I have a small position in ABS-CBN. I made an investment late last year entering at P16, about the same time I made an investment with MWC. I didn’t do a writeup on it because its just a small position. But the events that unfolded led me to believe that I should review my thinking with this investment and put it into writing.
The main reason I invested in ABS-CBN is its issue of franchise renewal. The threat of shutdown is real. Now that it happened, its very real. But I have reasons to believe that this is just a temporary thing. Why? Let me explain.
The legal basis of ABS-CBN’s shutdown was because of using the frequency they got from the government to make more channels and sell it to customers. Something the government says you can not do. You can not get a frequency for free and divide it to different channels and make money out of it.
But how the process goes is a little confusing. Even though by law, you can NOT do that, on the same law, it said only the NTC can provide permits if a broadcast station can produce a new channel from this frequency. And NTC gave the permission to ABS. And not only that, other channels seems to have done the same. They made new channels and sold to people.
The ABS CBN Black Box
The culprit that does the selling is the ABS CBN black box and in it, they sell access to pay per view shows using the free frequency. So can we just assume that they will get rid of the black boxes and they will allow ABS CBN to operate again? Will it affect the bottom line? Not much. The sale of the blackboxes are at the bottom of their revenue share. It won’t matter much in the overall income of ABS. That’s one scenario.
Shutdown and buyout
Let’s say the worst happened and ABS CBN is forced to close down. What would happen to the assets? The franchise extension is still being heard in the congress, meaning there is value in that license if it pushed through and they were granted an extension. For the moment, they are shutdown. Until the license got renewed, they have to find ways to air. So the problem now is to have a temporary license (which they have btw) until ABS got the license they need. That license have a value and other media mogul would certainly want that, being the largest broadcast company in the Philippines.
They could ask a white knight to infuse money to the company to stay afloat, like Razon with MWC. I think they will try anything to stay afloat until they get the license.
If that didn’t work, they might sell the assets. And say bye bye to an institution. As of this moment, the book value of ABS CBN is P41. Even if the assets sold at fire sale of less 50%, they would get P20 per share or so. I figured that my money is safe if I invested since the margin of safety is so big. If it went bust and I got P10 per share or 0, I still think its a good risk-reward ratio. A double if it goes well, a small loss if it doesn’t and a zero if its really bad.
If they sold all the assets and close down, I don’t think I would get a zero though. So I think I’m fine with that risk. That’s why I invested only a small part of my fund here. It might also be closer to the book value. Nobody knows for sure how much of a discount it would sell at fire sale. But zero is a small chance.
Thinking that it may go bankrupt is actually my first reasoning. And I know that if ABS close down, other businessmen would most likely buy it near book value.
On another perspective, GMA7 now is larger by market cap to ABS. Even though ABS has more than double the amount of assets. Go figure. As a value investor, there’s a lot to think about this ABS investment. And I usually avoid such kinds because its hard. If you can figure this out, perhaps it would provide you with great returns since we are in a bear market.