Sorry wrong analyst its keith fawcett
Price: $26 15/16
12 Month Price Objective: $36
Estimates (Sep) 1998A 1999E 2000E
EPS: NM NM d$0.20
P/E: NM NM NM
EPS Change (YoY): NM NM
PF EBITDA/Share: NM $0.82 $1.00
Adj. EV/EBITDA (Dec): NM 27x 23x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-1-1-9
Mkt. Value / Shares Outstanding (mn): $1,634 / 60.5
Book Value/Share (Sep 1999): $3.50
Price/Book Ratio: 7.7x
ROE 1998E Average: NM
LT Liability % of Capital: 12.0%
Est. 5 Year EPS Growth: 35.0%
Stock Data
+ Range: $26-$29 3/8
Symbol / Exchange: SBSA / OTC
Options: None
ú Initiating coverage with a Buy rating.
ú SBS is a pure-play Spanish-language radio
broadcaster, operating 19 FM stations in six
major markets, including New York City,
Miami and Puerto Rico.
ú Our 12-month price objective is $36 per share,
up 33% from current trading levels, and is
based on 30x our CY 2001E EBITDA.
Fundamental Highlights:
ú SBS is a pure-play on the boom economy of
Hispanic USA, reflecting explosive growth in
population and economic power.
ú The company?s flagship station, WSKQ-FM
known as ?La Mega,? is the top-rated station
in New York City among Adults 25-54, airing
in any format, English or Spanish.
ú For 1999, same-station sales are projected to
rise 24% and cash flow to jump 44% --industry-
leading results, English or Spanish.
ú In many U.S. markets, huge Hispanic
populations are served by a handful of FM
stations, creating a wonderful economic
model. As a result, SBS?s intermediate-term
and long-term growth prospects, we believe,
are excellent.
Spanish Broadcasting System ? 3 November 1999
(Continued)
2
La Mega Growth
Spanish Broadcasting System (SBS) is the second-largest
Spanish-language radio broadcasting company in the U.S.
The company owns 19 FM stations in six major markets,
including its pending transactions. SBS operates radio
stations in all four of the largest U.S. Hispanic markets ?
Los Angeles, New York City, Miami and Puerto Rico.
The company?s operational efficiency is superb, with an
industry-leading broadcast cash flow margin of 54% for
1999. The company simulcasts all of its radio stations on
LaMusica.com, a captive Web site.
In New York City, the company operates its flagship
station, WSKQ-FM, known as ?La Mega? 97.9, which is
not only the top-rated station in Spanish in New York City,
but also the City?s top-rated station among Adults 25-54
airing in any format, English or Spanish. Reflecting the
dynamic of Spanish-language radio, Mega?s revenues and
cash flow increased by an estimated 31% and 60%,
respectively, in 1999. Radio advertising is one of the
highest-growth segments in U.S. advertising; and Spanish-language
radio is the hottest sector within a hot industry.
In October 1999, the company went public at an initial
offering price of $20, selling 25.7 million shares (20.9
million primary) and raising net proceeds of $395 million.
Ra£l Alarc¢n, Jr., SBS?s Chairman and CEO, led the
company?s expansion into major-market FM radio.
Corporate insiders retain a 46% economic interest and a
75% voting interest, post-IPO.
Reasons to Buy
n Hispanic USA is a boom economy
Hispanic USA is truly amid a period of rapid growth in
population, disposable income, consumer spending and,
thus, advertising spending. In fact, the U.S. Hispanic
population is the world?s fifth largest Spanish-speaking
country, an emergent high-growth market without currency
or country risk.
U.S. Hispanics are the fastest growing population
segment in the US. The U.S. Hispanic population is 34
million, or 12% of the U.S. population, reaching a critical
mass that is affecting popular culture, presidential politics
and national advertising campaigns. Since 1990, the
Latino population has grown 38% fueled by immigration
and high birthrates, while the overall population has grown
just 9%. Moreover, the Hispanic populace is very young,
with more than one-third of the population still under the
age of 19, suggesting that the economic boom is just
beginning, as this group enters the workforce. In 2000,
Hispanic America gets a new census and possibly a large
upward revision in total population.
U.S. Hispanics represent 29% of the population in the
Top 10 U.S. Hispanic markets. The Hispanic population
is geographically concentrated. By market, Los Angeles
has 6.3 million individuals of Hispanic ancestry, or 39% of
the population; Puerto Rico, 3.8 million, nearly 100%;
New York City 3.6 million, or 18%; and Miami 1.4
million, or 38%. Especially in the Top 10 markets, many
local businesses are now dependent on Hispanics to grow
their businesses and, in certain instances, to survive. For
example, in Manhattan, the leading car dealership sells
80% of its total volume to Hispanic consumers. Spanish-language
radio, based largely on local advertising, will be
a principal beneficiary of this demographic trend.
n Spanish-language advertising is thriving
Spanish-language radio advertising, we believe, is in the
early stages of a secular boom. National marketers have
begun to concentrate attention on Hispanics, as a result of
their explosive growth in population and buying power.
Hispanic families are younger, larger in size, and
geographically concentrated, that is, they are an
advertiser?s dream demographic. Approximately two-thirds
of U.S. Hispanics speak Spanish at home. This level is
expected to remain constant by way of immigration and
extensive bilingualism among U.S.-born Hispanics.
Advertisers have found that the most effective means to
reach the U.S. Hispanic market is through Spanish-language
media. Spanish-language advertising reached $1.7 billion
in 1998, representing a CAGR of 18%, since 1993, or 2x-3x
faster than U.S. advertising in general. We fully expect
that Spanish-language advertising will continue to grow at
2x the rate of U.S. advertising.
n U.S. Hispanics are underserved by radio
SBS faces limited competition, as Hispanics are
overlooked and underserved by traditional radio, especially
on the FM band. In most major markets, huge Hispanic
populations are served by just a handful of broadcast
signals. In New York City, for example, 3.6 million
Hispanic Americans are served by just three FM stations
(two owned by SBS). When viewed as a city within a city,
Hispanic NYC is the size of Houston, a radio market with
$275 million in radio advertising. By comparison,
Spanish-language radio advertising in NYC was roughly
$56 million in 1998. The Hispanic marketplace has plenty
of upside and SBS?s acquisition strategy seeks to fill this
void in audience and advertising. Hispanics are heavy
users of radio and Spanish formats are often market-leaders
in terms of audience time spent listening weekly.
We regard SBS?s dominance of Spanish-language radio as
a highly protected niche strategy that is unlikely to be
attacked by mainstream major-market radio operators,
such as Infinity and Clear Channel/AMFM. Infinity?s and
Clear Channel?s clusters of major-market radio stations are
tremendously profitable and have reached the limits of
DoJ/FCC local ownership caps. Thus, we believe it highly
unlikely that any of the Infinity or Clear Channel FM
stations would be flipped into Spanish formats.
Spanish Broadcasting System ? 3 November 1999
3
Spanish Broadcasting System
n Gig nte Sales Growth
For FY 1999 (September), we are projecting that SBS?s
same-station sales will rise by 24% and cash flow by 44%
-- industry leading results, English or Spanish. For 2000,
we are projecting a same-station sales gain of 16%-17%
and an EBITDA gain of 22%. The company?s ad pacings
are up 20+% for 2000?s first quarter, suggesting that our
model may be overly conservative. In addition, for the
first time ever, SBS may be a beneficiary of political
advertising in the 2000 election, given the new critical
mass of the Hispanic populace, particularly in New York
and Florida. Our model assumes no political advertising in
2000, providing additional sales upside.
Spanish Broadcasting ? Income Statement
Sep Year PForma Rep PForma
$mm, except per sh amts 1999E 2000E 2000E 2001E
Net Revenues 109.9 124.4 128.4 141.0
Operating Expenses (52.5) (57.5) (59.7) (61.7)
Broadcast Cash Flow (BCF) 57.4 66.9 68.7 79.3
o BCF Margin 52.2% 53.8% 53.5% 56.2%
Corp Expenses (8.0) (8.9) (8.0) (8.5)
Adj. EBITDA 49.4 58.0 60.7 70.8
LaMusica.com (0.5) (1.2) (1.2) (1.3)
EBITDA 48.9 56.8 59.5 69.5
Deprec & Amortization (14.4) (13.6) (14.4) (14.8)
EBIT 34.5 43.2 45.1 54.7
Interest Expense, net (20.0) (14.0) (14.8) (19.0)
Pretax Profits 14.5 29.2 30.3 35.7
Income Taxes (6.9) (12.3) (12.8) (14.9)
o Effective Tax Rate 48% 42% 42% 42%
Pref Stock Dividends - (28.0) - -
Income avail to Common 7.6 (11.1) 17.5 20.8
Special Items - (16.8) - -
Income after Special Items $ 7.6 $ (27.9) $ 17.5 $ 20.8
Diluted EPS $ 0.13 $ (0.19) $ 0.29 $ 0.34
Diluted EBITDA/sh $ 0.82 $ 0.99 $ 1.00 $ 1.17
Diluted ATCF/sh (Cash tax) $ 0.46 $ 0.70 $ 0.70 $ 0.75
Diluted shs 60.530 58.800 60.530 60.530
Source: Merrill Lynch estimates
n Major-Market Economics
SBS is a major-market FM radio operator, which is the
sweet spot of radio broadcasting, offering the best
opportunities for high margins and the high absolute levels
of cash flow. The biggest Hispanic markets tend to be the
largest U.S. markets, including Los Angeles, New York
and Chicago. In the radio business, as market size
increases, the average revenue base available to a station
rises at a much faster rate than its operating costs. In
addition, FM music formats tend to enjoy lower
programming costs than AM news/talk/sports formats.
SBS operates no AM stations. Few radio broadcasters
have a significant major-market presence, especially in the
Top 3 markets, and this group is restricted to Infinity,
Clear Channel, Emmis, Hispanic Broadcasting and
Spanish Broadcasting. This gives SBS scarcity value.
There are several parallels between SBS in 2000 and
Infinity in its early stage of development in the 1980s.
Both companies have a focus on major-market radio,
intensive commission-driven sales activity, and market-leading
on-air talent (today, in NYC on FM radio, INF?s
Howard Stern and SBS?s Luis Jimenez are No. 1 and No. 2
in morning drive, radio?s most lucrative daypart).
n The Puerto Rico Opportunity
SBS is in the process of assembling an 11-station FM
cluster in Puerto Rico. Until now, Puerto Rico has been
untouched by the consolidation wave that has accelerated
growth in U.S. radio advertising. Puerto Rico remains a
highly fragmented radio market, and SBS will be operating
the first super-cluster in this market, capturing significant
consolidator economies, in our view. In addition, SBS
brings a core competency to Puerto Rico ? its expertise in
tropical musical formats, which target similar
constituencies in NYC, Miami and Puerto Rico. SBS will
have significant opportunities to cross-pollinate talent and
promotion, as well as cross-sell advertising packages.
Finally, and perhaps most importantly, Arbitron entered
the Puerto Rico market in 1998. Arbitron designated
Puerto Rico as the nation?s No. 13 radio market ranked by
population and No. 28 by radio revenue. Arbitron ratings
are the lingua franca of the radio ad buy, especially for
national advertisers. We believe that Arbitron will have a
material impact on radio advertising in Puerto Rico, re-ranking
stations and expanding total advertising.
Somewhat similarly, Spanish-language radio in the U.S.
received a big boost ratings and revenues in 1995, when
Arbitron instituted a separate statistical sample for
measuring Hispanic listening.
The absence of a reliable ratings system, along with
unusually high ad agency commissions, may have
suppressed radio advertising in Puerto Rico. For example,
both Miami and Puerto Rico have similarly sized
populations at 3.7 million. Radio advertising in Miami
totals an estimated $240 million with per capita income of
$18.0 thousand, compared with Puerto Rico at $90 million
with per capita income of $7.7 thousand. Using a crude
back-of-the-envelope approach, Puerto Rico?s normalized
radio advertising is roughly $115 million, instead of
today?s $90 million, based on the Miami marketplace and
adjusting for the differential in per capita income.
n The Gap in Advertising and Audience Share
Among investors in Spanish-language media, the notion of
the gap between advertising share and audience share is
widely known. For example, in NYC, SBS?s Spanish-language
radio stations account for about 10%-11% of
total radio listening in the market, but they garner less than
7% of total radio advertising. If SBS achieved parity
across all of its stations, the company?s revenues would
increase by an estimated $35 million, on its current
revenue base of $111 million (FY99, PF).
A mistaken presumption is that power ratios (advertising
share to audience share) for Spanish formats should be less
than parity, as Hispanic disposable income is roughly 75%
of non-Hispanic households. At mature stations, SBS is
often able to achieve power ratios in excess of 1.0, as do
Spanish Broadcasting System ? 3 November 1999
4
other specialists in Spanish-language radio. Radio?s
largest advertising categories tend to skew towards
consumer non-durables or household necessities, where
unit volume is largely unrelated to disposable income.
Hispanic households are also younger and larger than the
general populace, and thus spend more of their
discretionary income on consumer products, especially
during household formation. Revenue gains trail ratings
gains, and rapid increases in the Hispanic population and
its listening levels have often made it difficult for Spanish-language
broadcasters to close the gap.
Unlike many general-market radio broadcasters, SBS has
flexibility with respect to both pricing and unit spotloads. At
its developing stations, SBS?s unit pricing is often at a sizable
discount (50% to 65%), compared to similarly rated, general-market
competitors. SBS?s unit sell-out ratios are, in general,
less than mainstream radio stations, as well. To close the gap,
SBS has aggressively recruited top-performing salespeople
from general-market radio, bringing new advertising accounts
to Spanish-language media. In addition, there is a movement
afoot in radio, wherein advertisers are shifting dollars from
the A25-54 demo to A18-49, which is a positive event for
Spanish formats, as the Hispanic population is significantly
younger than the non-Hispanic population (median ages of 26
and 35, respectively).
n Mucho Acquisition Opportunities
Acquisition opportunities include building bigger clusters
of FM stations in the Top 10 US Hispanic markets and
consolidating the fragmented ownership of US Spanish-language
radio. Major market radio is clearly capable of
supporting additional FMs in Spanish formats. Down the
road, we expect the company to explore opportunities apart
from radio in Spanish-language media. The company?s
recently completed IPO has provided extra borrowing
capacity, as well as a new acquisition currency. We
estimate that debt to EBITDA will be 2.1x at year-end
2000 (the green shoe has been exercised). We peg excess
debt capacity at a minimum of $220 million.
Valuation and Price Objective
n 12-Month Price Objective of $36, up 32%
For 2000, we are projecting EBITDA of $59.5 million on a
fiscal year basis and $62.0 million on a calendar year
basis. These are full-year pro forma estimates, adjusted for
two pending transactions ? the acquisition of eight radio
stations in Puerto Rico for $90 million in cash and the sale
of two radio stations in the Florida Keys for $0.7 million in
cash. Our estimates assume no additional acquisitions,
which we regard as highly unlikely.
For purposes of valuation, we use calendar-year EBITDA
estimates that eliminate startup losses related to
LaMusica.com. Our adjusted EBITDA estimates are $63.2
million for CY00 and $73.5 million for CY01. We value
SBS?s 80% equity interest in LaMusica.com at $40 million,
marked-to-market for a recent bid on this asset.
In terms of adjusted EV/EBITDA, SBS is trading at 27x
2000PF and 23x our CY01. The closest comps are Hispanic
Broadcasting (HBCCA) and Univision (UVN), the nation?s
largest Spanish-language broadcasters in radio and television,
respectively. HBC is trading at 39x our 2000E, Univision is
trading at 30x our 2000E. HBC has typically traded above
UVN in part due to the more abundant acquisition
opportunities in radio. There are other specialty programming
companies, such as Acme Communications, a specialist in
WB-affiliated TV stations, which is trading at 32x our 2000E;
and Radio One, a specialist in urban music formats, which is
trading at 28x consensus 2000E.
EV/EBITDA Valuation: Niche Broadcasters
Share 2000E 2001E 1999E
Price EV/OCF EV/OCF S-S Sales
SBSA $27.00 27x 22x 24%
HBCCA $83.00 39x 30x 18%
UVN $84.50 30x 25x 28%
ROIA $57.00 28x 24x 24%
ACME $38.00 32x 24x 32%
Our 12-month price objective is $36 per share, based on a
target multiple of 30x our 2001E EBITDA, which equals
our forward growth rate over the next three years, aided by
acquisitions. We believe that the company?s valuation is
capable of further multiple expansion, beyond its current
27x 1999E, once the company notches several quarters of
solid gains in sales and cash flow. This type of multiple
expansion occurred for both Univision and HBC as those
securities became seasoned.
Investment conclusion. SBS is a pure-play on the boom
economy of Hispanic USA. Especially in the Top 10 US
Hispanic markets, where Hispanics average 29% of the
total population, we believe that Hispanics will become the
focal point of advertising campaigns designed to expand
the market share of national consumer brands. Ad
expenditures targeting Hispanics are growing at 2x-3x the
rate of US total advertising. Additionally, individuals of
Hispanic origin tend to retain their use of the Spanish
language, with a heavy proportion of bilinguals among
later generations. In many US Hispanic markets, huge
SBS is clearly well positioned to benefit from these
favorable macro-demographic trends among Hispanics.
As a result, SBS?s intermediate-term and long-term growth
prospects, we believe, are sensational. We initiate with a
Buy rating.
[SBSA] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[SBSA] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale.
MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce, 5 - Sell, 6 - No Rating. Income Rating(c):
7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA, and has been considered and
issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional
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