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Ascent Media share buyback

June 17, 2011

Thursday (June 16) Ascent Media announced that its board approved a share buyback program to the amount of $25 million. This is about 10% of the cash they had on the balance sheet as of their last quarterly statement and equivalent to about 4% of shares outstanding at todays share price. Because of the small size of the buyback I view this as bit of flag waving, i.e. a management statement that ASCMA shares are undervalued, more than any attempt to restructure the balance sheet of the company.

So I thought I should take a quick look at the Q1 financials while I was at it. Ongoing operations (Monitronics only) showed a loss of just over $8 million for the quarter, offset by a one-time gain from the sale the media content group.  Operating cash flows, including the costs to replace and grow the customer base, were likewise negative.  Overall cash balances did, however, increase by $82 million due to receipt of $96 million from the sale of the media content division.

What is important to remember here is that this is not at all the same Ascent Media that I bought into 2 1/2 years ago; they have in the meantime sold all their media businesses and purchased a completely unrelated security system business. My original purchase of ASMCA shares was based on book value and cash on the balance sheet. Three months ago when the stock approached my original intrinsic value estimate I sold half of my position (a bit early as I sold at $46 and the stock subsequently ran up to $49). I thought at the time, and continue to believe, that the new Ascent Media has considerable potential to build shareholder value, but it is no longer a deep value play; building value is now dependent on management’s ability to execute. I think I was a bit giddy with this potential back 3 months ago when the market was raging ahead. My reasoning was that the Monitronics business model shares similarities with the cable TV business where current management (especially with John Malone on the board) has considerable competency. Primary similarities include 1) the security business throws off a steady cash stream from ‘subscribers’, therefore allowing the use of significant debt leverage, 2) acquisition costs are capitalized and shield cash income from taxes, and 3) operational success depends heavily on efficient ‘subscribers’ acquisition (marketing) and retention or churn management (service). Small changes in operational metrics and debt servicing costs can make large differences in cash flow and profitability.

On reflection (and after a bit of market correction), I think I need to get back to my  value investing principles, so I will be lowering my sell target for ASCMA (to the $50 range) with the hope of exiting the position in the next several months and redeploying funds into more attractive ‘special situation’ opportunities.

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