Description

Introduction: Entravision (“EVC” or the “Company”) was previously written up on VIC by maggie1002 in February 2021.  I encourage readers to review that write-up for a more comprehensive overview of the Company and its businesses. 

There have been two major events since that write-up.  In December 2022, Walter Ulloa (the Company’s controlling shareholder, Chairman, and CEO) died unexpectedly of a heart attack.  His Class B shares collapsed, resulting in control of the Company reverting to shareholders.  In March 2024, Entravision announced that Meta (Facebook) would be ending its relationship with all Authorized Sales Partners (ASP’s), including Entravision.  The announcement sent Entravision stock down over 50%.  In contrast to the market, we ultimately believe the loss of the Meta business could be a positive event, especially with control of the Company in the hands of shareholders.  While the stock has since partially recovered, shares remain approximately 40% below pre-announcement levels, and offer an attractive opportunity for long-term investors.

Company Overview: Entravision is a Hispanic-focused media company operating in three segments: Television, Radio, and Digital.  The Company’s Television segment owns and operates 49 television stations in major markets including Orlando, Tampa, Washington D.C., San Diego, and Denver.  Entravision is the largest affiliate group for Univision.  The Company’s Radio segment owns 44 Hispanic-focused radio stations, including key stations the Los Angeles, Miami, Phoenix, and Sacramento. The Company’s Digital segment provides digital advertising solutions that allow advertisers to reach online audiences worldwide. Entravision was founded in 1996 and listed on the NYSE in 2000.

Meta Announcement: On March 4, 2024, Entravision was notified that Meta intended to wind down its ASP program globally and end its relationship with all ASPs, including Entravision by July 1, 2024.  Meta was Entravision’s largest customer, representing $586 million in sales (over 50%) and $23.8 million of EBITDA in 2023 (out of $57.7 million of consolidated EBITDA).  Entravision announced the news in the Company’s quarterly earnings release on March 5, 2024, and cancelled its previously scheduled earnings call.  As a result of the bad news (and lack of communication), the Company’s stock plunged, dropping over 50% on the announcement and trading even lower in subsequent weeks. 

Death of Walter Ulloa and Hiring of Michael Christenson as CEO:  On December 31, 2022, Walter Ulloa (Entravision’s founder, controlling shareholder, and Chairman/CEO) unexpectedly died of a heart attack.  Mr. Ulloa co-founded Entravision in 1996 and served as Chairman and CEO since February 2000.  Mr. Ulloa effectively controlled Entravision through his ownership of super-voting Class B shares and in recent years spearheaded the Company’s digital acquisition spree.  Upon his death, the super-voting Class B shares collapsed, and control of the Company reverted to Entravision shareholders.  In June 2023, Entravision announced that the Company had hired Michael Christenson as CEO.  Mr. Christenson looks like a strong hire, with a long history of experience in both operating and financial roles.  On several conference calls prior to the Facebook announcement, Mr. Christenson made it clear that future acquisitions would be on hold for the foreseeable future as the Company evaluates its current operations.  Following the Meta announcement, Mr. Christenson purchased 100,000 shares of Entravision stock at $1.6725/share, highlighting his conviction in the Company’s prospects. 

Digital Segment: The Company’s Digital segment was constructed over the last five years through a number of international acquisitions, with segment revenue increasing from $81 million in 2018 to $933 million in 2023. The Company’s digital segment operates in three lines of business, Entravision Global Partners, Smadex, and Mobile Growth Solutions.  Entravision Global Partners acts as an intermediary between global media companies and advertisers in developing countries.  In addition to its prior relationship with Facebook, Entravision also partners with Twitter (X), TikTok, SnapChat, and Pinterest.  While the headline revenue contribution from Facebook of $586 million dwarfs the Company’s other revenue sources, it is important to note that this revenue is reported on a gross basis with only 7% (reduced from 10% in H1 2023) of this reported revenue is actually retained by Entravision.  Smadex is the Company’s proprietary programmatic ad purchasing platform.  Smadex provides advertising solutions primarily to mobile app developers that help advertisers manage online campaigns.  We estimate that Smadex generates $90 million in revenue and $5-10 million of EBITDA.  Competitors including The Trade Desk (TTD) and AdTheorent (ADTH) both trade at high multiples with AdTheorent recently being acquired at over 1.5x sales.  The Mobile Growth Solutions business stems from the Company’s acquisition of Adsmurai.  The business is similar to Smadex but utilizes third-party programmatic platforms.  Following the loss of the Meta business, we expect Entravision to dramatically reduce segment expenses with the potential to explore strategic alternatives for the remaining businesses. 

Television Segment:  The Company’s legacy Television segment remains highly profitable and generates significant free cash flow.  In 2023, the Television segment generated $121 million in revenue and $40 million in EBITDA (33% EBITDA margins).  Results are expected to improve meaningfully in 2024 given the Presidential election year.  We estimate the segment could generate an additional $30 million in revenues and EBITDA from political revenue in 2024.  Other publicly traded television broadcast companies are trading at 7-8x EBITDA, suggesting a segment value of ~$400 million ($55m average EBITDA * 7.5x).  Additionally, the Television segment owns significant spectrum assets (Boston, Orlando, and Tampa) which could garner significant interest from mobile phone carriers should the FCC move forward with another spectrum auction.  Of note, in 2017 Entravision generated $263 million in proceeds from the sale of spectrum from just four of their television stations. 

Radio Segment:  Entravision’s Radio segment is also profitable and generates significant free cash flow.  In 2023, the Radio segment generated $53 million in revenue and $9 million of EBITDA (8% margins).  In 2024, results are also expected to improve dramatically with political advertising potentially adding an additional $10 million of revenues and EBITDA.  While most publicly traded radio companies operate with significant leverage making comparable challenging, assuming a 5x EBITDA multiple on average EBITDA of $15 million suggests a value of $75 million for the segment.  Given the strategic nature of reaching the Hispanic audience, the value of a broadcaster could exceed the value assigned by a traditional DCF analysis.  Of note, in 2022 a George Soros funded group purchased 18 Hispanic radio stations for $60 million.  Mr. Soros is also reported to own a significant state in Audacy’s debt, highlighting the potential strategic value of radio assets.  

Potential Cost Cuts:  In the same press release where Entravision announced the loss of the Meta business, the Company commented that it is conducting an extensive review of our strategy and cost structure.  This suggests that significant cost cutting measures are likely to take place, both in its Digital segment and at the Corporate level.  Since 2020, the Company’s corporate expenses have nearly doubled from $28 million in 2020 to $50 million in 2023.  The loss of the Facebook business likely causes the Company to reexamine its corporate costs with the potential for significant reductions.  A return of corporate expenses to 2020 levels would almost entirely cover the EBITDA lost from the loss of Meta as a customer. 

Financial Forecasts and Valuation:  Even with the loss of the Facebook business, we expect Entravision to generate robust profits and free cash flow in 2024.  Assuming the Facebook business goes away starting on July 1, 2024, we expect the Company to generate over $850 million in revenue and nearly $75 million of EBITDA in 2024.  Financial results will fluctuate with the U.S. election cycle and we forecast EBITDA to decline to $40 million in 2025.  Even with the recent increase in its share price, Entravision currently has a market capitalization of just $192 million and an enterprise value of $282 million (or under 5.0x average EBITDA).  We forecast Entravision to spend $8m annually on capex, $12m in net interest expense, and around $10 million in cash taxes given a sizeable NOL balance.  We utilize a DCF analysis to obtain a target enterprise value of $375 million (roughly 6.5x average EBITDA) and after subtracting $90 million in debt obtain a price target of $3.25/share.  Additional upside could be obtained through the sale of spectrum assets or entire segments or businesses (including Smadex). 

Capital Allocation: Entravision has thus far continued to pay a $0.05/quarter dividend after the Meta announcement ($17.5 million annual payment and a 9.2% current yield).  We expect there is still significant concern in the market that Entravision chooses to cut or eliminate its dividend.  Based on our projection we expect the Company’s free cash flow to easily cover its current cash obligations associated with the dividend.  At the Company’s current share price, we would likely be supportive of a reduction in the dividend to aggressively repurchase shares, although that would come with significant share price volatility.  We expect all other acquisitions or expansion projects are on hold for the time being with the Company utilizing any additional free cash flow to reduce debt.  We see each of these potential uses of cash flow being value accretive to equity holders.

Catalyst

Free cash flow generation, cost-cutting initiatives, sale of business or segment.