Description

Buckle up for a deep value idea. Technicolor (TCH) is an ugly business. Three of its four divisions are structurally challenged and the management team has stumbled recently on guidance and transparency. The company is trading just above €3/share, a 4.2x EBITDA multiple and 14% FCF yield on depressed NTM figures. A conservative SOTP valuation, even when considering the structural issues at hand, is in the €6-€7/share range. This value should be realized as the company continues to transition away from its historic dependence on unpredictable patent income towards a mix of stable and growing revenue streams.

Source: Technicolor; proprietary estimates

Description

Most people have heard of Technicolor but few actually know what the company does. Headquartered in Paris and formerly known as Thomson, Technicolor today is a collection of four loosely-related businesses:

1. Connected Home – The #2 global manufacturer of CPE (Consumer Premises Equipment) devices such as set-top boxes, routers and modems.

2. DVD Services – Global leader (quasi-monopoly) in replication/distribution of DVD, Blue-ray, CD and gaming discs.

3. Production Services – Global leader in post-production and VFX work for film, TV and gaming.

4. Licensing – Monetization of its 30,000 patents, focusing on MPEG, HDTV and video compression.

To summarize across the four divisions: Connected Home and DVD Services are both structurally challenged by legitimate concerns about cord-cutting and the rise of streaming content, although the former has lasting power that I argue is being ignored. The Licensing portfolio, recently an over-earning cash-cow for Technicolor, shrank dramatically in 2016 as lucrative MPEG patents rolled off and will never generate the FCF it once did, but remains a material contributor. The Production Services division is the gem of TCH and its primary area of growth. The following table documents the dramatic revenue and EBITDA transition that occurred between 2015-16:

Source: Technicolor Investor Presentation

There are two primary reasons for the stock’s >50% decline over the last 18 months: (1) the loss of high-margin patent revenue in 2016 and (2) a hit to profitability in the CPE division due to cost increases for DRAM and Flash memory components in 2017. While the loss of patent revenue was anticipated, the memory price increases were unexpected and have fueled fears around the structurally unattractive nature of the Connected Home division (which doubled in 2016 after acquiring Cisco’s CPE business).

TCH nearly went bankrupt in 2009, had two capital raises in 2012, and has net debt of ~1.5x EBITDA with a target of 0.8x. The CEO was hired in 2008 and today has three objectives: reduce net debt, grow the low-margin CPE business to take advantage of scale, and grow the Production Services business.

Thesis

Investors hate the complexity and have punished the CEO for his lack of transparency, as demonstrated by multiple guidance revisions in the last 12 months and his refusal to discuss division-level performance in detail. The loss of high-margin patent revenue coupled with the structural challenges facing set-top boxes and DVD sales make the business understandably unattractive. But the baby has been thrown out with the bathwater and at €3/share the stock trades at a >50% discount to the SOTP value.

Fair value of Є6+/share should materialize in 2018 as numerous catalysts converge. Namely:

1. The Connected Home division is poised to benefit from record-breaking new contracts signed in 2016 after Arris acquired Pace, making TCH the global #2 in a market that utilizes multi-vendor procurement. New contracts take 18 months to hit the income statement and the windfall of contracts TCH closed in 2016 begin to contribute in 2018.

2. DVD sales provide a strong albeit shrinking source of FCF, and with the acquisition of its only real competitor in 2016 (Cinram) TCH is poised for monopoly-like returns in a shrinking business where margin can be maintained. Contracts with studios start to be renegotiated in 2018 and management are confident of their negotiating power.

3. Patent revenue is currently at a low-point pending the launch of a new JV with Sony. Guidance is for “at least” €150mn of annual EBITDA, albeit lumpy, once the JV ramps up. There’s some upside optionality should the patent portfolio ever be sold, which is a possibility.

4. Production Services is a decent growth business being unfairly lumped in with its ugly siblings. Any change in management, activist involvement and/or divestment activity may address the current conglomerate discount.

Achieving a €6+ share price does not require aggressive revenue growth or margin expansion. The below table summarizes conservative Group-level financials projected through 2020e:

Source: Technicolor; proprietary estimates

The above figures are significantly below guidance, consensus, and historical/comp margin levels. 2017 guidance, which has been revised down twice, is for €420-480mn of EBITDA and >€69mn of FCF (€150mn before an €81m exceptional), with continuous deleveraging and “at least” €150mn of patent EBITDA starting in 2018. There is 2020 guidance of >€680mn EBITDA and >€280mn of FCF that will almost certainly need to be revised down at some point.

A comment on my valuation methodology: You’ll notice that this write-up relies heavily on EBITDA estimates and less on FCF or “owner’s earnings.” This isn’t ideal, but is required due to the limited division-level figures shared by management. Specifically, FCF by division isn’t shared, although the CEO does say that all divisions are FCF positive. This lack of management transparency is one of my largest issues with TCH, and certainly weighs on the share price, as I’ll discuss below. For now, lacking better alternatives, EBITDA estimates play a central role.

Technicolor is currently beaten up due to a confluence of bad issues, as I’ll discuss below, which the longstanding CEO has exacerbated with poor communication and unrealistic guidance. None of these issues are terminal, however, and they mask a business that is FCF generative and dominant within the structurally attractive video FX industry.

I’ll briefly discuss each division below and then summarize the valuation.

Connected Home

In 2016 Connected Home (CH) was 54% of group revenue and 39% of group EBITDA, earning an 8.3% EBITDA margin.

CH produces CPE set-top boxes (60% of revenue), broadband equipment (35%) and OTT devices (5%). The business is global and clients include leading telco/cable companies such as Charter, Comcast, ATT Direct and Vodafone, as well as Amazon and Dish for OTT devices. In 4Q15 TCH effectively doubled the size of this division by acquiring Cisco’s Connected Home business for the bargain price of 0.3x sales and 4.5x EBITDA (Arris acquired Pace in 1Q16 for 8x and acquired Motorola’s set-top division in 2013 for 7x). CH being a low-margin business, the goal of the acquisition was to improve EBITDA margins from 5% to 8%-10% through scale, and also to diversify Group EBITDA earnings following the loss of MPEG licensing revenue.

TCH uses 3rd party contract manufacturers such as Foxconn, but is itself responsible for design, assembly oversight and delivery. Contracts are fixed price, exposing TCH to component costs. In 2017 TCH (and competitors) have suffered as the most expensive components of CPE devices, DRAM and Flash memory, have doubled in price. This had a -200bps impact on the CH division EBITDA margin.

Arris controls 24% of the global CPE market, followed by TCH with 13%. Samsung, Echostar and Sagemcom each control 4-6% and the remaining 51% of the market is small regional players. Customers all employ multi-vendor procurement, making TCH a protected #2 globally. After Arris acquired Pace in 2016, TCH saw its highest ever level of new contracts, as mostly North American cable providers sought a new secondary provider. Notably, the benefits from this Arris-Pace merger have yet to be felt: contracts take 18 months from signing to generate revenue and TCH’s management has been clear that these should start to kick in during 4Q17 and materially during 2018. They expect EBITDA margin to improve from 5% pre Cisco acquisition to 8%+ on volume and efficiency gains. Arris achieves a 12% EBITDA margin and Pace earned 10% before it was acquired.

The structural issues facing the set-top box business are clear, as more people cut the cord in favor of OTT alternatives. But set-top boxes are just 60% of the division’s revenue. 40% come from broadband equipment (routers/modems) and OTT devices, both of which have structural tailwinds thanks to the adoption of the DOCSIS 3.1 standard and the rising penetration of broadband. While I’d never be excited to own this sort of low-margin, fixed-price contract business, it’s comfortably worth more than the 3x EBITDA multiple currently ascribed to it. Arris, a direct competitor whose revenue is 70% CPE and 30% Network & Cloud, trades at 7x. I value this division at a 5.5x multiple on 3% revenue growth and a margin that improves from 5% to 7% by 2020 (guidance and comp margins are 8%+). Revenue is poised to grow in North America and Europe as new contracts signed in 2016 come online in 2018.

DVD Services

In 2016 DVD Services was 25% of group revenue and 23% of group EBITDA, earning a 10.6% EBITDA margin.

If I told you TCH’s peak year for disc sales was 2016 you’d likely be surprised, but it was. Management has guided -10% declines annually for many years and fully expects such declines to come eventually, but to date the division has seen both volume and revenue growth. This is in part due to acquisitions. In 2015 TCH acquired Cinram, making it the global #1 for disc replication and distribution with >50% of the market. The only truly global competitor is Sony, and none of the other major studios allow Sony to manage their disc business, giving TCH an effective monopoly with the other 5 major studios.

Unit level economics aren’t disclosed but rough figures are that a studio will pay TCH $1 to replicate, box and deliver a DVD to a retailer, who pays $10 to the studio and charges $20 to a consumer. Figures are higher for the popular Special Edition / Collector’s Item SKUs. In other words, this is a highly profitable business for studios, and there is room for material margin expansion for TCH. Currently this is an 11.5% EBITDA margin business run from 2 replications facilities (Poland and Mexico), and guidance is to maintain this margin even when volumes decline via plant consolidation. Contracts with studios come up for renewal starting in 2018 and could benefit TCH.

There’s no denying this business is in decline, but as CD sales (still a $5bn/yr global market) show, the tail can be extremely long. In 2015 global sales of packaged video fell -13% to $21.6bn, and industry observers expect this figure to be $9.1bn by 2020, a -16% CAGR. With a 65% variable cost structure, low capex requirements and high FCF yields, TCH’s disc business can provide material, albeit shrinking, cash for the next 5-10+ years. I’ve valued this division two ways, both with similar results. First by modeling a 3x EBITDA multiple on -10% annual revenue declines and a stable margin. Second by running a DCF on -20% annual revenue declines with no terminal value, using a 10% discount rate. The DCF provides a slightly higher value despite, in my view, using draconian assumptions and being a more appropriate method for this sort of “run-off” business.

Another surprise fact: 2016 had the #4 all-time best-selling Blue-ray title (Star Wars Episode VII, with 5.7m units sold). The #1 all-time best-seller was Frozen in 2014 with 7.5m units sold. Industry insiders say children’s desire to physically own their favorite movies provides support to DVD/Blue-ray sales.

Production Services

In 2016 Production Services was 16% of group revenue and 20% of group EBITDA, earning a 14.5% EBITDA margin.

TCH owns a portfolio of post-production and special effects studios, most notably MPC, Mr. X, The Mill, and Mikros. They work on TV, film, advertising and gaming projects. Over 50% of Super Bowl ads employ TCH studios and in 2017 the firm worked on 20 Oscar-nominated films and won Best Visual Effects for The Jungle Book (a movie produced by Disney, which owns TCH’s largest VFX competitor, ILM).

This is a people-intensive, fee-for-service business with mid-teen EBITDA margins. TCH takes no exposure to the success or failure of a project, and must instead manage within its budget. Change orders are normal. There has been much discussion about the difficulties facing small VFX studios, but TCH is largely immune to these issues, the largest of which relates to the tax incentive schemes that dictate where studios choose to produce films. TCH has offices in the major “incentive markets” of Vancouver and London, in addition to Paris, LA, NYC, Toronto, Montreal and Bangalore. Their biggest competitor, Industrial Light & Magic, is a Disney subsidiary with offices only in California. TCH is ideally positioned to participate in the wage and tax arbitrage of this industry: 2,000 of the firm’s 6,000 employees are based in India working for the Production Services division.

Video post-production is a high-growth market. Management have guided to 10% p.a. revenue growth, constrained only by their ability to hire and train new talent and build out new render farms. Both of these inputs (labor and servers) make Production Services a capital intensive business, although costs are coming down with a gradual shift towards cloud computing and a growing office in Bangalore.

Scale matters in this business, and TCH is arguably the best positioned among its peers (Disney, Weta, Sony Imageworks). First, as mentioned a global footprint allows TCH to tap into tax-incentive schemes, providing a material structural advantage to California or New Zealand based competitors. Simply put, TCH can bid the exact same price as ILM or Weta and appear cheaper thanks to the tax break that comes with hiring them. In talking with staff at ILM they acknowledge this advantage and the career pressure to move to Vancouver or London (where TCH would be their likely new employer). Second, given that contracts are fixed-bid, small firms struggle to size up/down and rely heavily on contractors. Third, there is significant capex investment required in the render farms and proprietary I.P. While hardware costs are constantly declining, this is largely offset by ever-increasing processor requirements of video FX. Finally there is a virtuous cycle that benefits industry incumbents who are constantly growing their library of algorithms used in FX. Every time TCH develops a new algorithm it adds to a toolkit of skills that can be tapped for future work. This allows TCH to significantly reduce labor time and therefore underbid smaller competitors for new work.

Production Services is a labor-intensive business with high capex needs. Approximately 1/3 of the €150mn in Group capex goes to this division, primarily for server farms (that’s 6.5% of division revenue with what I estimate are 3-5 year useful lives). But this is slowly declining as cloud processing becomes a viable option and as hardware costs continue to decline. The division currently earns 14.5% EBITDA margins and guidance is for this to improve with scale. There is some execution risk regarding the rapid growth of this division and with potential additional acquisitions, but division revenue is +70% in 3 years and the margin has steadily grown from 12% to 14.5%.

I value this division at an 8x EBITDA multiple on flat 14.5% margins of 5% annual revenue growth (below guidance). There are no good public comps. TCH acquired advertising-focused subsidiary The Mill in 2015 for 9x EBITDA and this business seems to deserve at least a market multiple, if not more. Keywords Studios, a game testing and localization business whose post-production services overlap with those of TCH, currently trades at an eye-watering 35x NTM EBITDA.

Licensing

In 2016 Licensing was 6% of group revenue and 34% of group EBITDA, earning a 67.4% EBITDA margin.

With historic EBITDA margins of 75%, licensing revenue was a gift to TCH for much of the last decade. An activist investor, Vector Capital, tried in 2012 to break up the business on the simple (and possibly correct) thesis that the parts were worth more than the whole. In a boardroom battle against the current CEO, Vector failed and eventually sold out at a profit in 2015.

The quick story regarding TCH’s patent portfolio is that it used to make a ton of money and now makes less, but still some. Guidance of “at least” €150mn in EBITDA annually is unlikely to be met this year but entirely possible going forward. In 2016 TCH signed a JV with Sony to pool their patents related to HEVC, the next generation of 4K/8K video compression. The JV has been waiting for legacy agreements to expire during 2017 and should provide material revenue/EBITDA in 2018, as virtually every screen with 4K functionality will require their patents. Calculating the exact figure is impossible as no information has been shared. In 1H17 the division earned €56mn in revenue vs. €177mn during 1H16, reflecting the pause before the JV ramps up. Management provide frustratingly little information about the patent portfolio in general, leading most analysts to place sizable haircuts on the go-forward value of this division. Estimates range from €500mn to €1.7bn. An outright sale of the entire portfolio remains a conceptual possibility that would likely be greeted favorably.

I value the Licensing division via a 10 year DCF using management’s guided “basement” of €150mn EBITDA per year with zero terminal value and a 10% cost of capital. These inputs seem excessively conservative and derive a value of €783mn, far below most sell-side estimates. Note that the patent portfolio has minimal overhead expenses and preferential taxation under French law at 15%.

Valuation

Given the disparate nature of this business, a sum of the parts valuation seems appropriate. The following table summarizes fair value looking out 3 years:

Source: Proprietary estimates

The above table makes the following assumptions:

1. Connected Home: 2.4% CAGR revenue growth with EBITDA margin improving from 5% to 7%

2. DVD Services: -10% CAGR revenue declines with EBITDA margin stable at 10.5%

3. Production Services: 5% CAGR revenue growth with EBITDA margin stable at 14.5%

4. Technology: a DCF assuming €150mn EBITDA annually for 10 years with zero terminal value, discounted back at 10%.

The above table implies a 6.0x EBITDA multiple for the Group, which translates into a 12x P/E and 8% FCF yield. This seems appropriate for an ugly company like TCH, which will never achieve a market multiple and which will always have to deal with the structural decline of its DVD and (possibly) Connected Home divisions. The above valuation is also in-line with TCH’s historical valuation multiples, despite the above reflecting a higher quality stream of earnings (i.e. less patent revenue, more CH and Production Services revenue).

What does the current €3/share valuation imply? The table below reflects my best estimate. It includes zero growth assumptions for Connected Home, -20% annual declines for DVD on a DCF with no terminal value (10% discount rate), only 2.5% revenue growth for Production Services, and a lowball estimated €500mn value to the License portfolio. It also artificially holds net debt near the FY17e level, despite an estimated €585mn of FCF being generated under even these depressed revenue assumptions during 2018-2020.

Source: Proprietary estimates

Management have been clear on their views of each division. They acknowledge the challenges to Connected Home but are confident of their global #2 position and the lasting power of routers and other smart devices. For DVD they have guided -10% declines annually for the last 5+ years and are running the business for cash, with a plan in place to maintain current margins as it declines. They are most excited about the Production Services division, a 15% EBITDA business experiencing tremendous growth as media production of all sorts expands worldwide. Finally, they consider Licensing a byproduct from the R&D work of their other divisions and are explicit about the unpredictability of patent revenue and their philosophy of not relying on this division for achieving guided growth ambitions. It is worth repeating that TCH has historically heavily relied on this division, and that short term guidance almost certainly depends on it.

So then, what could go wrong?

Risks

There are several broad buckets of risk: (1) balance sheet, (2) currency (3) accelerated structural decline, (4) management reliability, and (5) the conglomerate discount. I’ll briefly address each here:

1. Balance sheet risks

Debt is a potentially terminal risk for structurally challenged businesses, but TCH isn’t structurally challenged, spits off healthy FCF, and has only a moderate amount of leverage. The CEO inherited and survived a near-bankruptcy experience in 2009 and reducing leverage is his #1 priority. Net debt ended 2016 at a reasonable 1.2x EBITDA and will likely end 2017 around 1.5x due to this year’s reduced EBITDA earnings. 2017 will be a trough year for EBITDA and a peak year for gross debt. There is a covenant of <4.0x net debt to adjusted EBITDA which is well covered: even taking the gross debt figure, EBITDA would have to decline to €250mn (from FY17e €400mn) for this to become a concern.

In March of 2017 TCH raised a €540mn 7-year senior secured loan at Euribor+350 that currently trades at par and reduced interest payments by 300bps. Management’s goal of reducing net debt to 0.8x is an oddly precise figure that seems to be dictated by the rating agencies, which have upgraded Technicolor’s rating consistently since 2010 (currently BB- / Ba3).

Source: Technicolor

A poor acquisition could jeopardize the balance sheet and erode faith in management. Here again, management have shown themselves to be effective capital allocators, purchasing Cisco’s CPE division, Cinram (DVD) and The Mill (ad FX studio) at attractive valuations. While additional acquisitions within the Production Services division are possible, the CEO has been clear that any deal would require rating agency approval and could not interrupt the guided goal of continuous deleveraging.

2. Currency risks

During the 1H17 call the CFO guided that a $0.05 move in $/€ has a €50mn impact on EBITDA. The CEO later backed-down this claim, and simply states that they hedge every contract once closed and monitor fx carefully. Most revenue and expenses are in USD, so there is real translation risk back to EUR. Management acknowledges this exposure but doesn’t speak in detail beyond the hedging comment, again leaving analysts to guess. Over the long-term I am not concerned with this translation risk, but it could have a material impact on achieving FY17 guidance, with the EUR +14.5% ytd.

Source: Thomson Reuters

3. Structural risks

The fear of structural decline within the Connected Home and DVD divisions weighs among investors, and any perceived acceleration of such declines could impair the share price. These trends are impossible for me to predict, but a few things give me comfort. First, 40% of Connected Homes revenue is from its router/modem business, which management want to expand to 60%. There is much less risk of disruption to routers and indeed a strong structural trend of increased broadband penetration globally. Second, TCH’s new position as the global #2 CPE provider is a tailwind as major telcos sign them up to replace Pace and as multi-national telcos increasingly utilize the top 2 players (Arris & TCH) to design devices that are rolled out to multiple global markets.

Another risk is that DVD sales decline more rapidly than anticipated. Industry estimates are for -16% annual declines. I feel comfortable modeling -20% annual declines and think TCH will be able to protect or potentially improve its margin as the only global provider of these services (a service that provides studios with a no-effort 90% EBT margin). This is a fully depreciated business generating €1bn/year in revenues, with an 11% EBITDA margin and just €15-20mn/year in maintenance capex. I estimate that it generates €50mn/year in FCF, which is being reinvested into the Production Services division.

Although not explicitly a structural risk, input cost inflation is a perennial risk for the Connected Home division. On June 29th the company announced an €80mn negative impact to the Connected Home EBITDA due to DRAM and Flash memory price increases, which more than doubled during 1H17 on the back of unprecedented demand from smartphone and server customers. This implies an 8% EBITDA margin will be closer to 6%, the pre-Cisco acquisition level. There’s no immediate fix as existing contracts must be honored, but as new contracts are signed and as component prices decline (expected 2018 as new supply comes online) the negative impact should reduce. Still, the exposure to input cost inflation is a contractual reality for the CH division and could hurt profitability in future years. It also reflects the unattractive nature of contract manufacturing, with low margins and limited negotiating power.

A quick comment on perceived structural risks to Production Services. Some people may comment that today represents a golden age for video production, with new studios cropping up daily and the cost of production declining dramatically. I don’t disagree, but it’s important to distinguish between disruption to the distribution channel vs. disruption to the content creation. I have no doubt distribution is being disrupted, but this doesn’t directly impact the trend of increased content creation. It may not always be Amazon, Netflix, Hulu, Apple, HBO, etc. that are paying to produce content, but it will be somebody. The trend of outsourcing post-production and VFX stands to benefit from the growing number of “producers” in the market, and TCH is a global leader that works with all major producers. Furthermore, TCH positions itself as a “premium” VFX provider, ensuring that even as technological barriers decline it will maintain market share within the ever-expanding high-end (4K/8K/VR/AR, etc.).

4. Management risks

This is my largest concern, and specifically relates to how management communicate with investors. Fred Rose, the CEO, has been with the company since 2008 and survived a boardroom challenge from Vector Capital in 2012. He is open about his willingness to ignore shareholder opposition to decisions that he believes are best for the business, and his messaging to the market leaves much to desire. On multiple occasions Fred has upheld dubious guidance that is subsequently missed. He did this in 4Q16 when discussing FY16 guidance, and most recently seems to have done it again during the 1H17 release, where he shared an €80mn negative impact to EBITDA from input cost inflation but stuck with the (recently-revised but still hard to believe) full-year guidance. Current guidance of €420-480mn for FY17 EBITDA seems extremely unlikely. I estimate they will just break €400mn. The table below takes 1H17 EBITDA by division and extrapolates the necessary 2H17 performance required to hit guidance. As you see, it hinges on License revenue, which was effectively turned off during 1H17 but isn’t really expected to turn back on until 2018 with the Sony JV.

Source: Technicolor; proprietary estimates

There is also old 2020 guidance for >€680mn EBITDA and >€280mn FCF that almost certainly needs to be revised down. Note that TCH currently only reports half year figures.

That management refuse to discuss detailed division-level performance only fuels this fire, as outsiders are left guessing how and where the EBITDA and FCF targets will be met. This inevitably leads to a criticism that TCH is overly-dependent on its patent revenue, a criticism that I believe is fair but diminishing. The CEO has said that every division is FCF positive, which is encouraging, but I estimate that the vast majority of the FY17 FCF target comes from the Licensing and DVD divisions. My best guess is that the CEO is protecting the Production Services division as it grows rapidly, funded in part by the FCF generated from license/DVD sales. It would be better if he simply acknowledged this, rather than leaving us to guess.

Management needs to improve guidance and transparency. They seem to finally understand this, and I anticipate an overhaul to guidance with the FY17 results. The market may react negatively to this in the short-term, depending on how it is handled, but over the long-term any improvement in division-level visibility will be a net positive. Note that my issue with management is confined to investor relations; I have faith in their ability to oversee the businesses units.

5. Conglomerate discount

Finally, there is the simple question of whether Technicolor can ever achieve a fair valuation as a group, or whether it requires divestment to unlock each division’s true value. Separating the divisions would definitely help. Fred Rose has indirectly agreed, claiming that anything is for sale at the right price, but as the 2012 boardroom battle and the lack of subsequent effort shows, selling divisions doesn’t seem to be high on their list of priorities. Still, management seem to be warming to this option.

An activist investor or energized board could expedite this change. Selling the patent portfolio, for example, would be an excellent move, even at the low-ball price of €500mn (vs. estimates of €1.0-1.7bn). Such a sale would immediately reduce leverage and improve the earnings quality of the Group. There are signs that such a sale is possible. The board includes a patent expert, Laura Quatela, whose firm was paid €867k in a related party arrangement during 2016 to advise the company on I.P. strategy. Most recently she helped reduce the number of patents from 40,000 to 30,000 in 1H17, and an outright sale once the Sony JV is in place seems like a rational move. But again, there is insufficient information sharing from management, and the CEO has a history of making unpopular decisions that he views as best for the business, even in the face of shareholder opposition.

Catalyst

Assuming no break-up, TCH is still on track to be a materially healthier business than it was just 18 months ago. As difficult comps roll off in 2018 and the list of catalysts highlighted in the Thesis section above start to take effect, a fair value of +€6/share should gradually be achieved. The current price, around €3/share, is outrageously low, ignoring the structural strengths of Production Services and Connected Homes and excessively discounting the material FCF generation still possible from Licensing and DVD Services. It’s an ugly business; nobody would be excited to own a DVD manufacturer… But at €3/share the downside has been all but eliminated and the upside story is compelling.