Contemporary, Top 40, and Latin Rhythmic; and television programs range from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews, and personality-based shows. The company was founded in 1983 and is based in Miami, Florida.

To highlight the strength of their Hispanic presence, SBSA operates 3 of the top 6 Spanish-language radio stations in the U.S; one of these stations is WSKQ-FM in NYC which is one of the top Spanish-language radio stations in the US based on average # of listeners per quarter hour (delivered highest listenership among all Spanish-language radio stations in the U.S. according to the 2015 Hispanic Fact Pact). Furthermore, after only two years their AIRE nationally syndicated show’s DJ has the strongest following of any Spanish language DJ in the U.S. to date with over 5 million followers. Also, their AIRE radio networks already service all of the top 30 Hispanic markets, cover 90% of the coveted U.S. Hispanic market, and reach over 11.0 million listeners an average week. SBSA leverages this brand strength, and their relationships with celebrities, to draw audiences to their live events and shows.

Our thesis is simple:

1.       The core radio business is solid

2.       The balance sheet looks ugly (11x debt/EBITDA)

3.       The cash brought in from the upcoming FCC auction will pay off much of the debt and partially exit the money losing smaller TV business

1)      The Core business is solid

As you can see from the data – the radio business has been growing steadily with minimal capex.  We are not excited about TV businesses in general given the threat of OTT (over the top).

As explained before, SBSA has a dominant position in the growing Hispanic markets; I would like to refer readers to nauset323’s great writeup of SBSA in 2007 as it explains the core business much more than I will here.

Hispanic population, buying power, and advertising spending have all increased dramatically in the U.S. since 200 with all signs pointing to continued growth over the next few decades. 31% of the U.S. population is expected to be Hispanic by 2060 (currently 18%) and total Hispanic buying power is expected to be 1.7 trillion by 2020 (currently 1.3 trillion). Furthermore, with Hispanics playing a critical role in this coming Presidential election, and others going forward, the company stands to benefit greatly from increased advertising spend by both parties to gain votes (currently $9.5billion a year is spent on Spanish language media advertising).

2) and 3)  The balance sheet is ugly and proceeds from an upcoming auction will be used to pay down the debt and partially exit the unprofitable television business

FCC Auction will bring in $100-200mm in our estimation:

With the use of wireless devices growing substantially, the FCC is conducting an auction to free up valuable spectrum for use by consumers. First the FCC will acquire spectrum from licensees of public TV stations in the “reverse auction” where, with each subsequent round, stations will be offered progressively lower payments. Bidding will end once the FCC reaches their spectrum clearance target in each particular market. After, there will be a forward auction in which the FCC will sell the acquired spectrum to wireless providers who will then repackage it for consumer use.

The following is a great article explaining the auction process - http://current.org/2015/12/a-guide-to-the-fcc-spectrum-auction/

Greenhill report on FCC auction:

http://wireless.fcc.gov/incentiveauctions/learn-program/docs/ia-opportunities-book.pdf

This is a private auction so the details won’t be known until the end of the year but the opening bids, which serve as an upper bound, are published; expect major haircuts from these opening bid prices.

 https://apps.fcc.gov/edocs_public/attachmatch/DA-15-1191A2.pdf 

In January, management exercised a clever swap to trade 3 radio stations in Puerto Rico for TV stations that could be auctioned off:

https://globenewswire.com/news-release/2015/12/30/798769/0/en/Spanish-Broadcasting-Announces-FCC-Approval-to-Exchange-Stations-in-Puerto-Rico.html

SBSA is taking part in FCC television spectrum incentive auction with the following stations:

·         Miami television station, WSBS-CD – Channel 50

·         Houston television station, KTBU – Channel 42

·         3 full power television stations in Puerto Rico, WTCV-DT - Channel 32, WVEO-DT - Channel 17 and WVOZ-DT - Channel 47

Based on opening bids, the following is the total upper bound on the value SBSA could receive from the auction. Please take this number with a grain of salt; it is extremely unlikely that it will receive anything close to this.

KTBU: $275mm to go off air

WSBS: $275mm to go off air

P.R.: $457mm (WTCV: $200mm; WVEO: $132mm, $125mm)

 = $1,007mm in total upper bound on the value of all their TV stations

In summary, SBSA management is intelligently auctioning off their television assets and using proceeds to pay down/ re finance the debt while maintaining their valuable radio assets. Because of the $260mm+ in NOLs the company will not have to pax taxes on the proceeds of the auction.

The following is our valuation model for SBSA.

Valuation Model:

Cash:                                                                     ($16mm)

12.5% Senior Secured Notes                       $275mm

10.75% Series B Preferred Stock                                $151mm

Comps trade at 9x EV/EBITDA so based on the outcome of the auction you may anticipate a 5x return if they net $200mm from the auction and apply it all towards paying down debt.

13D holder Alex Meruelo also increased his stake in April by 35%.

Appendix:

Comps from CapIQ

Catalyst

They are participating in the FCC auction and timing should be towards year end:

http://seekingalpha.com/article/3976143-spanish-broadcasting-system-sbsa-q1-2016-results-earnings-call-transcript?part=single

Q1 2016

Juan Garcia

Yes, we're currently working with Evercore and have been already entertaining certain reverse inquiries from several of our holders. We're also looking at a number of the strategies around our real estate assets. And with regard to the auction, we can't comment, but we definitely refer you to the SEC site, where clearly, as of May 31, the auction will start and we anticipate that the FCC is going to wrap this up before year end.