Boyar Asset Management’s Letter To Hemisphere Media Group
Boyar Asset Management‘s letter to Hemisphere Media Group Inc (NASDAQ:HMTV). According to Jonathan Boyar, “what they are doing to minority shareholders is terrible and is in our opinion a significant breach of their fiduciary duty.”
Letter To Hemisphere Media Group
Boyar Asset Management has been a longtime shareholder of Hemisphere Media Group, Inc (“HMTV”). We’re more than just disappointed at the May 9th announcement that Hemisphere Media will be acquired by controlling shareholder Gato Investments LP for $7.00 per share—we’re shocked. Yes, the takeover price was an ~86% premium to HMTV’s previous close, but this offer dramatically undervalues the Company: not only is it ~7% below the value of the stock at the beginning of 2022, but it’s also nearly 50% below Hemisphere’s 52-week high. This wholly inadequate “takeunder” is hardly in the best interests of long-term investors and is fraught with conflicts of interests.
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To add insult to injury, much of the past year’s price decrease appears to have been attributable to some of the Company’s own questionable capital allocation and managerial decisions. It is a travesty that the very people in our opinion who are responsible for the share price decline at HMTV are now the ones set to benefit from this laughably low bid.
We are far from alone in our concerns. Investment manager Edenbrook Capital, which owns roughly 7.65% of the total company (~14.94% of the publicly traded class A shares), staunchly opposes the deal. In addition to pointing out the discrepancy between the Company’s intrinsic value and the takeover valuation, it has highlighted inconsistent assertions from the Company itself as well as potential conflicts of interest, all of which leave us deeply concerned about the fairness of the process thus far.
The company generated adjusted EBITDA of $64 million in 2021, excluding Pantaya losses (as discussed later) and political advertising revenue. Importantly, this level of profitability was achieved in a non-election year. Puerto Rico’s election cycles run every four years, the next occurring in 2024. During these cycles, its television networks gain a meaningful influx of high-margin political advertising revenues. Assuming no increase in segment EBITDA this year ($64 million) and ascribing a conservative 7x EBITDA multiple (based on the low end of precedent comps in the media and communications arena over the last few years) produces a $448 million valuation for these properties alone. The enterprise value of Gato Investments’ proposed transaction is $494 million, including net debt of about $212 million (equity value ~$282 million). Hemisphere owns WAPA, the leading broadcast network in Puerto Rico, as well as several other prominent Spanish-language cable network stations in the U.S. and Latin America.
WAPA is a dominant property whose prime-time ratings, according to management, surpass those of the Big 4 in the U.S. (CBS, NBC, ABC, and Fox) combined. Put up for sale on a standalone basis, it could command a significant premium to Gato’s purchase price. (Over the many years the Boyar Value Group has been following media companies, we’ve seen many top-notch properties in the cable/broadcast sector command multiples in the teens—including in recent years.)
Pantaya is Hemisphere Media’s nascent streaming platform. Hemisphere owned a minority interest position in the business before acquiring the remaining stake in April 2021, in a purchase that valued the business at $165 million. Gato Investments does not plan to hold onto this business. Instead, Pantaya is slated to be concurrently acquired by TelevisaUnivision for radio assets and an undisclosed sum of cash. Why HMTV shareholders do not receive the proceeds from the Pantaya divesture is baffling.
Taking together $448 million for WAPA and related assets, $165 million for Pantaya, and $212 million in net debt suggests an enterprise value of at least $825 million—a whopping 67% more than the proposed offer. Leaving net debt out of the equation, we put the equity value of the assets, conservatively, at well upward of $613 million. What’s more, the Company has valuable stakes in several other media outlets we don’t even factor into our valuation, including a 40% interest in Canal 1, the #3 broadcast television network in Colombia. According to the Company’s 2021 10-K, issued March 16, 2022, it was underpenetrated in that market, with the highly scalable business model poised to grow and capture market share. The Company also holds meaningful positions in REMEZCLA (a digital media company focused on English-speaking Hispanics in the U.S.) and Snap Media (produces and distributes original movies and series).
We have a hard time believing that insiders truly think they’re giving shareholders a fair deal. In 2021, Hemisphere Media was buying back its shares at levels far higher than recent prices or the proposed takeover price, mostly during 1Q (at an average price of $10.37 per share) and 2Q (no average price available, but the stock was never less than $11.28 during that quarter). As recently as late last year, the Company said outright that its shares were undervalued at $11+.
Management previously asserted that there was value to be unlocked in Pantaya (although value destruction has ensued instead), alluding on November 5, 2021, to an undrawn revolver and the ability to expand the balance sheet as needed. Yet just 10 days later, the Company announced an unexpected secondary offering of 6 million shares, sparking an immediate 20.5% drawdown in equity value. Aside from an extremely short-lived rebound just one trading session later, HMTV shares have been under pronounced selling pressure ever since. Did the Company need the money for a compelling new growth opportunity? That seems unlikely, especially in hindsight. Was it capitalizing on a healthy run-up in its share price? No— the stock has been largely range-bound over the prior 5 years or so. Were there unstated liquidity concerns? In our opinion liquidity fears among the investment community, along with share-dilution concerns, was largely responsible for the stock’s fall over these past few months.
Even so, management continued alluding to strong growth potential, calling HMTV shares undervalued. On March 8, 2022, in a press release touting 4Q and full-year 2021 results, management boasted about record-high advertising and retransmission revenue from WAPA, predicting that Puerto Rico’s recovering economy would drive strong results this year. Management even went so far as to say, “Our market value has little correlation with our true underlying value,” then added on the earnings call that “[o]ur stock price does not in any way reflect the fundamental value and strength of our company.” Management had previously canceled the equity offering, stating in no uncertain terms, “We think the stock is incredibly attractively priced. We have no interest in a sales transaction at or anywhere near this price. In fact, we pulled our equity offering when our stock price went down to $8 or $9. We felt that we would rather be a buyer than a seller at that price. And clearly at this current price level, we are absolutely a buyer rather than a seller.” By then, HMTV shares had lost about half their value since the start of the year, closing at $5.45.
The proposed takeover price dramatically undervalues Hemisphere, raising fears that Company insiders may be attempting to capitalize on the reduced valuation (for which they themselves could partly be blamed) by taking the Company private at a level they know to be well below its intrinsic value. Such a take-private deal might benefit insiders, who could continue participating in the potential synergies and accelerated growth opportunities of the combined entities, but we believe that public investors are getting a raw deal.
Any board of directors has a fiduciary obligation to strike a fair deal for minority shareholders. Accordingly, Hemisphere’s board should insist on a higher takeover price and conduct a proper sales process with a view to extracting the most value for all shareholders, not just for current members of management.
Updated on Jun 3, 2022, 1:49 pm