This article is part of our Rising Star Portfolios series.
I follow special situations in my aptly named Special Situations portfolio. Today, I have a doozy of a situation, and it involves Grupo Prisa
The company, and why I'm buying
Grupo Prisa has a diverse range of media assets, focused primarily in the Spanish language. It's involved in broadcast TV, pay TV, radio, publishing, and newspapers. The company owns a majority stake in the top-pay TV operator in Spain, with 70% market share by revenue. It also has a minority stake in the top free-to-air TV operator in Spain and a majority stake in the top TV operator in Portugal. And it fully owns one of the largest content-production companies in Spain. It even has strength outside the Iberian peninsula.
Its publishing arm, Santillana, has a strong position in language, textbooks, and trade publications, and it's exposed to the high-growth economies of Latin America, where the division derives 65% of its revenue.
Its radio division, with a 73.5% stake in Union Radio, is the largest Spanish-speaking network in the world, with a presence in 10 countries and an audience of 26 million across nearly 1,300 stations. It has a dominant presence in Spain, Chile, and Colombia.
Finally, its newspaper division contains the wholly owned El Pais, the top daily newspaper in Spain. It also owns a 15% stake in Le Monde, which has a presence in more than 100 countries.
After the company made a huge spree of acquisitions, its debt surged to 8.5 times EBITDA as of September. But late last year the company merged with a special purpose acquisition company, which provided it an $870 million cash infusion and substantially diluted the former owners. Importantly, the company is committed to paring down its debt and it has the strong cash-generating power of its media businesses to do it. One Citigroup analyst estimates that debt will be down to just 3.5 times EBITDA by the end of the year. This deleveraging will allow value to accrue to equity holders like us. In addition, the merger also established a listing in the U.S., so shares are more liquid for American investors.
Just how cheap are shares?
|
Company |
EV/EBITDA |
P/FCF |
|---|---|---|
| Grupo Prisa | 12.5 | 4.0 |
|
Sirius XM |
11.7 | 32.9 |
| Washington Post |
3.5 | 7.6 |
|
Time Warner |
8.4 | 15.4 |
Source: Capital IQ, a division of Standard & Poor's.
With a price-to-free cash flow of ratio 4, Prisa's commitment to reduce debt, and the strong cash generation of its media properties, this stock is cheap, even if we don't capture the positive special-situation dynamics that accompanied the transaction.
Prisa comes in two flavors: A shares and B shares. They trade at nearly the same price, but the B shares offer a substantial dividend of $0.70 annually for the next three and a half years and then become A shares (which is why I recently called the stock free money). In other words, that's about a 6% yield on this $11 stock. The dividends are cumulative, too, so the company will have to make the payouts unless it goes broke. We'll be buying an initial stake of 3%, or $500, and see where things go from there.
Risks
A Spanish company that owns newspapers? Could I pick a worse geography and industry? Only if it were Ireland and banks. And of course, Prisa is more than just Spain and newspapers. Still, the Spanish ad market for newspaper TV is leveling off after a few years of recession-fueled decline. Ad spending was off 23% in 2009 and down again last year, but the numbers are expected to stabilize this year. And Prisa's dominant position means that even if things do remain weak, it can gain a relative advantage over its peers. The ongoing Euro-malaise bears watching.
I'll also be watching to see whether the company slips into its former bad habits, such as accumulating debt by making acquisitions. I expect this to be less of an issue in the future,given the recent expansion of the investor base, which includes smart owners such as hedge fund T2 Partners. T2's largest position is Grupo Prisa.
Summary
Although there are plenty of macro headwinds, the appeal of a deleveraging situation with a proven cash generator is immense. As importantly, the price looks right at just 4 times trailing free cash flow. So I think this small cap has some room to run.
