TVL - LinTV

[Packer16]

This is an extremely cheap stock that has comps which are trading higher and recent transactions that are also imlplying a much higher value.  In addition there are short/intermediate term catalysts  Disclosure - I own this company.

 

Lin TV is a local TV broadcaster with modest leverage and alot of free cash flow.  It currently sells for 5.5x EBITDA and 2.7x FCF.  It debt is 4.2x EBITDA declining from 7.5x EBITDA in 2009.  Two current transactions 4 Points and McGraw Hill sold for EBITDA multiples of 6.7 and 8.0 respectively.  The primary comps of BLC, SBGI, GTV and NXST trade from 5.8 to 7.9x EBITDA.  (Note: EBITDA is applicable here because TV stations have alot of A and require very little cap-ex).  Lin TV also has a JV with NBC which is at break-even now but will become very profitable with re-transmission fees.

 

Lin TV has done alot in terms of mitigating the internet threat.  It has developed alot of local content and has purchased RMM (an internet ad firm) to provide a wide array of media options for local merchants/firms.  Catalysts include the 2012 elections and increasing re-transmission fees from cable cos.  Longer term the firm has invested in the interactive (internet and mobile) side of the business and has some valuable spectrum and bandwidth that can be used for data/video transmission.  The firm is 45% owned by Hicks Muse and about 10% by GAMCO.  Comments appreciated.  TIA.

 

Packer   

[Cardboard]

Packer16,

 

Based on many of your threads, it seems that you have invested a fair percentage of your net worth in businesses that are very cheap, but that are suffering from some sort of secular decline. How has been the overall performance with them in 2010 and 2011? I am excluding 2009 since it was a huge rebounding year and almost everyone made money with anything.

 

This is not to pick at you, it is just that I have suffered a fair bit with cheap businesses suffering from secular declines and I have now written in bold on a piece of paper stuck on the wall in my office to not buy them under any circumstances. It just seems that the businesses kept on declining and that the original aspect of a bargain turned into a mirage. So I am just curious about your experience and I am trying to learn if there is something that I have done wrong in my previous purchases that could be fixed.

 

Cardboard

[Packer16]

In 2010 I was up 27% and down about 2% YTD.  I try to find the firms who have either increased FCF in a declining market (SGA is a good example in radio) or have declined less but have a specific niche (SALM is an example).  In each case, I look for firms that are developing original content and have developed a plan for dealing with the internet or a substitution threat.  This is where is I think the inefficiency is.  Whole sectors being avoided provide opportunities.  I do stay away from firms in midst of a secular decline like USMO, ELNK, AOL, S and other radio and TV firms without a content advantage.  My portfolio has been volatile but I would prefer a bumpy 15 to 20% than a smoother 5 to 10%. 

 

Packer 

[dwy000]

I've been in SGA for a while now and it's one of the best performers in my portfolio.  It's a stomach-churning investment to sit on as it tends to move by 5% or more in a day - but as long as the up days outnumber the down ones that's fine by me.  The underlying business is fantastic for this price.

 

I'm digging into TVL as we speak and I'm liking what I see so far.  I think the political advertising in 2012 will exceed historical rates and what they're doing on the digital/internet side is extremely positive.  Given the high levels of cash flow and the fact they're now down to 4.5x leverage (which in this industry is almost "unlevered"!) I'm hoping they divert some of that cash to share buybacks.  At today's price the ROI for that expenditure is multiples of what they save in debt service costs.

[dwy000]

I looked at Gannett as one of the TVL comps.  The cash flow is good but I struggled with the level of debt.  With the shrinking newspaper business I don't know if they can maintain the dividend (or how long the debt will permit them to).  I like the "pure play" of TVL.  If Gannett can stabilize the newsprint side there's definitely more leverage to the upside.

[Packer16]

I also looked at GCI but although it may have low financial risk it has high obsolscence risk due to its higher portion of operating income form newspapers.  TV is interesting in that the top independent TV players (SBGI, BLC and TVL) have had FCF increase over the past 5 years while the newspapaers have nose dived and radio is mixed (SGA up, SALM flat and others declining).  I see the media landscape as ranging from high obsolsence risk (Yellow Pages, Newpapers) to modest risk (magaiznes, radio, TV) to lower risk (cable and content).  TVL is in the low/modest risk categosry but trading in the high risk category.  I think the same is true of SGA and SALM.

 

Packer 

[Packer16]

Lin TV has just done a nice re-finance of about 1/3rd of its debt from 6.5% to LIBOR +3%.  This should save about $14 million per year.  More FCF to the equity.

 

Packer

[fenris]

Hi Packer,

When looking at FCF, did you adjust for acquisitions? It seems like they pretty consistently buy one thing or another almost every year. Do you expect this to continue?

 

Also, as of what date did you calculate 2.7x FCF?

[Packer16]

I did not adjust for acquisitions as they have been buying small companies over the past few years (since 2007) and instead have been paying down debt with cash flow.  The latest deal with ACME is good deal.  TVLs purchase is how I found out about them as owned/own ACME as a liquidation play.  My FCF calc is CFO - Cap Ex so for TTM is $66M so that translates into 2.6x FCF.  If you look at average of 2009/2010, you get $45M so that translates inot 3.8x FCF.

 

Packer

[Packer16]

It looks like LinTV can repurchase a good sized portion of common stock with the expected election FCF.

 

Packer

[Packer16]

It looks like with the refi of debt, they will have $9 million more (a little less than my initial estimate) for FCF bringing TTM up to $72 million and normalized up to $54 million with no election bump.  At current prices this is 3.2x TTM and 4.3x normalized FCF after a good run-up.  If they have a good election year, the FCF multiples will be smaller.  They also have positioned themselves nicely for online revenues with websites, apps and its online marketing company and to repurchase up to $25 million of its stock under the repurchase program.

 

Packer 

[Packer16]

LinTV had another good quarter and with the refi they have reduced interest expense to $40 million.  The TTM FCF is about $62.9 million including the debt re-fi.  The average 2010/2011 FCF (including re-fi interest rate) is then $67.8 million or $1.20 per share implying 3.6x FCF multiple.  The current level of debt $580 million is 4.3x 2010/2011 average EBITDA.  In addition, LinTV has stations in many swing states so they will be the benefit from large election spending.  LinTV has grown EBITDA in 2011 by 34% from 2009 and by 14% between 2010 and 2012.  FCF is up over 100% between 2010 and 2008 and over 50% between 2011 and 2009.  This again may a grower in a mature industry.

 

Packer   

[rijk]

packer,

 

thanks for sharing your interesting ideas, you have already explained your rational for some of your picks, i.e. strong fcf and unique content in an out of favor industry

 

many of the great value investors consistently warn against high debt levels, highly leveraged companies will likely suffer above average declines in a down market 

 

it would be great to have your perspective on leverage, especially in the context of companies like ltv and salm                               

 

regards           

rijk

 

[Packer16]

As to leverage, I like to see a "path" to a normalized/conservative level of debt.  With the amount of FCF TVL generates it can reduce debt by one-half to three quarters of an EBITDA turn per year.  So in the next few years they should be able to get down below 3.5x EBITDA.  This can snowball if the EBITDA is growing at a modest rate which will lead to higher levels of FCF growth.  They key is to find growing FCF versus decline.  The best situations are ones where the FCF is going from decline to growth as the market typically does not incorporate this into the price. 

 

The amount of debt is dependent upon the industry.  I am more comfortable with higher levels of debt for firms who have higher margins and more bankable assets (lease cos and media firms vs. technology companies).  This "path" concept is what SALM is following and why I like SALM versus lets say ETM (which has modest debt but the "path" will require a large paydown of debt versus the current market cap over the next five years versus SALM and SGA and does not have a niche) or ROIAK (which has a niche but I don't think will be able to handle the debt without a restructure).  I also look at the spread between the market debt rate and the FCF yield to get a sense of what the bond market thinks of the debt level.  The bond market for the most part is a more sober assessor of risk than the stock market.  I also like to look at the options market if options are available.

 

Packer 

[rijk]

packer,

 

thanks for your detailed comments, this is very helpful...

 

the reality check vs market debt yields is an excellent idea

 

do you think that traditional graham style investors like walter schloss would have been comfortable with the - fcf path to acceptable debt levels - principle?

 

regards

rijk

[Packer16]

Based upon my reading, I don't think so but it is more in the spirit of Buffet and others who extended the value principles to other situations.  This is the way good LBOs are put together so others have been doing this for quite awhile.

 

Packer

[dwy000]

I also like the fact that they stated they do not believe they will need to contribute additional capital to the NBC partership going forward.  They remain liable for the debt of that partnership (which is hanging over the stock price like a massive weight and preventing a sale of the company) but since the investment has been written down to zero it's a massive upside if and when they can start getting income from it.  That's just gravy.

[Packer16]

Correct. I have seen some analyst reduce thier target price by a full EBITDA multiple for this and do not consider how far ahead these guys are on the digital side and how their footprint includes many poltical swing states.

 

Packer

[Packer16]

Good 1Q results and an interesting deal.  On the surface it may appear expensive (10.5x EBITDA) but after synergies it is down to 6x EBITDA less than the SBGI acquisitions.  This transaction is very accretive to FCF as they can use the cash on the BS plus the estimated $80 million in 2012 to finance the deal and finance the rest of the purchase price of $200 m at about 7% interest.  This will push out the 3.5x debt target to about mid to end of 2014.  The FCF pick up is $19 million - $33 million in EBITDA for a cost of $14 million with no synergies (that is $0.36 per share).  If the $25 million in synergies is realized the total pick up is $44 million ($0.83 per share).  This is clearly the creme of the deals in terms of duopolies (5 out of 8 markets). 

 

Packer

[dwy000]

Packer - I think the FCF pick up will be a bit less than the $19m since that was based off of EBITDA and there's a capex requirement in there.  The synergies number is interesting though.  I'd love to see a breakdown on that to figure out how much is overhead reduction and how much is applying their cable compensation rates to the new entity.

 

Either way, given it's paid for out of cash and debt they're essentially buying a 15% yielding asset for 7% cost of capital.  It's a lot of debt but as long as the ad market doesn't crap out severely in the next 2-3 years it should be a great purchase.

 

This is still one of the cheapest values for the money out there.

[Packer16]

If cap-ex is about the level of TVL as a % of EBITDA then its about $4 to $5 million.  I would hope they would be able to pick up at least that amount in synergies given the corporate costs will mostly go away.  I haven't been able to get a breakout but as the acquistion progresses we should be getting the historical financial statements.

 

Packer

[rijk]

any ideas regarding what's causing the recent weakness, general market related or tvl specific?

 

regards

rijk

[Packer16]

No company specific that I know of but I purchased a slug at 3.75 so I am perplexed given the synergies of the acquisition and election cash flows.

 

Packer

[COYS]

Packer, what are your thoughts on the JV holding the Dallas and San Diego stations?  If I'm reading it correctly, there is potentially a fair amount of debt that TVL is on the hook for should the JV not be able to satisfy it's obligations.

[Packer16]

Yes there is but the debt has no covnanents and is not due until 2023.  The current estimate of value of the stations in in the JV is $700 million.  So we have 11 years for the value to increase by a little over $100 million.  Over the last yeat the value increased by $140 million.  The estimated value back in 2007 was over $870 million.  I look at this as an out of the money call on these two stations where LTV has to pay 20% of interest per year that is not covered by the JVs cash flows.  This amount has been from $3 to $4 million per year over the past few years.

 

Packer