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Monday, April 16, 2007

Alliance Atlantis Communications (AACB)


Canadian cable TV provider. 13 channels. Includes "CSI". 4 of their digital channels were in the top 10. Showcase Action ranked #1 in digital channels (has been there since 2002).

Controlling interest of 2/3 of the voting shares are owned by Southill which is owned by the Chairman Michael MacMillan and Seaton McLean. The small number of voting shares controlled by two people gives it a bad smell like the New York Times.

The annual report for Dec 31, 2006 is on their website. Revenue has been increasing for the past 2 years.
34% gross margins in 2006. 35% in 2005. 31% in 2004.
4.1% net margin in 2006. 6.8% in 2005. 2.9% in 2004.
Diluted earnings per share: C$1.13 in 2006. C$1.61 in 2005. C$0.78 in 2004.

They list free cash flow as C$103 million in 2006. C$120 million in 2005. (C$23 million) in 2004. [C$100 million seems about right, looking at the cash flow statement]

The fastest growing part of the business, "Entertainment" (up 76% since 2004) has gross margins of 34%.

Broadcasting segment:
Controlling interest in 13 Canadian TV channels and operates them. 50% interest in 2 French Canadian channels. Non-controlling interest in 3 other English niche channels.
Homegrown channels: Life Network, Showcase, Chowcase Action, Showcase Diva, History TV
Partnership channels: HGTV Canada, Food Network Canada, Fine Living Canada, National Geographic Canada, BBC Canada, BBC Kids, Discovery Health Channel.
Working on HDTV: just launched Showcase and National Geographic
Revenue comes from both ads (100% retained, ave 12 minutes per hour) and montly fees (some regulated, some negotiated).
7 of the 8 digital channels have over 1 million subscribers.

Entertainment segment:
CSI distribution outside the US worldwide. AACB owns 50% of the show in all forms in perpetuity. CSI expenses are recorded as investment and amortized according to AICPA SoP 00-2. CSI revenues were C$417 million in 2006 vs C$288 million in 2005, but this was due largely to second window license fees (cablecast/weekday syndication). I don't know much about CSI and the trajectory of the show's popularity.
Also a library of 1,000 titles, 5,500 hours. This is only about 10% of the segment and declining.

Motion Picture Distribution segment:
51% indirect ownership of Distribution LP, Canadian distributor of movies and made-for-TV programs, possible European expansion. Theaters, TV, VOD, DVDs. In 5 years, they've released 84 movies, 196 DVDs in Canada. Canadian rights for Mirimax, New Line Cinema, Focus Features, Weinstein.
They estimate 13% theater market share.
This business was fairly flat in 2006.

I really like the line-item breakdown of changes on the balance sheet on page 28. Operating cycle is up to three years and they don't split out current vs non-current assets/liabilities (non-classified balance sheet).

Bought back 2.9 million shares, partially offset by stock options.

Audited results. Price Waterhouse Coopers
Assets are mostly AR and investments in programs and films with some cash, broadcast licenses and goodwill.
Liabilities are mostly AP and loans.
Balance sheet seems reasonable. Business seems fairly capital intensive.

Operating cash flow is better than earnings minus capex for two years. Lots of cash goes into CSI. Amortization of film and TV shows pulls down earnings.

Two classes of shares: Class A voting. Class B non-voting. Their descripton of the capital structure is [not] surprisingly lacking in detail. The Notes section has more. Both classes are identical except for the voting. At the holder's option, Class A can be converted into Class B... seems unlikely but see below. Class B can convert into Class A under very specific circumstances.

Start of 2005:
2.8 million class A shares
40.4 million class B shares

1.8 million A shares were converted to B.
6K A share options exercised
548K B share options exercised
497K B shares repurchased, cancelled

Then in 2006:
753 B share options exercised
2.9 million B shares repurchased, cancelled

End of 2006:
1 million A shares
40 million B shares
1.8 million B share options outstanding
They grant about half a million per year

Roughly 43 million fully diluted shares.

Up to C$10 million bonuses in the motion picture distribution part of the business.

Up to 600K preferred share stock options with a 1 cent strike price, vesting based on target motion picture distribution goals. Convertible into subordinated LP units. This will need more details.

Need to look into the variable interest entities.


I don't know much about CSI, most importantly how much sticking power it has. In fact I almost never watch TV anymore. Some shows like the Simpsons just keep going and going. Others are amazingly forgettable. Maybe some that seem forgettable will come back again. I have no idea.

I don't have a good sense for how stable the balance sheet is.

A "no assumptions" guess would put the stock being worth around C$35 or US$31. The price is a bit over US$44. It's been going up fairly steadily over the last 4 years.
Definitely worth following

UPDATE minutes later:
It seems that AA Acquisition Corp is trying to buy them out at C$53 per share. May 18th hearing. A fund owns the other 49% of Motion Picture Distribution LP and believes they need to consent to the sale. Since the stock is selling fairly close to the expected acquisition price, this stock isn't worth following. No matter where you start looking (recent news, the annual report, etc.), the thing that rules an investment out is likely to show up somewhere else.

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