With networks beginning to share in retransmission consent fees paid to affiliates by the MSOs, Wells Fargo Securities analyst Marci Ryvicker has been working up projections of just how much money the major networks will receive. As a result, she is boosting her valuation estimate for CBS Corporation.
“Looking at the seven primary broadcast nets (ABC, CBS, Fox, NBC, Univision, CW and MyNetworkTV), we determined the total retrans opportunity for the TV industry to be approximately $2.3B by 2012, growing to $4.6 billion-plus over time – which represents growth rates of approximately 200% and 500%, respectively, from the reported $762 million generated in 2009,” Ryvicker said in a research report for clients.
That pile of money, she figures, will eventually go primarily to the Big Four networks. That’s because they will be collecting retrans fees from their big market O&Os as well as receiving a share of what their affiliates collect. “We believe the nets will grab the majority of retrans over time (likely $3.2 billion by 2017), with CBS having the most potential upside,” Ryvicker said.
As a result of her retrans analysis, Ryvicker has turned more bullish on CBS Corporation. By 2017 she sees CBS collecting around $410 million in retrans fees paid directly to its O&Os and an additional $250 million from its affiliates. “Applying a 7x multiple to this amount (7x is roughly where CBS currently trades and is likely conservative given the 100% margin on this revenue stream), we calculate an additional $4 in equity value which (in our opinion) is not in the stock. We reiterate our Outperform rating and are raising our valuation range to $18-20 from $15-16,” Ryvicker said. CBS had closed the previous day (Tuesday) at $14.59.
“Taking our analysis one step further, we calculate that there is an incremental $0.50 in EPS that is likely to accrue to CBS over time. We calculate this amount by taking the $410 million in incremental retrans (as described above), multiplying by 80% (assuming that 20% of retrans dollars are reinvested in the business) and then dividing by the 690 million diluted shares currently outstanding,” she added.
The analyst noted that the retrans landscape has been changing, since retrans initially went 100% to the local station being carried on a cable/satellite system. “The question we get most often is how the broadcasters will fare once the nets go after a portion of their retrans fees. The ideal situation is for both the nets and affils to grow retrans dollars as fast as possible, ultimately sharing in a bigger retrans pie. That being said, it is difficult to conclude exactly how this relationship will play out given that negotiations are still in their infancy and disclosure is limited. We believe the NET retrans opportunity for the affils is approximately $0.7 billion in 2012, doubling to approximately $1.4 billion by 2017,” Ryvicker answered.