Earlier this week Klarman’s Baupost Group purchased an additional 437,000 share of RHI at $1.19 a share.
Klarman now has 36.9% of the outstanding shares.
Here is the trading data for this year.
Klarman has been in touch with management as the 13D/A stated:
“The shares were acquired for investment in the ordinary course of business. Although the Reporting Persons intend from time to time to discuss with management issues about the Issuer and its strategic direction…”
So, what is RHI Entertainment (RHIE) and what the hell do they do?
RHI Entertainment, Inc. develops, produces and distributes new made-for-television movies, mini-series and other television programming worldwide. The Company provides long-form television content, including domestic made-for-television (MFT), movies and mini-series. It also selectively produces new episodic series programming for television. In addition to its development, production and distribution of new content, it owns an library of existing long-form television content, which the Company licenses primarily to broadcast and cable networks worldwide. RHI Entertainment, Inc’s business is comprised of the licensing of new film production and the licensing of existing content from its film library in territories worldwide. Licensing rights in its film library generate contractual accounts receivable. The contractual accounts receivable reflects license agreements it has entered into with third parties for rights to its film content in future periods.
Now, this is an interesting one because a quick glance at the financials reveals nothing that would make someone jump up and say “I’ve been buying at almost 5 and now it is under two, let’s pick up a whole lot more shares”. This is, however just what Klarman did. Klarman is also one of the best investors out there now so paying attention to him makes sense.
It also makes finding out what there is about this he likes worth the time. If you know, please leave it in the comments.
Disclosure (“none” means no position):None
9 replies on “Seth Klarman Ups RHI Stake to Over 36%”
Todd,
i have been trying to figure out the fascination as well. They do have an extensive library.
Some great advice that I’ve heard is that “if you can’t figure out a top investor’s position, don’t follow him into it.”
This is especially the case with someone like Heebner–but also Klarman.
Early 2007, Klarman had around 4 million shares of SLM in what was most likely a hopeful arbitrage trade.
During the next reporting period he sold off around 67% of his shares, down to 1.4 million. The stock collapsed soon after–but at the next reporting period Klarman had increased his stake to 21.9 million shares (!).
That made up a huge percent of his (invested) portfolio–and many people were using it as an excuse to follow him into the trade (around 20 dollars).
Of ocurse it turned out to be a head fake–Klarman was out by the next reporting period.
Anyway, don’t want to discourage anyone from trying to figure out why Klarman is doing this or that (after all, I have a whole blog devoted to doing this for the 5 top investors).
But the above history is worth keeping in mind…
agree….i do not follow blindly but will look into it
You have it right on it is the library! It you look in the 10K it is worth more than Market Value. I belive this breaks down to $3.5M per hour of TV time. In addition, all networks are exploring and moving more towards made-for-TV it is cheaper than paying for large seasonal mini-series. RHI – is undervalued based of interlectual property along. Not to mention they are adding to this library.
Clearly, there are things to like. They have a business model where they commit to production only after they have studio signing up to take on the content, i.e., a break-even investment at worst. The gravy is the high margin dollars generated once the production is in the library. That is as defensive a film investment strategy as you can get.
The problem with the library argument is that it assumes that the library of content is still relevant, it still holds the same value that it once did when this company was LBOed. Also, their recent move into starting to make regular series productions (seeking alpha transcript) makes me wonder if they are getting feedback that series are what the networks are looking for as compared to mini-series (which is a bulk of their library content). Combine this with the pricing compression they experienced in the last quarter on library pricing makes it hard to put a value on the library WITH a significant margin of safety. Add in the fact that they still have $500M of debt overhang and you have to make a compelling case for the future earnings power of this franchise in combination with the library. All said, unless I had some definitive insight into the value of the library assets TODAY vs. what they were valued 2 years ago from a credible media analyst/source in the know (which I am not), I wouldn’t put my toe in. That said, Klarman is Klarman and he obviously believes that the answer to the library question is a resounding YES. I am definitely going to continue to follow Klarman’s maneuvers in this stock.
Economy going into a depression, what will most people do? They still wish to be entertained. The library asset is a big part of this story.
Take a look at the statement of cash flows and “amortization of film production costs” which amounted to approximately $137MM during 2008, $122MM in 2007, and $113MM during 2006. Then look at the balance sheet and you will find $780MM in “Film production costs, net”, i.e. they have a huge amount of future amortization sitting on the balance sheet.
Anon,
re: amortiation. where are you going with it? in theory they will always have more as they add films to library..
RHIE gets two types of revenues: Production rev. and Library rev. The former refers to all revenues achieved from a movie/miniseries in its first year of release. The library rev. is what that movie makes after its first year. Library revenues cost virtually nothing to produce (insignificant maintenance costs). But production revenues are always (and will continue to be) a loss making exercise.
Now to costs and FCF (NOTE: ignore the goodwill impairment charge for 2nd half of 08). Gross profit is $49 mil. To this you add amortization of film production costs (included in COGS) and subtract additions to film production costs (cash expense) and you end up with $34.5 mil. Subtract SG&A and you're left with an operating profit/pretax FCF of $11.2 mil. But this little profit isn't what matters…
You see, production revenues are usually around 70% of the cost to produce those revenues. However, the following year, the increase in library revenues from the previous year's movies ranges anywhere from 15-50% (net of decreases in lib. revenue from older movies). So the point is, if they just keep making $100 mil in production rev. each year at a cost of $150 mil or so, library revenues will grow and outpace these production losses. Theoretically, as production rev/costs become relatively smaller figures, the growth rate will actually increase at a decreasing rate (however this is an unrealistic assumption if projected far into the future: growth rates can't increase for very long or the company will become the economy!).
So that's the theory behind why RHIE might be a phenomenal investment. There are other issues such as: will they be able to keep attracting the same amount of revenue given current production costs. What is production costs increase? The cash loss from a consolidated subsidiary was very significant ($26.5 mil) and will this continue to drain cash?