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Friday, October 8, 2010

Liberty Acquisition Warrants

This situation has three components to it:

1) Grupo Prisa (PRS.MC), which closed (10/7) at 1.68 euros, or $2.335 (at EUR to USD of 1.39:1)
2) Liberty warrants (LIAWS), $1.63
3) Liberty stock (LIA), $10.29

First some background:

Grupo Prisa was founded in 1972, as the editorial company of daily newspaper El País. Prisa's activities are classified under generalist press (El País), specialized press, radio (11%), educational publishing (17%), and television (18% Telecinco and 56% Digital+). Post recent transactions to reduce the group's debt pile, we think the group's most important assets are its holding in Digital+ and then Santillana, its educational publishing business. As such, it is less of an advertising play than historically.

Liberty Acquisition Holdings Corp. is a publicly traded company formed for the purpose of effecting a business combination with one or more operating businesses. Liberty completed its initial public offering of 103,500,000 units at $10.00 per unit in December 2007. Each unit was comprised of one share of common stock and one half (1/2) of one warrant to purchase a share of its common stock.

Prisa initially announced in March 2010 that they had reached an agreement with Liberty Acquisition Holdings in which Prisa would buy 100% of Liberty through an exchange of shares Prisa shares valued for a total consideration of €660m - implying that Liberty obtained a >50% stake in Prisa and the Prisa controlling shareholders would have been diluted to c30% (but according to the agreement would not lose control). Since then the deal has been amended twice. Below is the most recent iteration:

Prisa’s syndicate of banks had agreed to extend its current bridge loan (€1.9bn) to May 2013 if certain conditions were met; of which the most important, in our view, was a capital injection of at least €450m. The Liberty transaction assures a US$870m injection (€680m). Prisa announced on August 4, 2010 a revised structure to the Liberty deal
(initially announced in May 2010) that practically assures that the deal is approved.
In summary, in exchange for the US$870m cash, Prisa shall:
1) LIA shares: Issue 1.5 ordinary shares; 3.0 non-voting convertible shares (NVCS) and $0.50 cash for each LIBERTY share.
— For the NVCS, there is mandatory conversion in 3.5 years (Each NVCS converts to 1.33 shares of common stock for common prices below €1.50, 1.0 share for stock prices above €2.00, and a conversion ratio of [2.33 – (2 * Stock Price)/3)] for stock prices in between €1.50 and €2.00); they receive €0.175 minimum dividend per annum
2) LIA warrants: Issue 0.45 ordinary shares and $0.90 cash for each LIBERTY warrant

I am advocating a purchase of the warrant. Based on Prisa’s 10/8 close and the EUR/USD conversion rate at that time each LIA warrant receives:

$0.90 + (0.45 x (€1.68 x 1.39 (conversion rate))) = $1.95 vs. a current share price of $1.63. The current spread implies a profit of 20% - this can be increased should the underlying security (Prisa) move up in value.

The main risk to the warrants is if the deal falls through. The risk of the deal falling through is limited, as Prisa has secured US$500m interest and the deal terms are attractive to Liberty shareholders. In order for the deal to be approved, at least 70% of Liberty shareholders (excluding Sponsors) need to give their approval. With the secured US$500m only another 20% of shareholders need to give their consent.
The approval of the deal should enable Prisa to refinance its Balance Sheet and management (with the help of the Liberty management) to focus on its operating
business. Additionally free-float and disclosure should also increase – this last point is key as Prisa has been mired by a single dominant family owner who many believed was more interested in empire building than in maximizing shareholder value.

While the transaction does reduce the level of debt (through asset sales which are contingent upon the merger plus the large cash influx from LIA) the pro-forma entity will remain highly levered. A slide presentation has been provided that estimates net debt declines from €4.75 billion to €3.25 billion, equivalent to 5.2 times TTM EBITDA.
It can be seen here:
http://www.sec.gov/Archives/edgar/data/1407539/000095012310084024/g24574exv99w1.htm

It also gives a good overview and a recommend reading it.

On a total enterprise value basis it will trade around 7x EV/EBITDA not a screaming buy but fairly valued and its leaves room for upside as operational efficiencies and deleveraging occurs.

Overall you have a chance to lock in a good return – you could hedge if you wanted but I think Prisa’s stock is interesting enough that I would rather have the beta risk. I was going to expound more on this here but its late – just know that Prisa is a force to be reckoned with on the Spanish-language media scene. The conglomerate operates in newspaper and book publishing, radio broadcasting, and pay TV services in Spain and Latin America. They will benefit as ad rates and consumption returns to normal in Europe.

2 comments:

Stephen said...

I am an advocate of purchasing the warrants as well. But you can't simply look at where PRS trades today because the number of shares outstanding will be totally different. Instead, you should make a guess as to how many LIA shareholders will elect to convert to shares instead of take cash to back out the new fully diluted share count and, seperately, formulate an estimate of what you think PRS is worth. If PRS's TEV is 6.2MM euro and 80% of LIA shareholders take part in the deal, i get 960MM shares total and warrant value of ~$2.30.

tyler said...

interesting write-up, thank you for sharing this. How does one purhcase the warrants?