AMC Networks (AMCX) – Tender Offer – $280 Upside

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

Offer document

 

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.

 

AMC Networks

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.

30 COMMENTS

  1. g4734g

    DT, nice writeup….I have been trading this one since the tender announce and agree with your thesis……This and others, (like Discovery) are priced for Armegeddon, while throwing off massive amounts of FCF. You mentioned the remaining authorization on buybacks. I’m assuming this tender is being conducted under this existing authorization, meaning they will still have over 100 million remaining? But as you say, when they are throwing off close to an annual run rate of $800 million FCF, one would think no big deal for further authorizations.

  2. Mike

    Hi, sorry I’m new to these that have a range, at IB do I tender at no specified price or tender at bid? Thanks.

    1. dt

      If you tender odd-lot position at no specified price then you are guaranteed to be accepted in the tender. If you indicate a specific tender price, then your shares will only be accepted if the final tender price is equal or higher to the one you have indicated.

    1. R

      I think that would depend on the current market price vs. the low end of the tender range.

      Tendering at no specified price indicates you are a willing seller at $22.50 (below current market price) if there is sufficient interest in tendering at that level or with no specified price.

      1. g4734g

        Excellent point…….many folks don’t realize the negative cumlative impact of large number of folks tendering at no specified price……whole lot less shares company has to count as they move up the pricing range counting shares and bids

  3. bigdaddy85

    I think the best way to play this was is sell the bull put spread at $22.50/$20.00 or sell the puts outright.

  4. g4734g

    There are no weekly options….so puts don’t expire until after tender expires. What would your thesis be on out right selling puts….. Seems to me probability of a post tender sizable drop are real?

  5. bigdaddy85

    Correct. Puts do expire two days after the tender expires but I am assuming there won’t be much of a sell of because if you tendered your shares, you won’t know by expiration if your shares were fully or partially accepted. So you won’t be likely to sell shares.

    1. g4734g

      You are probably right. I see mchx expired yesterday and the tender was successful. No post tender drop today

  6. RJChicago

    Since many of you are extremely experienced with these sorts situations and I am just learning about them – generally, if a tender offer is under-subscribed – what is the price action after the tender? I know that is probably way too broad and each situation is, um, special – but it seems like to me in general that if it is undersubscribed it would generally not be followed by a significant price drop – but I would love to know if that is historically the case the majority of the time. Thank you – really appreciate the wisdom from this community.

    1. Gosupress

      That sounds like a fair assumption to me. There are no guarantees. But I think companies doing tenders like this (especially this size) do quite well subsequently.

  7. dt

    Indeed, the final price is below what I expected – $50 dollar loss for odd-lot account.

    It’s always a bit of guesswork with these Dutch tenders, but risk/reward seemed good on this one.

    1. MarkB

      Schwab charges me $40 for executing a tender offer. Does anyone have another broker that charges less or is that the going rate?

      1. bigdaddy85

        I have 6 brokers, including Schwab, and no one else charges besides them. I have found the best are Interactive Brokers, E Trade, and Merrill Lynch. TD Amertirade Corproation Actions support has seemed to get better as well

        1. slow

          Why do you think E Trade and Merrill Lynch are good?

          Thanks

      2. Platitudes

        @MarkB ask them to refund the charge. I am not charged this fee at Schwab. It may have something to do with account classification or size, but know that they have not charged this fee to at least some accounts. It doesn’t hurt to ask.

      3. Writser

        https://www.schwab.com/legal/schwab-pricing-guide-for-individual-investors

        “Security reorganization fees: Fees are waived with $500,000 or more in Household Balances.”

        I think hat they sometimes also waive fees with smaller accounts for whatever reason so you could try asking them to waive it but it’s not their official policy.

        Lots of brokers charge fees for corporate actions: TDAmeritrade has a similar program where they charge smaller accounts. Etrade charges fees, Tradestation, etc. etc.

  8. Jim Davis

    I my experience , everyone but IB charges a fee. Etrade, Ameritrade, Ally.

    Ameritrade for some time had an account type that waived the fee, but that ended a few years ago

  9. MarkB

    Thanks all! I’ll definitely take a deeper dive into IB. Interesting that schwab waives after 500k but I’ll also ask for a lower account.

    Thanks again!

  10. Terence

    Expect your cash or stock back soon, as final results are out.

    DT wrote and I agree: “It’s always a bit of guesswork with these Dutch tenders, but risk/reward seemed good on this one.” The $23.20 tender price is LOWER than the last trading days and weeks before tender deadline. 70% of tendered shares were guaranteed delivery, meaning last minute submission typically done by the big boys, so apparently many of them want out even at LOWER than the then current trading price.

    In future deals, I wonder how to get some guess on how much the big boys want out desperately? I think it’s difficult to get this info.

    I played this one >99sh, thinking it will not be too oversubscribed and get priced a little higher than trading prices.

    https://finance.yahoo.com/news/amc-networks-announces-final-results-110000499.html

  11. dt

    One of the members accurately noticed that this tender included an unusually large portion of stock tendered by notice of guaranteed delivery (T+2 rule) – 65% of all shares accepted in the tender (usually it is around 5% -10%).

    Any ideas what could have accounted for this and might it be related to lower than expected tender offer price?

    – 7.1m shares submitted by guaranteed delivery;
    – Total volume on Oct 13th – Oct 14th was only 7.7m. My understanding is that stock acquired on the 12th or earlier, would settle on the 14th and guaranteed delivery notice would not be required.
    – So if the guaranteed delivery indicates shares acquired and tendered on the last two days, then almost the whole volume on these last 2 days had to be driven by the incremental buyers of the stock. And that should have resulted in significant upward share price pressure, which has not been the case.

    1. Terence

      DT: two things the answers of which I’m not sure of.

      65% is unusual for a tender with a price range, and the trading price is within the range? I have not looked, but I sort of remember sometimes it is quite high, maybe not this high. You mentioned Usually 5-10%: is this for all tenders, including tenders with a specific price and exchange offers?

      Guaranteed delivery: it is indeed possible that this consists of last minute buyers, but I think (and always thought) that these are the big boys who have held the stock for a long time, but just waited for the last minute to tender, so they can choose their tender price given the latest trading price.

      1. dt

        It really depends on what does guaranteed delivery means. If it is to account for T+2 rule, then it would mean that a large block of shares was acquired and tendered during the last two trading days before the expiration (however, trading volume stats on these two days does not seem to support this).

        If it relates to the time of tender submissions, then I would expect the guaranteed delivery % of all tendered shares to be approximately the same across most tenders. Whereas now AMCX clearly stands out.

        Most probably this has no importance at all, but there are chances that this large % of guaranteed delivery shares is in some way connected to the lower than expected final tender price.

        1. Platitudes

          FWIW, Guaranteed Delivery has always been described as a feature to account for unsettled shares whenever i’ve had conversations with Corporate Action department staff.

        2. dt

          This does not explain why and how there were so many unsettled shares participating in the tender.

  12. Zulu Investor

    Partially addressing some of the prior points…I think it is tough to guess where the final tender price range will fall and in response to that, I always buy only when the stock is at $22.5 in this case or basically trading at the bottom of the possible tender range. Even then, if tendering is not free for your brokerage (some cost $38 as does mine), then you may have to take that into further consideration and buy at a price point where downside is little to none. Heads I win… tails I don’t lose anything or much.

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