I guess I’m already starting to subvert my edict of not “describing my portfolio” but it’s awfully hard not to talk about news of interest, and news of interest tends to be about things that I’m invested in.
With that said, there’s a lot of news lately about Alliance Atlantis, the well-known entertainment conglomerate. Ever since they put themselves up on the auction block definitively in the press, their stock has seen a nice jump from the days when this excellent article was written — AAC.B traded at a homely $13, although most stocks in that time period were not doing so hot. That story points out the major Achilles’ heel of AAC.B, which is that they are carrying a giant debtload and running a deficit, due to their strategy of producing higher-cost, and (arguably) higher-quality programming, as opposed to the typical bad-old-days fare of Canadian television programming (remember Tarzan?):
MacMillan says that all of this was carefully plotted out. To prepare for the spending spree, in 1999 AAC issued $220 million in senior subordinated notes at a credit-card rate of 13%. This was followed up in June, 2000, and January, 2001, with additional issues of $81 million and $138 million, respectively, at the same rate, with the last issue selling at a 1% discount. Debt peaked in 2001 at $730 million.
Plenty of activity, plenty of forward thinking, but servicing this enormous, expensive debt with negative cash flow simply cannot go on forever. Take fiscal 2002 as an example. The company posted net earnings of $47.3 million, up 35% over the previous year, on revenue that increased 19% to $959.9 million. Sounds great. However, during the year, AAC expensed $75.4 million in interest alone, and its current ratio (of assets to debt), which at the beginning of the year was 1.071, plummeted to .658. Furthermore, the company reached the end of the year with a retained deficit of $121.5 million. Translation: The ability of the company to pay its bills as they come due is declining.
And looking at their latest financial documents, that debt hasn’t really disappeared. What’s changed? Some would say the biggest thing is the fact that Alliance Atlantis holds a 50% interest in the ridiculously popular CSI franchise and international distribution rights, which hadn’t really exploded when that article was written. It’s hard to know whether the broadcast and movie distribution assets are significantly more valuable now, although that $13 price seems like a bargain now.
That said, I bought in after having passed over AAC.B many times before, probably due to some notion of it being “too expensive” (a lot of my takes on stocks are often hunches or intuition, to be frank). There was obvious bidding interest at the time, enough potential buyers, and a strong collection of assets that I felt reasonably secure in putting a chunk of change into it. While Corus sits back and watches CanWest and Goldman go at it, I’ll bide my time as well. I don’t expect the crazy bidding war that broke out for Falconbridge that ended up with Xstrata lording it over Inco like some kind of metals Muhammad Ali glowering over Sonny Liston, but feeling the heat of potential competitors in bidding is always a good way to see prices pushed up. That said, if the Canwest deal goes through at $55 or thereabouts, it may be too late for johnny-come-latelys to participate in this special situation to a significant degree.
UPDATE: I’m posting this early because the deal I mentioned closed even faster than I expected. A deal has been announced valuing AAC.B at $2.3 billion, or $53 a share, below today’s closing price of $53.61. Not particularly huge upside, and well below the $60 one particularly enthusiastic analyst estimated.
I am long Alliance Atlantis (AAC.B).