A&E Television Network (AETN) premiered its fourth season of Duck Dynasty August 14. The one-hour episode garnered 11.8 million viewers, the highest number ever to watch a non-fiction cable show. A+E Networks, the holding company, is owned jointly by Disney (NYSE:DIS) and Hearst Corporation. The show's runaway success increases the value of A+E Networks immeasurably.
Can an IPO be far off? I'll have a look at the reasons going public makes sense.
There have been 129 IPOs in the U.S. through August 14; that's one more than in all of 2012 and only 26 away from being the best year since 2007. Not only have a large number of companies gone public this year but they're also performing well with the average IPO up 29% from its offering price. The average total return of the top five IPOs is 205%. Needless to say the IPO market is hot and getting hotter.
SEE: IPO Basics: What Is An IPO?
Despite the robust IPO market, there haven't been any significant media-related offerings in 2013. Interestingly, the one big exception—Silver Eagle Acquisition Corp. (Nasdaq:EAGLU)—doesn't even have an operating business. It's a special purpose acquisition corporation (SPAC) established by media industry veterans Harry Sloan, Jeff Sagansky, James Graf and Dennis A. Miller. The group seeks to acquire one or more media and entertainment businesses using the $300 million in net proceeds plus any debt needed to complete a deal within 24 months. Blind pools are good for the sponsors (Sloan et al.) and terrible for everyone else. Avoid like the plague.
Potential Size of A&E IPO
Disney and Hearst acquired Comcast's (Nasdaq:CMCSA) 15.8% stake in A+E Networks in July 2012 for $3.03 billion. The deal valued it at $19 billion. Slightly more than a year later Duck Dynasty has blown the doors off cable television. Surely it's risen since then. Disney values the equity investments on its balance sheet at $2.7 billion, which is clearly much too low.
So what is the real value of its 50% interest in A+E Networks?
In a recent article Bloomberg mentions an unnamed source within the company who says it generates $1.2 billion in annual profits from $3.6 billion in revenue. I'm assuming Bloomberg means "operating" profits in this context and not "net" profits. The bottom line based on a 35% tax rate would be $780 million, a net margin of 21.7%.
Not too shabby.
A+E Networks Peers
|Discovery Communications (Nasdaq:DISCA)||5.9||19.9|
|AMC Networks (Nasdaq:AMCX)||3.2||17.1|
|Scripps Network Interactive (NYSE:SNI)||4.4||17.9|
Bloomberg's estimate of earnings and revenues combined with an average of its three peers puts A+E Networks' market value between $14.3 billion and $16.2 billion. Currently, Discovery's enterprise value is $35.8 billion, almost double A+E Networks and 7.3 times revenue. Although Discovery does a better job internationally, A+E Networks CEO Nancy Dubuc is moving fast to expand overseas. In July it announced it had acquired the remaining shares of AETN it didn't already own from AOL (NYSE:AOL), giving it complete control over its network in Asia. Not only is the executive bullish on Asia, she's also a big believer in Europe and the Americas. In a couple of years that gap will be closed.
If you apply the same enterprise-value-to-revenue multiple for A+E Networks as is the case for Discovery, we come to a value of $26.3 billion, which seems fair given its shortcomings internationally. Discovery's debt as a percentage of enterprise value is 18%. Using the same percentage for A+E Networks (as a private company equity investment it's not broken out in Disney's financial reports) for simplicity sake, I arrive at a market cap of $22 billion. It's not scientific by any means but it's close enough.
SEE: Using Enterprise Value to Compare Companies
Zoetis (NYSE:ZTS) is the largest IPO so far in 2013 raising $2.2 billion. Assuming a $22 billion enterprise value for A+E Networks, it could easily raise a couple billion dollars issuing shares to the public. If everything went smoothly, Disney and Hearst could then consider what to do with the remaining shares. Obviously, the needs of a public company are different then those of a private one. What each board would want to do at that point is entirely hypothetical.
Whether or not you believe that Disney's 50% investment in A+E Networks is accurately reflected in the price of its stock, I believe it makes total sense to go public at this point in the IPO cycle because there appears to be two to three years of strong activity ahead. The fly in the ointment is the economy. There are signs it's slowing. If we're still moribund by Christmas, the IPO market will flatline in 2014 and there will be no reason for Disney or Hearst to consider going public.
But if it did I'd seriously have to consider buying some.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.