Special comment BREBRE Bank Bank Securities Securities BRE Bank Securities 16 November 2010 Special comment Media Cyfrowy Polsat Accumulate Poland SOBK.WA; CPS.PW (Reiterated)
Piotr Grzybowski (48 22) 697 47 17 An Attractive Acquisition [email protected] Current price: PLN 14.55; Target price: PLN 15.30
We approve of Cyfrowy Polsat’s plans to acquire 100% of shares in the TV network Polsat. We do not expect the acquisition to bring considerable savings. Nonetheless, Polsat's discount to its competitor TVN and the expected improvement in its earnings make it an attractive acquisition target. The main factors that will help it improve profitability are the “maturation” of its thematic channels (in the case of TVN, it took some 2 years for such channels to break even at the EBITDA level, and this is the time that has elapsed since the launch of Polsat’s main thematic channels, Polsat Play, Polsat Cafe and Polsat News; this year, Polsat Jim Jam and Polsat Futbol have been added) and the expansion in their reach when they are included in the distribution network of Cyfra Plus. Rather unexpectedly, and at an attractive price, the minority shareholders in Cyfrowy Polsat got exposure to the Polish TV advertising market, which is set for much faster growth than the pay-TV market. According to our estimates, the acquisition generated ca. PLN 262m in additional value for CP’s shareholders, i.e. PLN 1.0 per share. Given our current valuation, this would boost Cyfrowy Polsat’s target price to PLN 16.3 per share, which entails upside potential of 11.6%. After we have studied the detailed data on Polsat, we will comment on its consolidated revenue and its valuation in our next research update.
Terms of the Transaction Cyfrowy Polsat will acquire a 100% stake in the Polsat TV network for PLN 3.75bn. A portion of this amount will be paid through an issue of 80m shares in CP to the current shareholders of Polsat TV, with the average price of CP stock for the past three months (PLN 14.37 per share) used in the calculations. Thus, the share offering will account for ca. PLN 1150.0m of the total price tag. The remaining PLN 2.6bn will be financed with debt. At the moment, Cyfrowy Polsat is negotiating a bank loan totaling PLN 1.4 1.6bn, bridge financing in the amount of PLN 1.2 1.4bn and a renewable loan for PLN 0.2bn. The transaction is to be finalized by the end of Q1’10. Assessment of the Acquisition In our opinion, the takeover of Polsat TV creates value for Cyfrowy Polsat’s shareholders. First, valuation multiples implied by the price entail a discount to the main competitor, TVN. According to the earnings guidance published by the Management, the TV network will generate and EBITDA of PLN 305.0m, which entails an EV/EBITDA of 11.8 (when acquiring Polsat TV, CP will also take over ca. PLN 150m in free cash), compared to EV/EBITDA of 13.4 for TVN. As a result, this year’s discount figures to 12.0%. In the following years, we expect Polsat TV to increase its revenue faster than TVN. This is because the weakness of its earnings is largely determined by its thematic channels, which were launched with a considerable delay vs. TVN’s thematic channels (3 4 years on average) and which should soon see a considerable improvement in profitability as they “mature”. In addition, until September Polsat had been absent from the Cyfra Plus platform, which has over 1.3m subscribers. With Cyfra Plus now in the Polsat TV's distribution network, the latter's reach will expand, improving ratings and advertising revenue. In addition, it will receive substantial content licensing income. For example, TVN gets nearly PLN 200m per year from pay TV operators for the distribution of its channels, which is close to the channels’ advertising revenue. According to our estimates, Polsat's inclusion in the Cyfra Plus network, which reaches 10% of Polish households, will add some PLN 20 25m to the network's licensing income, which will be fully reflected in the Company’s EBIT. We estimate the increase in advertising revenue stemming from the increase in the network’s reach at PLN 5 10m. Upside Potential for Ratings According to TNS OBOP, the average ratings of the TVN channel figured to 13.5% in January October 2010, with Polsat’s ratings at 13.6%. To be sure, advertisers pay less attention to TNS OBOP’s data than to AGB Nielsen’s, and the aggregate ratings of the TVN Group rely on thematic channels and TVN7, which add some 5.5pp to them, compared to 2.9pp added by Polsat's thematic channels. Still, a discrepancy between the aggregate ratings of the TVN and Polsat groups and their TV revenues has been fact for several years (31.5% in favor of TVN the past four quarters). TVN's much greater ability to cash in on its audience stems from its much stronger position in the "Premium" segment, i.e. the “commercial demographic”, which perceives TVN stations as higher quality television. We do not expect the acquisition to affect the strategy of Polsat TV and lead to revolutionary changes in the how the two Groups are perceived by viewers and advertisers. Let us point out, however, that Polsat might have a longer term potential to win over viewers who are more attractive from the marketing point of view. Some new shows seem to suggest the network is already increasing its focus on the commercial demographic. No Dividends for 2010 Due to the acquisition and a considerable increase in debt, CEO Libicki said the Company would not pay dividends from its profits for 2010. In our opinion, the Company's debt reduction program (cutting the net debt/EBITDA ratio from 4.0 to 2.0 over three years) means that a dividend from profits for 2011 is also unlikely. We expect the first payout from the profit for 2012.
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BREBRE Bank Bank Securities Securities Special comment
Future Outlook In our opinion, the most likely scenario for the future is for both entities to continue with their strategies, i.e. maximizing content distribution network in the case of Polsat TV and making the offer for viewers more attractive in the case of Cyfrowy Polsat. Therefore, we do not expect considerable cost synergies. Instead, we see the added value for shareholders in exposure to the rapidly expanding pay TV market. The other, less likely scenario is the replacement of third party content with own channels, which would be a very risky move, affecting the competitive standing of the pay TV platform. On the other hand, the move would seriously strengthen the Group’s new thematic stations, which could strengthen its position in the advertising market at the expense of the competitors (CP has a 33% share in the pay TV market). Implications for valuation Using TVN as reference for the transaction, we value the equity of Polsat TV at PLN 4.24bn, which entails a PLN 490m surplus over the purchase price. Our analysis also factors in a 2% discount stemming from the fact that TVN has an online arm (a higher discount does not seem warranted given that the faster growth rate (ca. 12pp) applies to just 12% of TVN's consolidated EBITDA). After factoring in the dilution of the added value stemming from the planned share issue, the transaction adds ca. PLN 262m to our original valuation of PLN 15.3 per share, i.e. ca. PLN 1.0 per one old share.
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BREBRE Bank Bank Securities Securities Special comment
Michał Marczak tel. (+48 22) 697 47 38 Managing Director Head of Research [email protected] Strategy, Telco, Mining, Metals, Media
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BREBRE Bank Bank Securities Securities Special comment
List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6 9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from 5% to 15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months.
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