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Corsair – Market Is Undervaluing Local Broadcasting Media Special Situation

By Mark Melin. Originally published at ValueWalk.

As Corsair Capital Management looks back on its second quarter in a letter to investors reviewed by ValueWalk, it might take solace in the fact that its Corsair Select, up by 3.9%, beat the S&P 500, which posted a 3.1% after more than doubling that performance in the first quarter on the Trump rally train. Corsair Capital was up 2.3% over the same period. When looking at the underpinnings of the Trump rally and the recent past for central bank interest rate hikes, Corsair, noting odd complacency, thinks there is potential for the term “past performance may not indicate future results” to come into play. Macro picture aside, the New York-based long / short hedge fund, run by Jay Petschek, noted idiosyncratic stock plays that benefited performance as they see current opportunity amid a marketplace that might not be in proper tune with the reality on the ground.

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Jay Petschek

Jay Petschek – Market looking very complacent as risk appears around every corner

When looking at the macro market environment, Corsair, like many analysts, notes that the CBOE VIX index shows investors “quite complacent.”

“Unlike homeowners who renew their fire insurance policies year after year despite not seeing their homes burn down, many investors have become quite comfortable investing on an unhedged basis,” the letter opined, pointing to a high-wire act made particularly perilous as interest rates on the rise in the recent past and the Trump legislative agenda upon which much of the initial 2017 rally was based appearing to unwind recently. “Investor sentiment has swung so far from the behavior that followed the crises of 2008 that, as one financial pundit put it, ‘the only thing we have to fear is the lack of fear itself.’”

As investors increasingly are moving to passive investments. Corsair noted that twice the asset flows found their way into index ETFs in the first three months of 2017 — $98 billion – than moved into the passive products in 2015 and 2016 combined.

Here Corsair finds numerous allies including Joel Greenblatt of Gotham Capital and John Rogers of Ariel Capital who think the historic shift to passive investing will create opportunities for active managers.

Specifically, Jay Petschek opines:

Joel Greenblatt, adjunct professor at Columbia University, succinctly summarized the current situation: “The opportunities for active managers to outperform, because there are fewer people trying to beat the market, are becoming even greater. It’s counterintuitive and it seems strange that opportunities will get better for active managers as the investment flows go elsewhere – but that is exactly what happens.” Furthermore, we believe that the value of having a hedged or less-than-100%-invested portfolio likely remains as important as ever in order to ride out the market’s inevitable gyrations.

Although the public discussion has not emphasized the potential for the tranquil market bubble to end, Corsair, like Jim Rickards, notes that sophisticated investors are increasing speaking in coded language about the potential for the market weather to turn from fall to winter. Corsair doesn’t play the low win percentage game of trying to predict exactly when a crash will occur, but they note the market environment is starting to smell like five-day old fish.

Jay Petschek likes local media investing opportunity, thinks market generally doesn’t get it

When Corsair looks at the market environment, the value identification processes they use often takes the consensus market opinion and attempts to poke holes in it from several perspectives to find opportunity. It is here Corsair has a value opportunity identified.

When looking at the local broadcasting business, Jay Petschek thinks the market is making evaluation mistakes and throwing the baby out with the bathwater.

National advertising trends, which point to unbundling of cable packages and the ability to reach people through online methods at a much lower price than through traditional networks. Local advertising and broadcasting is a different animal, Corsair argues, and this has led investors to undervalue local programming. It is the national content producers and networks that are in trouble, not local news and sports, they argue. It is for this reason that Sinclair Broadcasting Group’s acquisition of Tribune Media and their stash of local television stations could actually lead to a treasure trove of unrecognized value.

“the SBGI/TRCO merger will create significant value given the powerful underlying financial and industrial rationale. Given the specific merits of the deal and the >40% accretion to FCF per share, we believe the recent sell-off belies the value created,” the report noted.

On the quarter, however, the biggest contributor to the hedge fund’s returns was an online company, IAC/InterActiveCorp, which rose 40% over the quarter. Other winners on the quarter were timeshare management and exchange operator ILG Inc and Quintiles IMS.

Jay Petschek notes:

As of July 1, 2017, the five largest positions in Corsair Select were AON PLC, IAC/InterActiveCorp, ILG Inc, Orbital ATK, and Quintiles IMS Holdings Inc.

Jay Petschek ends off the letter with a bullish pitch for Sinclair Broadcasting Group (“SBGI”).

The letter states:

Merger Synergies


In our view, the SBGI/TRCO merger will create significant value given the powerful underlying financial and industrial rationale. Given the specific merits of the deal and the >40% accretion to FCF per share, we believe the recent sell-off belies the value created. The deal presents several idiosyncratic opportunities:


• Unusually large “retrans” synergies


• Unusually large programming savings opportunities


• Sizable corporate and station-level expense savings opportunities


Some of the weakness in SBGI’s stock may be attributed to a misunderstanding of the $100MM+ in “medium-term” synergies highlighted by management. We believe these synergies are readily attainable and should exceed $100MM. This can be illustrated by looking at just two of the four buckets called out by SBGI, namely “station level expense reductions” and “overlap market redundancies”:


1. “Station level expense reductions” – TRCO’s station level operating margins appear to be ~10% lower than SBGI when controlling for “net retrans” and WGNA. If we assume that only half of this gap relates to station-level non-programming expenses, we get $66MM in cost-savings.


2. “Overlap market redundancies” – FCC deregulation would enable SBGI to keep as many as 11 duopolies yielding an estimated $42MM in cost-savings.


Given the TRCO/SBGI transaction does not require an SBGI shareholder vote and certain incremental synergies are contingent on further deregulation, we believe SBGI’s management team is incentivized to provide conservative estimates and downplay further opportunities.

ATSC 3.0 – Free “Call Option


Finally, SBGI provides a unique “call option” on the new broadcasting transmission standard ATSC 3.0, an IP-based, mobile friendly standard that will help broadcasters reach consumers on whatever device they are using. Beyond enhancing the traditional broadcasting business, ATSC 3.0 will also enable the deployment of data on a “one to many” basis by utilizing excess spectrum not used for broadcasting. We believe SBGI could see the financial and commercial benefits of this new standard within 3 years. In addition, SBGI is the only publicly traded broadcaster with meaningful intellectual property in the ATSC 3.0 standard, which given Samsung’s and LG’s involvement, should eventually be deployed in both TV and mobile devices. Even if SBGI earns a modest royalty on a per device basis, the sheer number of mobile devices sold per year could yield a healthy eight-figure annual royalty stream at some point in the next 5 years.


Valuation


We

The post Corsair – Market Is Undervaluing Local Broadcasting Media Special Situation appeared first on ValueWalk.

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