RLJE – Undiscovered and undervalued media company
RLJ Entertainment is the new namesake company of media legend Robert Johnson. Starting in 1980, Johnson built out the BET network and turned it from a niche startup into a multi-billion dollar enterprise which he eventually sold to Viacom for $3 billion. In February of 2011, he launched RLJ Acquisition Group, a Special Purpose Acquisition Company (SPAC) meant to acquire media assets. In April 2012, RLJ announced the acquisitions of Image Entertainment and Acorn Media Group and closed them in October of 2012. As a result of the acquisitions, RLJE now owns or distributes content in a number of niche categories including, urban, comedy, British mystery & drama, horror, fitness/wellness and music. The combined entity looks extremely attractive from a valuation standpoint and there are a number of growth catalysts lined up over the next couple of years. Robert Johnson serves as Executive Chairman of the company and owns one quarter of the outstanding shares.
A press release out on January 18th disclosed that the current CEO was leaving, being replaced by the COO, and concurrently, the company lowered financial projections for 2012. By the tone of the press release, it sounds like Ted Green, the former CEO was fired, most likely due to his inability to meet company targets for the legacy DVD distribution business at Image Entertainment. Ted Green was initially chosen as CEO because he had some roll-up experience and the Image Entertainment side of the business was larger than the Acorn side of the business. Acorn Media, under the direction of Miguel Penella, had executed extremely well on its growth plan, in the years leading up the merger. They greatly expanded their direct-to-consumer business, acquired a majority stake in the Agatha Christie library and rolled out Acorn TV, a digital subscription channel which they are using as a roadmap for further expansion into different genres. Mr. Green appeared to be a great salesman (maybe a little too good), whereas Mr. Penella, through leveraging the content and contacts that Mr. Johnson provides, is the true brains behind executing on a long term growth strategy. The press release specifically points out that the Acorn side of the business was performing as expected while the Image side of the business was lagging.
Based on company projections, RLJE is extremely cheap, both on a standalone valuation basis and relative to peers. The company recently lowered guidance for 2012 and admitted that there are some kinks being ironed out with regards to revenue recognition from the Agatha Christie Library. Since RLJE owns 64% of ACL, they thought they would be able to consolidate revenue on to RLJE’s balance sheet. In actuality, there are some protections afforded to existing minority shareholders which does not allow full consolidation under GAAP, so RLJE is currently in negotiations with the board to find a mutually agreeable way to allow for the ACL business to be consolidated on to RLJE’s income statement. As it stands, the company recently came out with the following guidance:
Metric Company Guidance Midpoint
2012 Revenue $180-$185mm $182.5mm
2012 Adj EBITDA $28-$30mm $29mm
Revenue projections do not include approximately $12mm in ACL revenue that they must account for using the equity method under GAAP, so an apples-to-apples comparison on the revenue line is $192-197 million. The company also forecasted revenue growth and expanding operating margins for 2013. They did not give specific numbers and did not commit to providing further guidance when the company reports earnings in March. Given the fact that the new CEO was able to reset expectations upon taking the role, it should be safe to assume he is setting the bar low. For an exercise, let’s conservatively assume 5% revenue growth and 10% EBITDA growth, since the release said they expect operating margins to increase and all synergies from the acquisitions have not yet fully been realized. This would put 2013 revenues at $204mm and EBITDA at $32mm.
The capital structure of the company currently stands as follows:
Fully diluted shares 13.3 million
Share Price $4.80
Market Cap $63.8million
Long Term Debt $55.0 million
Cash and Equivalents $11.0 million
Enterprise Value $107.8 million
The company also has approximately 21 million warrants expiring in October of 2017, with the lowest strikes at $12.00, and a $15 million revolver that is expandable to $25 million under certain circumstances.
If the company were to achieve these conservative expectations, it would be valued at 3.7x 2012 EV/EBITDA and 3.3x 2013 EV/EBITDA. Similar small cap media plays are currently trading around 9x 2012 and 7x 2013 EBITDA estimates (see BONA, GAIA, PER.LN, EROS.LN, ETO.LN)
Growth prospects going forward
One of the knocks on RLJE is that they are primarily a DVD distribution company. On the surface, this obviously is not the sexiest space to be given the advent of digital media. However, the pro forma company shipped more DVDs in 2011 than in 2010, and they expect to ship more DVDs in 2012 than in 2011. The company attributes this to an older, wealthier audience, interested in genre-specific content. These consumers are typically less price sensitive and less tech-savvy than younger consumers and as a result, are slower to embrace newer technology. In order to make up for the inevitable decline in the DVD distribution business, RLJE has taken on a number of growth initiatives. About a year ago, Acorn Media rolled out Acorn TV, a subscription based digital media channel. Acorn TV broadcasts British-centric media over the internet for a cost of $2.99 per month to approximately 23,000 subscribers. The company plans on greatly expanding the content available on Acorn TV in 2013 and increasing prices to $4.99 per month while targeting a subscriber base of 60,000 by the end of the year. The company also plans on rolling out a similar digital channel for its urban content in 2013. Johnson will be integral in the rollout of this digital channel in that the channel will have access RLJE’s urban content as well as BET’s content.
RLJE has a number of non-exclusive digital distribution contracts with SVOD (Streaming Video-on-Demand) platforms. Typically these contracts last between 12 and 18 months and the growth here has been accelerating over the last few years. Because RLJE does not want any specific content tied to any specific platform, they choose to structure all contracts as non-exclusive deals, which allows them to sign more contracts but at lower prices due to non-exclusivity. Management is actively seeking to expand in this area as it is clear that more and more people are streaming their video content over the internet instead of watching TV.
The company is continuing to look for opportunities to expand their content library. Early in 2012, Acorn Media acquired a 64% interest in the Agatha Christie library, giving it control over the content. This has proven to be very lucrative as management has been pleasantly surprised at how successfully they have been able to monetize these assets. Over the last couple of years, British media has experienced something of a renaissance due to the popularity of shows such as Downton Abbey. RLJE is currently eyeing acquisitions to further expand in the urban space, but they do not plan on issuing any stock to pay for it with the stock at these depressed levels. They only want to use cash generated from operations and the revolver to pay for any further assets as they believe their stock is very cheap.
The company has identified $5.3 million worth of hard synergies coming from combining Acorn Media and Image Entertainment. The main sources of synergies come from redundant costs, getting rid of duplicate positions and transferring Acorn Media’s distribution over to Sony. Image Entertainment has an agreement with Sony through 2016 where they can package their DVD’s with Sony’s to ship out to retailers. This saves Image Entertainment a lot of money on postage and shipping due to Sony’s scale, and Acorn will also be able to save money once they move over to Sony’s shipping network in April of this year.
Insiders own a substantial portion of the overall stock in RLJE. Chairman Robert Johnson owns approximately 25% of the company’s shares and JH Partners (PE firm involved with the original Image Entertainment rollup) and Image and Acorn insiders own an additional 30% of the shares. This is both a positive and a negative. The positive is that shareholders’ interest in deeply aligned with management’s interest. The negative is that it leaves only a small amount of stock floating in the open market.
Since the deal closed in October, RLJE has suffered a large selloff, moving from about $9.00 when the deal was announced down to the current area. There were likely some leaks that the company’s projections were way too optimistic. As evidenced by the stock action on January 18th, the lower guidance was almost fully baked into the stock since the fairly drastic cut in 2012 projections only resulted in a 0.25 selloff on little volume. When bad news stops driving a stock lower, that’s usually the time to get involved.
RLJE has rights to over 5,000 titles in a wide range of genres and niches. The own approximately 25% of the title and have exclusively rights to distribute the balance. Generally, the distribution contracts last between 15 and 20 years and RLJE boasts a 95% retention rate. The library is extremely stable. In addition to their current library, the company has entered into an agreement with SunTrust to create a self-funded, original content production fund. Basically how it works is that RLJE will put up 10% of the fund’s assets ($6 million of the overall $60 million) with SunTrust funding the rest. The maximum liability RLJE will incur on this venture is $6 million. From there, RLJE, with the help of Johnson’s contacts, will produce urban-centric original programs to distribute through their own channels plus potential outside sources. Funds received from the content will go back into the fund in order to produce more programming and the cycle starts over again. Johnson has also contributed an advertising-based free Youtube channel focused on religion/faith content that the company might also use as a model for future growth. Johnson contributed this asset at no cost to RLJE.
In summary, RLJE is a company trading at extremely depressed multiples, chaired and backed by a very seasoned and successful media mogul who has done this before. There are multiple avenues of growth going forward for the company, both organically and through acquisition. Insiders own over half of the outstanding stock, so management and shareholder interests are very aligned. It seems as though the selling pressure from the last two months is subsiding and given the illiquid nature of the stock, a small amount of interest can move the stock a long way.