Current Price: $23.69
Offer Price: $22.50 - $26.50
Upside: $280 (for 99 shares if priced at the upper limit)
Expiration Date: 14th of October
AMC Networks has launched a dutch tender offer for $250m, which amounts to 23%-27% of outstanding class A shares at $22.50 - $26.50. Odd-lot holders, 99 shares or less, won't get prorated. Directors/management own 5% of class A shares (and have voting control through Class B shares) and won't participate. The expiration date is set for the 14th of October.
Shares are currently trading closer to the lower limit (having declined from $25/share right post-announcement), providing an attractive entry point to play the tender - $280 upside vs $120 downside for odd lots.
I think this offer has a decent chance of getting priced above the current share price levels or even ending up undersubscribed. A number of arguments in favor of this:
- The tender offer is large for 23%-27% of outstanding shares;
- Tender is priced close to 52-week lows as AMCX shares have not recovered from the COVID sell-off. The pre-announcement price stands at $20.5/share.
- Dolan Family and other members of the board/management have combined economic ownership (Class A & B shares) of c. 26%. They will not participate in the offer - management clearly thinks that AMCX shares are worth more. Likely some other shareholders will follow suit.
- Most importantly, AMCX shares appear relatively cheap (this applies to many other legacy cable networks). AMCX has been averaging about $11/share in pre-tax earnings over the recent years vs the current stock price of $24/share.
- As of the 30th of June, the company had $386m of share purchase reserve left. Given the historically low-level price of AMCX shares at the moment, another decently sized buyback could be launched in near future. During 2019 the company has bought back $54m shares at an average price of $54/shares.
Background of the Tender Offer
Over the years AMCX has been struggling with cable cutting and competition from larger peers. Meanwhile, it's main "flagman" franchise The Walking Dead is already stretched for over 10 seasons and is slowly coming to an end. Ratings of the show are declining, season 10 started in October, while the last (11th) season will air in 2022. After the announcement of the last season (9th Sept) AMCX fell 10%, and then the tender was launched over the next week. So overall, cable cutting, the lack of growth and fear of 'expiring' popular content have decimated the company's stock - since Feb'19 it's down 64%.
Despite that, the company continues to generate very substantial FCF, which became even more evident during the COVID-19 outbreak (lower CAPEX on content, etc.). During H1'20 FCF was $392m (30% of current market cap), which is a 70% increase from the last year. Management states that FCF will remain elevated for the rest of the year:
In term in terms of free cash flow, we remain confident in our full year outlook. We continue to project full year 2020 free cash to be above 2019 levels [...] So, feel very good about where 2020 looks like, and I think it sets us up well for '21.
And although this might be a slowly melting ice-cube, AMCX business is not dying yet and could potentially remain a "cash cow" for several more years. For quite some time media and investors have been positioning AMCX as an attractive acquisition target for larger streaming peers (Disney, Warner, Viacom). No official offers have been made yet, however, its worth keeping in mind that recently most potential buyers had their hands full starting their own streaming services, processing larger acquisitions, dealing with covid-19 and etc., so I think the M&A option is not to be brushed off here yet, especially with the backdrop of a large tender offer. During the last conference call (Q2'20) an analyst suggested the company should be taken private. Unfortunately, AMCX did not comment on this part of the question:
If you look at the free cash flow you generated in the first half and if we think about what that implies kind of fully realized to your yield, it makes you wonder if you couldn't realize a lot more value as a private company. And I know, I've asked this question before, but between public filing costs and having to deal with folks like us, just I wonder how the Board is thinking about public versus private benefits at this point.
The company operates 5 cable channels (AMC, WE tv, BBC America, etc.) and also runs 4 streaming services -- Acorn TV, Shudder, Sundance Now and Urban Movie Channel. It also owns a bunch of original content (scripted series), with the most prominent being The Walking Dead and the Preacher.
AMCX is controlled by a cable mogul, billionaire Charles Dolan, and his family, who have been running it since '90s. AMC Networks, alongside MSG Networks and Madison Square Garden, were all part of Cablevision. AMCX was spun off from Cablevision in 2011.
Together with the current tender offer, it was announced that Charles Dolan is stepping down from the board, passing on the wheel to his son James Dolan.