Salomon Smith Barney report on TVGIA>
TVGIA: Gemstar Merger Likely to Close in Q200; Raising Target to $49
Tv Guide Inc Cl A(TVGIA)*
Rating: 3H
Salomon Smith Barney ~ February 15, 2000
02/15/00 TV Guide, Inc. (TVGIA $46.93,3-H,Tgt $49.00) Spencer Grimes
--SUMMARY:--TV Guide, Inc.--Cable
*TVGIA reported Q4 EBITDA of $56M, $14M higher than our expectations. Lower
operating costs at developing units (IPG, TVG and TV Guide Online) was a
key driver.
*Net of $(.06) versus our $(.03) was due to a $15.2M write-down of the SSDS
unit and GMST merger expenses of $4.5M.
*TV Guide Interactive increased its customer base by 600K to 3.2M at 12/31.
The on-screen guide is available in all of the top 25 DMA's and the
company is talking with top MSOs about exclusive distribution.
*Both TV Guide and Gemstar have shareholders' meetings scheduled in March
to vote on the merger; an April close is expected.
*We are raising our TVGIA target price to $49 to reflect the .6573 share
exchange and GMST's $74.81 share price.
02/15/00 TV Guide, Inc. (TVGIA $46.93,3-H,Tgt $49.00) Spencer Grimes
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $N/A $N/A $N/A $N/A $0.63A
Previous 12/99 EPS $0.12A $0.06A $0.01A $(0.05)E $0.09E
Current 12/99 EPS $0.12A $0.06A $0.01A $(0.05)E $0.09E
Previous 12/00 EPS $0.01E $0.03E $0.07E $0.10E $0.21E
Current 12/00 EPS $0.01E $0.03E $0.07E $0.10E $0.21E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $0.48E
Current 12/01 EPS $N/A $N/A $N/A $N/A $0.48E
Footnotes:
02/15/00 TV Guide, Inc. (TVGIA $46.93,3-H,Tgt $49.00) Spencer Grimes
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:3H Prior:No Change Price (02/14/00)....:$46.93
P/E Ratio 12/99.....:521.4x Target Price..:$49.00 Prior:79.00
P/E Ratio 12/00.....:223.5x Proj.5yr EPS Grth...:0.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:9.60
LT Debt-to-Capital(a)29.2% Dividend............:$N/A
Revenue (99)........:1268.40mil Yield...............:N/A%
Shares Outstanding..:154.0mil Convertible.........:No
Mkt. Capitalization.:7227.2mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
02/15/00 TV Guide, Inc. (TVGIA $46.93,3-H,Tgt $49.00)
--OPINION:------------------------------------------------------------------
TV Guide announced solid Q4 results of $56M in EBITDA (vs. our estimate
of $42M), $318M in revenues (vs. our estimate of $327M) and $(0.06) in
net income (vs. our estimate of $(0.03)). Net income is negatively
impacted by a $41M amortization charge from the TV Guide Magazine
acquisition, a $15.2M write-down of the SSDS consulting business and
merger expenses of $4.5M. In addition, the company invested
approximately $29.9M on developing units such as TV Guide Interactive,
the new TV Guide Channel, TV Guide Online and TVG, the horseracing
channel.
TV Guide Magazine Group
The flagship magazine has pared back its subscriber base from 11.9M in
Q498 to 11.0M in Q499, while increasing EBITDA 4% year-over-year through
cost initiatives and margin improvement.
TV Guide Entertainment Group
Although the existing analog EPG (TV Guide Channel) subscriber base
remains flat at approximately 50M, sequential ad sales have grown an
impressive 27% versus Q399 due in part to the re-branding efforts and
more effective cross-platform selling of advertising. TV Guide Online
experienced 48M page views/month and 83K unique visitors/day, which
equates to a quarter-over-quarter growth rate of 30% and 1.5%,
respectively. Moreover, the burgeoning Web site was voted "best TV hub
on the Internet" and was ranked in the top 100 of all Internet sites by
Yahoo. TV Guide Interactive announced the addition of 600K subscribers
in Q4, representing a total of 3.2M, a 23% increase from Q3. The
interactive programming guide (IPG) is in all of the top 25 DMAs and
carried by 75 MSOs. Management noted daily usage statistics of the
IPG--the average user spent 15 minutes/day as well as going to the IPG
and flip bar 8 and 15 times, respectively. The company delayed the
rollout of Release 15 (software that enables advertisements on the IPG)
because of concerns over Y2K and indicated a March launch of the new
software. The company will introduce the service in selected markets
until it is certain the IPG is operating seamlessly.
United Video Group
The previously announced strategic alliance with Echostar has converted
30K customers from SNG's large-dish C-band product to Echostar's
small-dish product. To recap the terms of the deal, TV Guide received
$10M up-front from Echostar as well as $250/customer conversions and a
monthly residual royalty. Additionally, UVTV (the superstation business)
reported a 52% EBITDA margin compared to our estimate of 47% and a growth
rate of 4% from Q498. Lastly, TVG announced that it is in almost 7M
homes and is packaged in over 40M. Echostar has included TVG in its
basic $19.99 package implying TVG's ubiquity in the continental U.S.
Although no subscriber is precluded from seeing the TVG signal, there are
only three states in which viewers can currently place wagers; three more
states are close to legislative approval (most notably, California and
New York). Economics of TVG are favorable for the company (and
distribution partners) with breakeven for the service at 200K customers,
which is estimated to occur in 2001. Until then, TVG is expected to lose
approximately $3M/month or a run-rate of $36M.
TV Guide's merger status with Gemstar is on target to close in Q200, with
both companies' shareholders meeting in mid-March. It remains
conceivable that federal regulators could delay or even prevent the
merger from occurring, but we do not foresee this happening. Currently,
the arbitrage spread is 7.1%, thus implying a market sentiment that the
deal will close. Finally, we are raising our TVGIA target price to $49
to reflect the .6573 share exchange and GMST's $74.81 share price.
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