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Letter from Boyar Asset Management to Hemisphere Media Group Inc (NASDAQ: HMTV). According to Jonathan Boyar, “what they are doing to minority shareholders is terrible and constitutes in our view a material breach of their fiduciary duty”.
Letter to Hemisphere Media Group
Boyar Asset Management is a long-time shareholder of Hemisphere Media Group, Inc (“HMTV”). We are beyond disappointed with the May 9 announcement that Hemisphere Media will be acquired by majority shareholder Gato Investments LP for $7.00 per share – we are shocked. Yes, the takeover price was around an 86% premium to HMTV’s previous close, but this offer significantly undervalues the company: not only is it around 7% lower than the share value at the start of 2022, but it is also nearly 50% lower than the 52-week high for the hemisphere. This totally inadequate “support” is hardly in the interests of long-term investors and is fraught with conflicts of interest.
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To add insult to injury, much of the price decline over the past year appears to have been attributable to some questionable decisions by the company in capital allocation and management. It’s a travesty that the very people we believe are responsible for driving down the share price at HMTV are now the ones who will benefit from this ridiculously low offer.
We are far from alone in our concerns. Investment manager Edenbrook Capital, which owns about 7.65% of the entire company (~14.94% of publicly traded Class A shares), strongly opposes the deal. In addition to highlighting the discrepancy between the intrinsic value of the Company and the valuation of the takeover, he highlighted inconsistent assertions by the Company itself as well as potential conflicts of interest, which leave us all deeply concerned about the fairness of the process so far.
The company generated adjusted EBITDA of $64 million in 2021, excluding losses from Pantaya (as discussed later) and political advertising revenue. Importantly, this level of profitability was achieved in a non-election year. Puerto Rico’s election cycles occur every four years, with the next one occurring in 2024. During these cycles, its television networks earn a significant influx of high-margin political advertising revenue. Assuming no increase in segment EBITDA this year ($64 million) and assigning a conservative multiple of 7x EBITDA (based on the low end of previous comparisons in the media and communications industry in recent years) yields a $448 million valuation for these properties alone. The enterprise value of the transaction proposed by Gato Investments is $494 million, including net debt of approximately $212 million (equity value ~$282 million). Hemisphere owns WAPA, the main broadcast network in Puerto Rico, as well as several other leading Spanish-language cable network stations in the United States and Latin America.
WAPA is a dominant property whose prime-time ratings, according to management, exceed those of the big four in the United States (CBS, NBC, ABC and Fox) combined. Listed for sale on a stand-alone basis, it could command a significant premium over Gato’s purchase price. (In the many years the Boyar Value Group has tracked media companies, we’ve seen many top cable/broadcast properties order teen multiples, including in recent years.)
Pantaya is Hemisphere Media’s fledgling streaming platform. Hemisphere held a minority stake in the company before acquiring the remaining stake in April 2021, in a purchase that valued the company at $165 million. Gato Investments does not plan to retain this business. Instead, Pantaya is set to be simultaneously acquired by TelevisaUnivision for radio assets and an undisclosed sum of cash. Why HMTV shareholders are not receiving proceeds from the Pantaya sale is puzzling.
Taking together $448 million for WAPA and related assets, $165 million for Pantaya, and $212 million in net debt, this suggests an enterprise value of at least $825 million, or 67% more. than the proposed offer. Leaving net debt out of the equation, we put net asset value, conservatively, at well over $613 million. Additionally, the company has significant stakes in several other media outlets that we don’t even factor into our valuation, including a 40% stake in Canal 1, the No. 3 television network in Colombia. According to the company’s 10-K 2021, released on March 16, 2022, it was underpenetrated in this market, with the highly scalable business model poised to grow and capture market share. The Company also holds significant positions in REMEZCLA (a digital media company focused on English-speaking Hispanics in the United States) and Snap Media (produces and distributes original films and series).
We find it hard to believe that insiders really think they are giving shareholders a fair deal. In 2021, Hemisphere Media was repurchasing its shares at levels well above recent prices or the proposed repurchase price, primarily during Q1 (at an average price of $10.37 per share) and Q2 (no price average available, but the stock has never been lower by $11.28 this quarter). As late as the end of last year, the company was adamant that its shares were undervalued at $11+.
Management had previously claimed there was value to be unlocked in Pantaya (although value destruction ensued instead), alluding on November 5, 2021 to an unfired revolver and the possibility of expand the balance sheet if necessary. Yet just 10 days later, the company announced an unexpected secondary offering of 6 million shares, causing an immediate 20.5% drop in share value. Aside from an extremely fleeting rebound just a trading session later, HMTV shares have been under pronounced selling pressure since then. Did the company need money for an exciting new growth opportunity? That seems unlikely, especially in hindsight. Did it benefit from a healthy rise in its share price? No – stock has been largely limited for the past 5 years or so. Were there undeclared liquidity problems? In our view, liquidity fears within the investing community, along with fears of stock dilution, have been largely responsible for the stock’s slide over the past few months.
Despite this, management continued to hint at strong growth potential, calling HMTV’s shares undervalued. On March 8, 2022, in a press release touting 4Q and full year 2021 results, management boasted of WAPA’s record advertising and broadcast revenue, predicting that the recovery of Porto’s economy Rico would drive strong results this year. Management even went so far as to say, “Our market value has little correlation to our true underlying value,” then added on the earnings call that “[o]Our stock price in no way reflects the fundamental value and strength of our business. Management had previously canceled the share offering, stating unequivocally, “We believe the share price is incredibly attractive. We have no interest in a sell transaction at or near this price. In fact, we withdrew our stock offering when our stock price fell to $8 or $9. We felt that we would rather be a buyer than a seller at this 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 significantly undervalues Hemisphere, raising concerns that company insiders are trying to capitalize on the reduced valuation (for which they themselves could be partially blamed) by taking the company private to a level they know to be well below its intrinsic value. Such a privatization deal could benefit insiders, who could continue to participate in the potential synergies and accelerated growth opportunities of the combined entities, but we believe public investors are getting a raw deal.
Every board has a fiduciary duty to reach a deal that is fair to minority shareholders. Accordingly, Hemisphere’s Board of Directors should insist on a higher buyout price and conduct an appropriate sale process with a view to extracting the most value for all shareholders, not just current members of the direction.
Updated on June 3, 2022 at 1:49 p.m.
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