Prisa: Debt Deal Done, Asset Sales On Deck

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

Investors who believe in the efficient market hypothesis ("EMH") need to look no further than shares of Promotora de Informaciones [(PRIS)(PRIS.B)] ("Prisa") to discover that the market clearly misprices securities.

Since I wrote my December 6 narrative on Prisa, the A shares have appreciated 23% while the B shares increased 32%, with each share class currently sitting at $2.13 and $2.80, respectively. Not bad for about 3 weeks of 'work.'

In the last narrative, I pointed out that significant catalysts were looming in the near-term, including: (1) a debt restructuring/equity recapitalization and (2) asset sales. With the debt restructuring complete, I expect Prisa to turn to the asset sales to continue its deleveraging plan (discussed below).

First, dispelling the EMH: Arbitrage

I posited in my last report that the B shares effectively represent 1.59 A shares given certain scrip dividend preferences for the B's and conversion preferences when the B's will be forcibly converted to A's in May 2014.

I still believe a mispricing exists between the two classes.

Given the unique nature of Prisa's dual class structure which is set to mandatorily become a single share class structure (only A shares will remain) in 5 to 6 months time, an arbitrage opportunity exists for discerning investors. Because the B shares are convertible by the holder at any time up to May 2014 when they are mandatorily convertible, if the price of the A's is higher than the price of the B's divided by 1.59 (0.26 A scrip dividend payable and a 1.33 A to 1 B conversion ratio, both occurring in May 2014), an investor could short the A's and go long the B's for a low-risk profit. Note that the short interest in the A's materially increased from 1.1 million to 1.5 million between November 29 and December 13 (the period my report was published), according to Nasdaq.com.

The other way to participate in Prisa's future is by simply owning the B shares which are clearly a better value (and safer since they also possess liquidation preferences) than the A shares today.

Debt Restructured

Prisa is no longer at risk of defaulting on its loans in the near term as the debt maturities were extended by 5-6 years, provided certain milestones are met, including non-core asset sales generally defined as Prisa's audiovisual assets (56% share of Digital+; 17% share of Mediaset Espana; and 90% share of Media Capital).

Details of the debt deal are as follows:

(click to enlarge)

The key to the debt deal is that it provides Prisa 3 years to sell its audiovisual assets and to buy a portion of its debt back at a discount. The debt deal should help increase Prisa's negotiating power with potential buyers because it provides adequate time to sell the asset for the right price, thereby maximizing debt reduction potential over the next several years.

Asset Sales On Deck

On the heels of the debt restructuring, various Spanish media sources are reporting that Prisa has set a January 15 deadline for non-binding offers for its Digital+ asset. [Note: I have an email in with Prisa Investor Relations regarding this topic.] What we do know from the last conference call is that numerous foreign buyers have been performing due diligence on the asset and are submitting non-binding bids.

In my last report, I indicated that Prisa previously sold a partial (44%) stake in Digital+ to Telefonica (TEF) and Mediaset Espana (OTC:GETVY) in a deal valuing the asset at €2.35 billion. While there has been slight subscriber attrition since that deal, the control premium that should be ascribed to the 56% share of Digital+ should help stabilize the sale price, as does the existence of multiple bidders which could include Telefonica, MediaSet, Vivendi (OTCPK:VIVHY) which is flush with cash after a number of non-core asset sales, 21st Century Fox (FOX) via its listed asset British Sky Broadcasting (OTCQX:BSYBY), among others.

The key risk in owning Prisa B shares is not a matter of if a deal gets done for Digital+, but rather at what price? If the deal is consummated at a level that is considered inadequate, I expect that Prisa shares could pull back on news of an unsatisfactory deal. In my view, I think Prisa could realize between €1.2 and €1.4 billion using the 2009 Telefonica/Mediaset deal as a benchmark. Multiple bidders, industry consolidation, a newly refinanced balance sheet and the control stake for sale should put Prisa in a better negotiation stance.

Conclusion

Getting ahead of positive catalysts by connecting-the-dots on publicly available information is key to event-driven investing. All signs point to continued positive news out of Prisa's turnaround plan and deleveraging process.

2014 is looking like it will shape up to be a pivotal year in Prisa's long, complex, stressful, multi-year turnaround and slimmed down capital structure. With the forcible conversion of the B's into A's and the potential for near-term asset sales, Prisa still looks like an appealing event-driven idea heading into the New Year, even though I expect volatility to continue until investors are provided some more certainty with respect to the turnaround plan and asset sales.

Source: Prisa: Debt Deal Done, Asset Sales On Deck

Disclosure: I am long 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...)

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