Ascent Media (ASCMA)
This is the next post in my series reviewing my current portfolio holdings
According to Yahoo Finance, ASCMA “provides content and creative services to media and entertainment industries.” That’s a rather vague description at best, but it’s not for what it does that I invested in ASCMA. The company was spun off from Discovery Holdings in September 2008 (in 2005 Discovery Holdings, itself, had been spun off from Liberty Media). Prior to September 2008, Cox Communications (through Advance Newhouse) and Discovery Holdings each owned partial interests in the Discovery Channel. However, management at Liberty Media/Discovery Holdings and Cox felt that true value of the Discovery Channel was not being reflected in the stock market valuation of their respective companies because of Discovery’s complex ownership structure. For several years the two parties had been negotiating a transaction that would put ownership of the Discovery Channel under a single corporate entity. For some reason Cox was uninterested in Ascent Media being part of this new corporate entity, either because including ASCMA in the new corporate entity would muddy its valuation (the new company would be more than a pure play on a cable TV channel) or simply because the two parties were unable to agree on a valuation for ASCMA. Whatever the case, the resolution was to spin-off ASCMA from Discovery Holdings before the Discovery corporate transaction took place. The problem was that ASCMA was cash flow negative. So in order for the spin-off to pass SEC scrutiny, ASCMA was loaded with enough cash to keep it afloat for the forseeable future.
Talk about timing! ASCMA was spun off to Discovery Holding shareholders just as the Lehmann Brothers fiasco was unfolding . On September 17th 2008 the spin-off became effective, and shares of ASCMA were distributed September 26th.
Prior to the spin, ASCMA looked like an interesting investment to me for a number of reasons.
- This was a spin-off and ASCMA wasn’t a big part of Discovery Holdings; one share of ASCMA was distributed for every 20 shares of Discovery Holdings. [Yes, this was another of the Liberty Media A & B class shares, but we can ignore that except to note that the B shares are controlled by John Malone and I, for one, was happy to have him as a fellow investor.]
- ASCMA’s market cap was going to be relatively small, under $500 million; there would be only just over 14 million shares outstanding,
- Investors receiving the spin-off shares probably weren’t interested in them; they had bought into Discovery Holdings, one of the closest things to a pure play in cable channels, and what was this capital-intensive technical company anyway?
From the Form 10 it looked like book value was going be around $48 per share with about half of that in cold hard cash. I thought if I could get in at 2/3 of book value or less this might be a good investment. As it turned out, I was able to average in for about $25.60 a share, just above cash value. And had I held out a bit longer, I could have bought in at significantly below cash value; in the ensuing rout the stock traded down to $18 a share in December.
Some additional asset sales were completed in 4Q 2008, but there was no real change in the company’s financial performance; it continued to have a net loss in 2009. A new president was brought in and given adequate incentive, shares and options, enough to make me feel comfortable that my interests are aligned with management. The most significant event has been that the board of directors was expanded to include John Malone in January 2010 and Malone made an open market purchase of 35k shares on March 18. A number of conclusions could be made here, but suffice it to say that what is most important is that Malone is becoming more involved.
At year-end 2009, book value per share had fallen to $41, though cash and marketable securities had increased slightly to about $24.60 per share. Subsequently, the UK technical facility owned by ASCMA was sold back to Discovery for $35 million (or about $2.50 per share), further increasing cash.
When I initially took a position I assumed that the company would put itself in order financially (cut losses) and buy in a significant amount of the outstanding shares within a couple of years, and the share price would rise to around book value. However, the financial crisis had a very negative impact on ASCMA, and I think what was originally going to take a couple of years will now take at least a year longer. The company is still basically earning no return on its invested capital, a situation that can’t go on for too much longer. I view the appointment of Malone to the board as an indication that things are about to change. Within the next six months I would hope for an announcement of a share buyback or a dutch tender offer (more likely). I don’t think there is really an acquirer for the whole company, though it could get sold off piecemeal if an economic turnaround isn’t effected in the next year or so. I am still targeting an exit price in the range of $40-45, but I will reevaluate by year-end if no share buyback is forthcoming.