Market Musings - December 17, 2017

We continue our blog series: Market Musings, Volume 1, Edition 15, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present Disney's Fox Purchase Indicates Viacom's Strategic Value Is $59.50/Share.

If Disney's (ticker DIS) recent agreement to purchase most of the media assets of Twenty-First Century Fox (ticker FOXA) for $52 billion in DIS stock tells us anything, it illustrates what the going rate for such assets is today in the hands of a strategic buyer. Below is a description of the transaction from the joint PR announcing the deal (source):

Specifically, DIS obtains ownership of the following properties:

1. Fox's Film Business, consisting of Twentieth Century Fox, Fox Searchlight Pictures and Fox 2000;

2. Fox's TV Production Business, consisting of Twentieth Century Fox Television, FX Productions and Fox21;

3. Fox's Cable Properties, consisting of FX Networks, National Geographic Partners, Fox Sports Regional Networks; and

4. Fox's International Properties, consisting of Fox Networks Group International, Star India and Fox’s interests in Hulu, Sky plc, Tata Sky and Endemol Shine Group.

Wells Fargo assigned the following 2018E EBITDA multiples to the constituent FOXA assets (source):

A. Film studio = 13.5x F’18E EBITDA = $15B;

B. Fox International Cable = 10x F’18E EBITDA = $6B;

C. STAR India = 17.5x F’18E EBITDA = $13B;

D. 28 of FOXA’s 37 domestic cable networks incl. the RSNs = 11x EBITDA = $25.5B;

E. FOXA’s 30% stake in Hulu = $1.7B; and

F. FOXA’s 39% stake in Sky = $10B.

Wells states that DIS is paying $60B for the EBITDA producing properties, or a 12X multiple against the $5B in EBITDA these are expected to produce in 2018. However, after taking $1.5B synergies into consideration, DIS is paying an adjusted multiple of 9X EBITDA.

If we take these EBITDA multiples at face value, we can use them to derive the following rough valuations for VIAB's similar properties:

1. Paramount Studios = 13.5X F'18E EBITDA of $200MM = 2.7B + $1.3B real estate value for Paramount Lot = $4B

2. U.S. Media Networks (~72% of FY2018 media networks revenues) = 11X F'18E EBITDA of ~$2.7B = $29.7B

3. Foreign Media Networks (~28% of FY2018 media networks revenues) = 13.5X F'18E EBITDA [midpoint of 10X to 18.5X range for FOXA international] of ~$330MM = $4.45B

4. Equity method investments (book value at 9/30/2017) = $258MM

5. Corporate = 18X loss of $270MM (including $50MM restructuring) = -$4.86B.

TOTAL VIAB ENTERPRISE VALUE = $33.55B

Subtracting net debt of $9.7B as of 9/30/2017 leaves us with an equity-only valuation for VIAB of $23.85B, or $59.50/share based on 400.6MM shares outstanding. This represents a 16X multiple of VIAB's FY2017 FCF of $3.69/share ($1.477B/400.6MM), which would still be well below the overall market multiple.

All of the foregoing is in line with our previously published work on VIAB in late October 2017, where we valued the company's stock at $58/share (see here). Even though the market price for VIAB has risen approximately 17.5% since then, if we are correct there would still be about 100% upside for VIAB if it were valued as if in the hands of a strategic buyer such as DIS, Comcast or another large media player that could extract substantial synergies. In order to believe that VIAB is worth the current market price, one would need to value its U.S. media networks at just 6.5X EBITDA instead of the 11X EBITDA that DIS is paying for FOXA's domestic cable properties. Granted, FOXA's properties include regional sports networks, so a slightly higher multiple might correctly be ascribed to FOXA's cable channels than VIAB's, but it strains credulity to believe that VIAB's domestic media networks are worth just 60% of FOXA's. (Note that each EBITDA turn higher assigned to VIAB's domestic media properties equates to an additional $6.75/share for the company's stock.)

DISCLOSURE: Long VIAB.