Description

Hemisphere Media (HMTV) is a Hispanic media business run by a great management team, Alan Sokol (CEO) and Craig Fischer (CFO) levered to multiple positive secular trends and with a few hidden assets potentially worth more than the current market cap. 

1. Core Business 1 – WAPA Puerto Rico

WAPA PR is the dominant local broadcaster in Puerto Rico and has captured the lion’s share of television ratings on the island due to local brand loyalty (local content vs. content from Mexico) and the flywheel of the largest budget to create the best local content. WAPA has 20% primetime share, more than ABC/CBS/NBC/Fox combined in the US and 50% share in the 18-49 demographic during primetime. Even during the Puerto Rican recession, Wapa’s absolute dollar advertising revenue remained constant as the industry shrunk and advertisers opted to remain with Wapa.

I spent some time in Puerto Rico touring WAPA PR’s facility and walked through the business with local management. I was impressed by the ‘Outsiders’ de-centralized team that Alan/Craig put in place on the ground, their knowledge of the Puerto Rican viewer, what appeals to him/her and the local content they can create that the competitive local broadcasters who are larger Mexican media companies can’t since they simply just re-use Mexican content in Puerto Rico because the market isn’t large enough of a focus for them. 

Aside from touring WAPA’s facility, over the course of 3 trips to Puerto Rico in 2019 for other investments, I met with developers, political officials, local banks, startup incubators and additional media businesses and am very bullish on the Puerto Rican economy as a result. 

• Post Maria FEMA aid has increased development/employment – Q3 was the first time the unemployment rate is below 8% in 55 years

• Wealthy Americans are moving down to the island to take advantage of Act 22 Federal tax shield status

• 95% of the island is an Opportunity Zone, attracting tax incented capital for redevelopment

• PREPA, the power utility is about to be privatized, the last step in improving a dated power infrastructure

• US governing board installing financial controls and limiting leakage of funds from political embezzlement

All of the above bodes well for foreign investment and an improvement in the overall Puerto Rican economy, especially the privatization of PREPA, which should, hopefully, improve the quality of the grid while lowering the cost of power. 

Given the high correlation between macro environment and advertising revenue for a local broadcaster, I think all of this bodes very well for advertising revenue growth for WAPA PR. I model high single digit advertising revenue growth. As for retrans, the company guides to double-digit retrans growth given the negotiating power they have over MSOs because of their strong ratings. I also assume high incremental margins since the opex required to support retrans and advertising growth is minimal.

2. Core Businesses 2 & 3

HMTV owns five payTV channels with US/Latam carriage with all of the major MSOs:

1. Cinelatino – Hispanic Movies, 20m subscribers in US, Latam, Canada; 2nd highest rated Spanish language network in the US

2. Pasiones – Hispanic Telenovelas, 20m subs in the US/Latam, double digit ratings growth  

3. WAPA America – Puerto Rican News/Programs from WAPA (extremely high margin given no content costs), 4.4m US subs and double digit advertising growth 

4. Centroamerico TV – Central American News/Programs, 4.4m subs (highest growth Hispanic segment) with double digit ratings growth

5. Television Dominicana – Dominican Republic News/Content, 2m subs, recent increases in MSO carriage to drive subscriber growth

The upside from these channels comes from subscriber growth due to secular growth in the non-Mexican Hispanic population in the US. Hispanics make up 18% of the current US population, on track to comprise 20% by 2025 or a 16% CAGR. As such, HMTV US PayTV subscriber base is growing 4% in 2019/2020, despite cord-cutting trends affecting all other PayTV operators. The recent launch of HD channels is also helping increase affiliate fees and customer carriage.

The most important question to answer when it comes to payTV channels is the risk from Netflix. I think this risk is mitigated by the short shelf life of the content (i.e. the morning news from the Dominican Republic being broadcast that day to US subscribers of Television Dominicana) which Netflix doesn’t buy and the content locked up in exclusivity within Cinelatino/Pasiones (and Pantaya, their streaming service but more on that, later). 

I believe that with LSD subscriber and MSD affiliate fee & advertising revenue growth, HMTV should grow its payTV business revenue in the HSD percentage range and low double digit free cash flow range; LDD affiliate free growth in Latam on LSD subscriber growth yields LDD revenue growth.

3. Two Additional Free Options:

Canal Uno – Two years ago, HMTV bought Canal Uno, the very distant (and almost non-existent) third place local broadcaster in Colombia. This network is similar to PBS but with much worse content when they acquired it and very little market share. Management believed there was significant low-hanging fruit to pick in improving the broadcast experience in Colombia (for example, commercial breaks were double that of the US). We are already starting to see an improvement in market share and ratings and believe Canal Uno can get to 35% market share in the next 2-3 years, in a current $500m market that should grow to $600-700m in a few years. At a 50% EBITDA margin and minimal capex, HMTV’s 40% share in Canal Uno can generate significant free cash flow in the next 2-3 years. On top of this, they can re-distribute Canal Uno content into the US, much like they do with WAPA America at no cost and extremely high incremental margins. 

Pantaya OTT Streaming – The Pantaya OTT streaming JV between Lionsgate and HMTV (plus Univision content) seeks to lock up most new Hispanic content into a streaming service apart from Netflix. They currently have 500,000 subscribers with a 17m US TAM, limited churn and continued subscriber growth despite the end of the promotion/trial period. The app is also in the top 10 most downloaded entertainment apps on Google and Apple. 

The nice thing about both Canal Uno and Pantaya is that they have just hit the point of being self-funding so HMTV will not need to invest additional capital, meaning greater free cash flow for buybacks, today – this is part of the reason I think the idea is so timely, today.

4. Great Management 

Alan Sokol (CEO) and Craig Fischer (CFO) ran the Hispanic media strategy at Intermedia (Leo Hindery’s, former CEO of TCI, private equity firm). In 1997, Alan Sokol (while at Sony) managed the acquisition of Telemundo for $750m ($350m equity check). They increased revenue from $200m to $500m and market share from 10% to 30% over three years. In 2001, Sony sold the asset to NBC for $2.7bln, a 6.5x return on their equity. In 2006, Intermedia bought WAPA (Puerto Rican broadcaster) from Lin TV for $130m – I think it’s worth substantially more, today. 

I believe the company is too small for Alan and Craig’s talents and will be used as a platform to roll up quality Hispanic content assets with Canal Uno in Colombia being the first new asset and a recently rumored deal to buy Univision (with Liberty Global) may follow. Alternatively, I think Alan and Craig are thoughtful enough (with no ego) to not necessarily need to run a public company and would be just as happy running the business within a larger media company, as long as the parent also exemplified an ‘Outsiders’ type entrepreneurial culture. 

5. Why is HMTV Misvalued? 

Hurricane Maria in Puerto Rico obfuscated Wapa’s earnings and the businesses is just finally beginning to normalize. The media landscape has had a lot of dislocation because of streaming and the market is likely slow to recognize value in cablenets/local broadcasting. This is a small company with JVs which is not en vogue among investors, today. Finally, many hedge funds who have owned large stakes in the business have closed down, causing some forced selling. 

6. What’s It Worth?

Catalysts: Continued core business free cash flow growth combined with buybacks, growth in Pantaya and Canal Uno free cash flows distributed to HMTV; potential Univision deal or acquisition of HMTV by larger media company.

Catalyst

Continued core business free cash flow growth combined with buybacks, growth in Pantaya and Canal Uno free cash flows distributed to HMTV; potential Univision deal or acquisition of HMTV by larger media company.