Thursday, March 13, 2008

Canwest Global

After running through the numbers and business for Canwest, an investment in their stock definetely looks interesting. Canwest has an Enterprise Value of 2.8 billion (2.1 billion debt + 100 million cash + 800 million market capitalization).

Of that, their publicly-traded 56% stake in Network 10 is worth 1.2 billion. This is before any capital gains taxes, but effectively you are paying 1.6 billion for the rest of their business.

For that 1.6 billion, you get 28% of the Canadian newspaper publication, 11.3% of total TV audience, and a 250 million equity stake in CW Media(more on this later). In 2007, the publishing business had revenues of 1.3 billion and pre-tax profit of 260 million. The Television business had 670 million in revenues and 70 million in pre-tax profits.

Why is it so cheap? One reason is because of balance sheet confusion, which makes Canwest look more indebted than it really is. If you subtract Network 10's debt (because it is a seperate publicly traded co.) and CW Media's debt (non-recourse), the debt level is much more manageable.

A more likely reason though is because the terms of the CW Media deal is very confusing. Currently, Canwest owns 35% of the subsidiary, yet it is consolidated because it has majority voting power. The deal was levered up with almost 800 million in debt, and in three years the company will merge with Canwest's Canadian Television business. Their ultimate stake will depend on how profitable the business is at that time, making this entire mess difficult to value.

Still, it is difficult not to assign some at least some positive value for the Canadian TV segment. And you can likely justify the price you are paying for Canwest off the newspaper alone; It currently trades at 1.23x sales, while most of its American peers are trading at around 1.3x sales. Throw in the fact that this is business has minimal capital expenditures and the cash flow is really "free", and it seems like a great deal.

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