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Published: October 5, 2012 at 06:31 AM GMT
Last Updated: October 5, 2012 at 06:31 AM GMT
Clear Channel (CCMO) had a busy week, starting with a star-studded Music Festival last weekend at the MGM Theater in Las Vegas and Bloomberg reported that the firm could be eyeing-up an acquisition of Pandora (P) in the wake of news that Apple may be entering the Internet radio game. The stocks been up big -- it's risen almost 80% since the end of August. The Festival, with a line-up of superstars from Taylor Swift, Usher, Pink and Rihanna to Bon Jovi, Green Day and Aerosmith, Clear Channel execs Bob Pittman, John Hogan and John Sykes proved that a legacy media company known for radio and out-of-home can become a dominant digital force, demonstrating the unique power of legacy media that no digital-only company could hope to compete with. Even Vevo, with all its music industry clout would be hard pressed to host an event as all-encompassing and impressive as the iHeartRadio Music Festival. In its second year, the festival included VIP pre-parties, after parties, after-after parties and backstage hospitality that exceeded the high standards set by industry events such as the Super Bowl and Academy Awards. While few Wall Street analysts attended, Clear Channel demonstrated to ad execs and partners that iHeart is not only a major player in the digital space, but it has support from top talent unequaled in the media industry. Credit Pittman and Sykes for recapturing an excitement not experienced in the industry since the early MTV Music Video Awards days, which they also inspired and hosted. Clear Channel radio stations across the country sent contest winners to the event, which included on-stage introductions of leading DJs, reinforcing the iHeart connection to radio. In addition to the event, bartenders, taxicabs and billboards throughout Las Vegas sported iHeart branding. Clear Channel also made news this week inking a radio royalty deal with Glassnote. This is the second time the media firm signed with an independent record label to pay out digital and terrestrial revenues to a label and its artists. Fitch Ratings apparently likes these types of deals when it reported on the initial royalty deal with Big Machine. This type of model appears to enable Clear Channel to better take advantage of its online assets.
Last Friday, House lawmakers introduced The Internet Radio Fairness Act, designed to lower the royalties that Internet radio services pay by placing Internet radio under the same rate standard as cable and satellite. While the bill is unlikely to be voted on by year end, Barclays' Anthony DiClemente believes the new legislation could benefit Pandora (P). He admitted this development puts his Underweight rating at risk as "content costs as a percentage of revenue could decline before the expiry of the current agreement with SoundExchange, improving margins". He's underweight though Positive on P shares with his $9 PT.
As News Corp (NWSA) readies its plans to split itself up, Nomura analyst, Michael Nathanson took a unique approach to valuing the firm. Investors are familiar with the domestic assets of "Good News" (Fox News, FX, etc.), but much less so with the international properties. In a note to investors this week, Nathanson deconstructed a recent 10-K from the firm to "focus on the dynamics and growth drivers of Fox International Channels".
As a percentage of total FY12 Good NWS revenues, International Cable -- which includes things like Fox International Channels and STAR India -- accounts for over 10% of revenues and 15% of EBIT ($2.75B and $780M, respectively). That makes International the 3rd biggest segment within Good NWS. With EBIT growth of 16% in 2012, International sourced about 11% of total company profit growth on the year. On the back of this analysis and a little some-of-the-parts calculus, the analysis believes $26 would fetch an appropriate target for Good News with the rest of the company valued $1 - $2. Nathanson raised his price target to $28 to reflect this new perspective.
Chris Merwin published his second installment of updates on the VOOM HD v EchoStar Satellite trial. The trial has been plagued by a series of delays and absent a settlement, the longer the carriage disruption and the longer AMC Networks (AMCX) is forced to go without carriage from DISH Network (DISH). Merwin believes "the facts of the case support VOOM's position", increasing the likelihood of either a favorable settlement or judgment for VOOM (and CVC/AMCX). He's Overweight AMCX with a price target of $48.
Verizon (VZ) cut an agreement with TiVo (TIVO) this week that includes a cross-license provision for both firms' advanced television patents. As part of the deal, Verizon will pay $250M to settle all litigation between the companies. This outcome was in-line with what Janney's Tony Wible expected, both in terms of timing and size. His analysis shows that the deal represents $200M in present value or $1.48 per diluted share to TiVo. Additionally, the analyst emphasized that TIVO stands to save $10-$15 million in annualized legal expenses. Recognizing that there are still pending cases with Motorola and Cisco, Wible maintained his BUY rating and increased his fair value to $14.50.
Publicis (PUBGY) reached a conditional cash offer to acquire all outstanding global digital agency, LBI. Publicis will offer E2.85 per share, an almost 40% premium to the 12 weighted average share price of LBI.LBI was one of the few remaining independent global agency groups. Deutsche Bank's Patrick Kirby noted that LBI is a lower margin business than its acquirer, putting up 12.2% operating margins versus PUBGY's 16%, "primarily reflecting a higher staff cost/revenue ratio".
Publicis stated the deal valued its bolt-on acquisition at 11x 2012 EBITDA, at the lower valuation end of some of the recent deals we've seen in the agency space. Kirby stated in a note to investors that he doesn't see this deal as particularly attractive financially and felt investors require more justification from the firm for the deal's strategic value.
DB also published on Omnicom (OMC) this week, reiterating its Buy rating. Analyst Matt Chesler slightly trimmed his 2012 EPS but made no real material change to his model. He thinks that the current PE premium on OMC should be greater than the current 3%, "given better growth and lower volatility". He's hearing from management that there has been no divergence from the steady, healthy, underlying business trends.
While the U.S. is holding up, Europe is getting incrementally worse for the firm, while the rest of the world continues to put up double-digit growth numbers. All in, while he lowered EPS estimates for Q3 from $0.77 to $0.72, he's still a believer that the stock should be priced at a higher premium than the rest of the market. He raised his price target from $52 to $59 on his earnings update.
Needham was out with an early earnings preview for CBS Corp (CBS). Analyst Laura Martin has been a believer in the stock put it out ahead lowering her estimates for 3Q 12. She did so because she believes the firm saw lower revenue in the Entertainment segment, due to viewership declines during the Olympics. And on the Publishing side, the media analyst expects CBS to have difficult comparisons over last year when the Steve Jobs biography was published.
She now expects CBS to report revenue of $3.48B on the quarter, up 3% y/y and down 2% from her previous estimates. She's lowering her view on the entire FY 12 revenue and Operating EPS lines. That said, Martin is sticking with her FY 13 estimates that show 6% revenue growth and 11% EPS expansion. She rates CBS shares a BUY with a $40 PT.
Credit Suisse's Spencer Wang described Disney's (DIS) path towards $60 per share. He thinks the diversified media conglomerate can get there on the strength of its margin improvement in Parks. Analyzing a few recent projects (Aulani resort, Art of Animation Hotel, and Cars Land), he sees break-even to $225M in profit in FY13. Therefore, Wang's jacking up his Park EBIT to 16.1% vs. 14.8%, up from his prior estimate of 15.2%.
The Credit Suisse analyst also forecasts "a modest re-acceleration" for affiliate revenue growth for Disney's Cable Networks. These two catalysts -- Park and Cable -- propelled Wang to boost his FY13 EBIT estimates by 1.6% to $11.24B and his EPS numbers by $0.08 to $3.63 (18% growth). He maintains his Outperform rating and raised his PT by $2 to $58.
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