Prisa: Significant Catalysts Ahead

Authors Note: This is a complex, event-driven, special situation investment. Investors are advised to do their own due diligence.

Executive Summary:

1. Significant asset sales and a looming debt restructuring could cause shares of embattled Spanish media conglomerate Promotora de Informaciones [(PRIS) (PRIS.B)]("Prisa" or "the company") to appreciate.


2. A cleaner balance sheet and a set of higher-margin, less capital-intensive businesses levered to Latin America should allow Prisa to grow profitably.


3. Reducing complexity in Prisa's capital structure could allow for more investor clarity.


4. The focus of this article are Prisa's B shares, which have certain dividend, conversion and liquidation preferences to the A shares. The B shares trade at a 22% premium ($2.12) to the A shares ($1.73) (as of Dec. 4, 2013). However, the B shares include a special scrip dividend (about 1 A share for every 4 B shares, see resolution seven in hyperlink) and conversion preferences (1.33 A share for every 1 B share) when the B shares will be forcibly converted to A shares in May 2014. Discerning investors are effectively getting 1.6 A shares for every 1 B share owned.

Introduction

Prisa looks like a speculative, high risk bet on the Spanish economy. However, there are significant, event-driven catalysts looming in the near term that could both reduce risk and move the stock quote appreciably higher.

First, a bit of background. Prisa is a highly leveraged Spanish media conglomerate with valuable and, importantly, salable assets, comprised of pay-TV, education publishing, radio and newspapers. Prisa also is levered to Latin America, and has an addressable market of over 700 million Spanish speakers worldwide.

(click to enlarge)

Prisa's equity was brought to the New York Stock exchange via a special purpose acquisition company ("SPAC") led by Nicolas Berggruen and Martin Franklin. In return for injecting significant capital (900 million euros), the founding family, the Polancos, were diluted to a non-control position. However, the business and share price performance since the deal has been a disaster because of continued economic turmoil in Spain, and Prisa's inability to get out from under its massive debt balance.

The lion's share of the debt is comprised of the following:

A syndicated loan with a bullet payment and single maturity of March 19, 2014, which may be deferred until December 19, 2014, upon meeting certain targets. The syndicated loan has a balance of 1.28 billion euros, and is owned by a consortium of institutionals.

A bridge loan, which does not provide for partial repayments, is currently due on January 15, 2015. Also subject to the same targets above, the maturity of these loans may be extended to September 19, 2015. The bridge loan has a principal balance of 1.3 billion euros.

Luckily, I think the debt problems are about to change in a big way.

Asset Sales

First, Prisa is expected to dispose of its audiovisual assets which include a 56% share of Digital+, Spain's leading pay-TV business; a 17% share of Mediaset Espana (GM:GETVY); and a 90% share of Media Capital, a Portuguese broadcaster.

Digital+ was valued at 2,350 million euros in late 2009, when Telefonica (TEF) and Mediaset each acquired a 22% stake from Prisa. There is quite a bit of interest in this asset from strategic buyers, both domestically and foreign.

On Prisa's latest conference call, management indicated:

And as you know, we have a process advised by banks in selling Digital+, and we've had, so far, 5 interested parties. They've been submitting nonbinding bids and so on. We've had the first round of management presentations, so we are in the process. Obviously, we have waded through the process, and the 5 interested parties so far are foreign, all of them. So there's no any -- I mean, these are external parties. There's another question asking whether -- given the shareholders' structure at Digital+, if it's possible to be acquired by a foreigner. There's nothing in the shareholder structure that prevents it to be purchased by a foreigner. The only thing is that, as you know, Telefonica and Mediaset have substantial rights on the asset. They have a right of first refusal and so on. So obviously, they are in a preferred seat. [indiscernible], but there's nothing preventing a foreigner or anybody to acquire Digital+.

Using the Telefonica/Mediaset deal as a benchmark, I think Prisa could realize up to 1.25 billion euros for Digital+. While there has been some subscriber attrition since that deal, Prisa recently invested in creating a better football platform and realized its first subscriber growth in 6 quarters. The presence of multiple bidders and the fact that Prisa holds a control stake should help stabilize the sales price for Digital+, as well.

Turning now to the other audiovisual assets, both Mediaset Espana and Media Capital are publicly traded. Prisa's 17% stake is currently valued at 530 million euros and its Media Capital stake at some 80 million euros. This is total speculation on my part, but I could see Mediaset wanting to acquire the 17% stake from Prisa directly (potentially at a small premium) in order to retire the minority interest. Mediaset is in a net cash position, making the operation more likely, in my opinion.

The asset sales could generate up to 1.8 billion for Prisa in the near term. It would also leave Prisa much more levered to Latin America. In the first 9 months of 2013 excluding Digital+, Prisa generated 56% of its revenue and 61% of its EBITDA in Latin America.

(click to enlarge)

Debt Restructuring

To buttress the asset sales, Prisa reported that an agreement has been reached with 84% of the creditors regarding the restructuring of all its financial debt. A proposal was issued to the remaining dissenters in early November, and Prisa indicated it expected to come to an agreement on the restructuring before an Extraordinary General Meeting ("EGM") next week, on December 9.

The EGM agenda includes voting on a number of items, including:

• Extending debt maturities by 5 to 6 years


• Allowing a 3-year window for Prisa to sell non-core assets (pay-TV assets in Spain and Portugal), with the right to buy a portion of its debt back at a discount.


• A capital raise of 353 euros via warrants (17% dilution, up to 372 million New A Shares) for medium-term corporate needs. By my calculations, the total share capital is expected to be 2.2 billion ordinary A shares in May 2014, after the capital raise and all convertible bonds and B shares are converted and the final scrip dividends paid.

While I don't like the prospect of being diluted, I think a clear resolution to the debt overhang will lead to equity value being recognized.

In fact, the capital raise prices the New A Shares at 0.94 euros apiece, almost three times the current 0.33 price in Spain. This value closely comports with the 1.03 euros conversion price for the 434 million of mandatory convertible bonds subscribed by the banks and Telefonica in 2012.

Note that the ADRs trading on the NYSE represent 4 ordinary shares trading in Spain.

Therefore, sophisticated investors are paying about 1 euro apiece for ordinary A shares, the equivalent being 4 euros for the A share ADRs. Today, investors are required to pay $2.11 per B share, or roughly $1.32 per A share when considering the scrip dividends and conversion equity kickers to be issued in May 2014.

Using the New Shares and convertible bonds conversion prices as an indication of value, I think Prisa will ultimately be valued around those prices, or ~2 billion euros for the remaining education, radio and publishing businesses, implying about a ~$5 price for the A share ADRs. In the near term, I expect a bump in share price if/when a deal is announced, and I have a $5 target on the A ADRs over the next couple of years (which I reserve the right to amend should material, new information present itself).

Risks

The key risk in owning Prisa shares right now clearly is the complexity around completing the asset sales and debt restructuring. As such, investors interested in Prisa should note that the shares have been, and likely will continue to be, very volatile until investors get more clarity on the details and consummation of a deal.

Even with the risks, I think the exposure to Latin America and the significant mispricing in the B shares (relative to the A shares) make for a compelling investment opportunity. Investors considering this investment should maintain a two to three-year time horizon for all the catalysts to play out.

Conclusion

While Prisa appears like a risky bet, I think the potential for significant asset sales and debt restructuring will finally put Prisa on firm financial footing, allowing it to focus on growing its business in fast growing Latin America.

This investment isn't for the faint of heart, and I expect continued volatility. However, investors willing to pick their spots could see significant gains once the capital structure is simplified, the balance sheet is strengthened and Prisa is able to grow earnings and cash flow.

The last time Prisa announced a debt restructuring in June 2012, the shares soared over 20% before giving back the gains and trading lower for most of 2013. This deal is more substantial and I expect Prisa will once and for all get out from under its debt problem, setting the stage for improved business and, most importantly, share price performance.

Source: Prisa: Significant Catalysts Ahead

Disclosure: I am long PRIS, PRIS.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

from SeekingAlpha.com: Home Page http://seekingalpha.com/article/1882271-prisa-significant-catalysts-ahead?source=feed