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A League Of Their Own: Batting For Returns In The REIT Industry – Part 2

Sweden Takes The Lead In Nordic TMT Restructuring

Can ComScore Break Nielsen's Near-Monopoly On Ratings

Credit Analysis

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Disney Stock Rise Increases Multiple Nearly A Full Turn For Fox Assets


A League Of Their Own: Batting For Returns In The REIT Industry – Part 2

Highlights

In this report, we demonstrate how investors can use these data points as alpha strategies.

Oct. 28 2016 — The SNL Real Estate database, now an offering of S&P Global Market Intelligence, contains property level and geographical market-based demographic information that can be difficult for investors to obtain. These unique data points are valuable to investors seeking an understanding of the relationship between property level information and future stock price movement.

In this report, we demonstrate how investors can use these data points as alpha strategies. Our back-tests suggest that metrics constructed from property level information may provide insights about future price direction not captured by fundamental or estimates data. Investors may want to consider incorporating information on a REIT’s property portfolio when building a robust REIT strategy.

This paper is a continuation of our work on the efficacy of stock selection signals within the REIT industry (REIT Paper - Part 1)

Key findings include:

  • The ability of a REIT to cover both interest and preferred dividend payments is important, especially if investors forecast a tightening in monetary policy.
  • Metrics constructed using property level data have a low correlation with metrics constructed using fundamental and estimates data.
  • A strategy that combines both property level and fundamental data has an information ratio (long-only active return) that is at least 15% higher than a strategy that uses only property level or fundamental data.

We introduce a new class of signals derived by overlaying demographic information on REIT property level data. These new signals enable investors to compare the average demographic characteristics of real estate portfolio across REITs.

A League Of Their Own: Batting For Returns In The REIT Industry – Part 2

download the full report

Equities
Sweden Takes The Lead In Nordic TMT Restructuring

Highlights

Sweden's incumbent telco Telia Co. AB acquired in July 2018 its Norwegian counterpart TDC A/S's arm, consisting of the cable operator Get and ISP TDC Norway, as well as much sought after content assets from Bonnier AB, holding commercial and pay TV networks TV4 AB in Sweden, MTV Oy in Finland and C More Entertainment AB across the Nordics.

In October 2018 The Norwegian Competition Authority approved Telia Company’s acquisition of Get and TDC Norway and later that month the acquisition was completed.

In January 2018 Tele2 and Com Hem announced merger plans, which received European Commission approval in October 2018.

Dec. 18 2018 —

Sweden became an originator of heightened consolidation market in the Nordics that reached a crescendo of restructuring activity in 2018. Sweden's incumbent telco Telia Co. AB acquired in July 2018 its Norwegian counterpart TDC A/S's arm, consisting of the cable operator Get and ISP TDC Norway, as well as much sought after content assets from Bonnier AB, holding commercial and pay TV networks TV4 AB in Sweden, MTV Oy in Finland and C More Entertainment AB across the Nordics.

In October 2018 The Norwegian Competition Authority approved Telia Company’s acquisition of Get and TDC Norway and later that month the acquisition was completed. The merged companies will have about 2.3 million mobile customers, and about 1.8 million people will use Get's and TDC Norway's broadband and TV services. At the same time Telia sold assets in Azerbaijan, Georgia, Kazakhstan and Russia, in-line with other Nordics players that have exited Eastern European markets in recent years, including MTG and Telenor.

Earlier, in January 2018 Tele2 and Com Hem announced merger plans, which received European Commission approval in October 2018. In November 2018 the Swedish Companies Registration Office (SCRO) registered the merger, which now sits under Tele2 AB with Com Hem Holding dissolved. The Com Hem brand remains in use for the time being. The aggregate deal value was $4.03 billion. The new company now counts 817,716 broadband subscribers with a 21.0% market share. The merger combined Tele2's 44,000 broadband subs with Com Hem's 773,716 subs as of the end of September 2018.

In 2018 the Modern Times Group (MTG) divided the operations into two groups: MTGx and Nordic Entertainment Group (NENT). NENT comprises of the old group's Nordic Entertainment division, MTG Studios and Splay Network. The split was initiated by TDC's bid for what became NENT on 1 February 2018. The bid was consequently withdrawn as a result of a $6.00 billion takeover of TDC by Macquarie consortium with MTG pushing ahead with its restructuring plans. All of the multichannel assets stayed with NENT.

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Technology, Media & Telecom
Can ComScore Break Nielsen's Near-Monopoly On Ratings

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Sep. 17 2018 — Advertising agencies are becoming increasingly frustrated with the inability of Nielsen Holdings PLC's Nielsen Media Research to convince the major media companies to embrace its new cross-platform measurement system, called Total Audience Measurement. This creates a huge opportunity for comScore Inc., formerly Rentrak.

ComScore is trying to reinvent itself following its delisting in 2017 — it was relisted June 1 — following an accounting scandal. The company's stock has fallen from $65 per share intraday on Aug. 17, 2015, to close at just $18.06 per share on Sept. 6. It currently has a total enterprise value of less than $1.2 billion, paltry in comparison to Nielsen Holdings' $12.9 billion.

In April, comScore named Bryan Wiener, previously executive chairman of Dentsu's digital media agency 360i LLC, as its CEO. On Sept. 5, the company announced that it hired Sarah Hofstetter to serve as president and head up commercial strategy, including sales and marketing.

Wiener and Hofstetter have worked together for two decades, most recently at 360i, where Hofstetter was CEO and chairwoman. The two executives' deep ties to the advertising community may be just what is needed to bring a competing cross-platform measurement system to the broadcast and cable network industries.

Cable network ad revenue grew for decades before stumbling, albeit modestly, during the last recession. More recently, despite a booming economy the cable network ad industry has faltered, in part due to cord cutting and cord shaving but also because current ratings do not include all of online viewing and out-of-home viewing.

Currently, the ratings only include online viewing within a three-day period, which includes the exact same commercial load as linear. Many media companies do not believe that online viewers will tolerate the huge ad load that exists on linear TV and do not include the same commercial pods that appear on linear TV when serving up the shows online.

Although negotiations between Nielsen Media Research and the major media companies have been going on for some time, many in the industry are tired of the delays in adopting a new system and are looking at alternate ways to measure viewing.

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Credit Analysis
Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Mar. 20 2018 — The race to become the first trillion dollar company is heating up, with everyone paying close attention to the tech mega-caps — Alibaba Group Holdings Ltd. (NYSE: BABA) and Amazon.com Inc. (NASDAQ: AMZN).

Despite a lack of consensus over who will take the crown, one thing is evident: no two companies in the race are as neck and neck and as similar in business strategy and operations as Amazon and Alibaba. Both champion the e-commerce landscape in their specific countries – Amazon in the U.S. and Alibaba in China - and both have made their forays into new industries such as food and healthcare.

Wall Street is following these companies closely, with Alibaba slightly in the lead in terms of analyst recommendations. As of April 2, 2018, the Chinese e-commerce behemoth has received 37 buy ratings and just two hold, according to S&P Global Market Intelligence data. The average analyst price target of $226.44 suggests upside potential of roughly 23%. Amazon, in contrast, has received 31 buy ratings and two hold. The average analyst price target of $1,709.05 suggests upside potential of roughly 18%.

To keep a tally of the race, we used the RatingsDirect® Monitor, a data visualization portfolio monitoring tool that provides risk/return insights and helps track and analyze market movements for publicly-traded companies that are rated by S&P Global Ratings.

Figure 1: Tech Mega-Caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

Tech mega-caps: S&P Issuer Credit Rating (FCLT) vs. 3M Stock Price Volatility (%)

For illustrative purposes only.

At a market cap of $471.6 billion, Alibaba is not too far off from catching up to Amazon’s $700.7 billion cap. Alibaba stock’s price has observed a three-month price volatility of 40.1%, the largest among the tech titans and far surpassing Amazon’s 30.8%.

Although the higher volatility and lower S&P Global Ratings’ long-term credit rating present more risks for investors, Alibaba’s higher return on assets and lower P/E and leverage ratio suggest more opportunities for the Chinese e-commerce behemoth to grow and reach the $1 trillion valuation first.

Comparing disruptive levels of innovation

To compare the disruptive level of innovation in the various sectors that Amazon and Alibaba have entered, we selected comparable events between the two conglomerates and examined industry-level probability of default (PD) changes of the PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

The war for groceries

Both Amazon and Alibaba have been stepping up their battle in the grocery business. Just last year, Amazon’s announcement to purchase Whole Foods Market Inc. for $13.7 billion shocked investors, with shares of some of U.S. food’s largest players – Kroger Co. Supervalu Inc., Costco Wholesale Corp., Target Corp., and Wal-Mart Stores Inc. – dipping on the news. The market perceived credit risk of the U.S. food retail industry also escalated. One week following the announcement, the U.S. food retail PD jumped from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or about a 30% increase in the industry’s probability of default.

Figure 2: U.S. Food Retail Median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

U.S. food retail median Market Signal Probability of Default: June 15, 2017 – June 23, 2017 (%)

Alibaba also aggressively expanded its food footprint in 2017 with its rollout of new supermarkets under the Hema Xiansheng brand and its $2.9 billion investment in China’s largest hypermarket operator Sun Art Retail Group. Just this year, reports that Alibaba held early development talks with Kroger Co. left the Chinese food industry shaking. One week following reports of the discussions by Reuters and New York Post, China’s food retail PD increased 109.10% from 3.05% on January 23, 2018 to 6.39% on January 31, 2018. [i] [ii]

Figure 3: China Food Retail Median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

China food retail median Market Signal Probability of Default: January 23, 2018 – January 31, 2018 (%)

The battle for pharma

Pharmaceuticals have been another potential battleground for the e-commerce giants.

According to an October 5, 2017 note published by Leerink Partners managing director Dr. Ana Gupte, Amazon is “hiring relevant talent and are in active discussions with mid-market PBMs [pharmacy benefit managers] and possibly even larger players such as Prime Therapeutics.” Following publication of the note, the U.S. drug retail PD escalated 22.55% from 16.16% on October 4, 2017 to 19.81% on October 12, 2017.

Figure 4: U.S. Drug Retail Median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

U.S. drug retail median Market Signal Probability of Default: October 4, 2017 – October 12, 2017 (%)

Similarly, China’s drug retail PD jumped 90.67% from 1.55% on February 1, 2018 to 2.96% on February 9, 2018, following Alibaba’s February 2, 2018 announcement to partner with European pharma giant AstraZeneca PLC.

Figure 5: China Drug Retail Median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

China drug retail median Market Signal Probability of Default: February 1, 2018 – February 9, 2018 (%)

The risks of innovation

In summary, our PD Market Signal model shows that Alibaba disrupts the short-term market perceived credit quality of firms more than Amazon does. The Chinese e-commerce behemoth is viewed by many investors as a proxy for China's consumer economy and growing middle class, whereas Amazon is not, and PD movements are reflective of this. As illustrated by our RatingsDirect® Monitor, Alibaba has a much lower leverage compared to Amazon, with a last-twelve-months Debt/EBITDA ratio of 1.4, compared to Amazon’s 2.9. Alibaba also has higher growth potential from the perspective of ROA and P/E. Alibaba’s ROA stands at 7.4%, compared to Amazon’s 2.4%. Further, Alibaba’s lower P/E ratio of 46.3, compared to Amazon’s 235.3, suggests that the Chinese firm may be undervalued.

Figure 6: Tech Mega-Caps: ROA (%) vs. Debt/EBITDA (x)

Tech mega-caps: ROA (%) vs. Debt/EBITDA (x)

For illustrative purposes only.

Figure 7: Tech Mega-Caps: ROA (%) vs. P/E Ratio (x)

Tech mega-caps: ROA (%) vs. P/E Ratio (x)

For illustrative purposes only.

Whether Alibaba will claim the $1 trillion title before Amazon, however, remains to be seen. A fast growing company, Alibaba faces significant challenges from China’s ever-changing business environment, including potential regulatory, litigation, and international expansion risks, as outlined in roughly 45 pages of the firm’s most recent annual report.

Despite the inherent risks, what sets Alibaba apart is its domination of China’s online marketplace, which is the single-largest in the world. Founder Jack Ma has also been faster than Bezos to expand his business lines. The use of Alipay, one of the world’s largest mobile payment platforms, and the firm’s roughly $350 million investment in Chinese electric-vehicle maker Foxconn Technology Group are just a few examples of the firm’s growing economies of scale.

[i] Alibaba, U.S. grocer Kroger had early business development talks: source. (n.d.). Retrieved March 01, 2018, from https://www.reuters.com/article/us-kroger-alibaba/alibaba-u-s-grocer-kroger-had-early-business-development-talks-source-idUSKBN1FE0EF

[ii] To battle Amazon, Kroger eyes Alibaba alliance. (n.d.). Retrieved March 01, 2018, from https://nypost.com/2018/01/24/krogers-answer-to-amazon-go-alibaba/

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Disney Stock Rise Increases Multiple Nearly A Full Turn For Fox Assets

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

The increase in shares of Walt Disney Corp. has caused the deal price for the coveted 21st Century Fox assets to rise from $66.1 billion to $70.6 bil., and the multiple to go up almost a full turn from 11.9x to 12.8x cash flow.

It's rare that a stock rises significantly on news or rumors of a major acquisition, but media investors appeared to love the Dec. 14 news that Walt Disney Co. plans to buy some of the most coveted assets in the content world, including movie and TV studios, 22 regional sports networks, STAR India Pvt. Ltd., and a 39% stake in Sky plc from 21st Century Fox Inc. Prior to the close of the transaction, it is anticipated that 21st Century Fox will seek to complete its planned acquisition of the 61% of Sky it doesn't already own.

Walt Disney deal for 21st Century Fox assets

Shares in Walt Disney rose 2.9% Dec. 14 on news of the deal to close at $110.57, an 8.4% increase over the 30-day average used in the deal announcement, which put the deal at $52.44 billion in equity for a total of $66.14 billion including assumed debt.

If the Dec. 14 closing price were used rather than the 30-day average, the equity value of the deal would be worth $4.41 billion more, raising the deal price to $70.55 billion including debt.

Disney-Fox deal, seller’s versus buyer’s multiple

With cash flow remaining the same, this raises the seller's multiple from 11.9x to 12.8x and the buyer's multiple from 8.3x to 9.0x. Of course, there is no telling what the actual average 30-day price will be, as this transaction is likely to make a long journey through the Department of Justice's review process.

In addition, there is some risk that the exchange ratio could change due to a final analysis on what the tax bill will be for Fox on this huge asset sale. Disney is footing the tax bill, but being reimbursed by a special dividend from Fox in a complex deal that will save taxes for Fox.

However, there is no question that both companies are being favored by investors after a long, volatile period where media stocks were being crushed and then would bounce back on various bits of news surrounding cord cutting, cord shaving, and the failure of the industry to adopt the new Nielsen Total Audience Measurement metric, which counts online viewing.

Both stocks are up quite a bit from the trading day before CNBC's David Faber first reported on rumors of a Disney-Fox deal. Shares in Fox are up 39.7% since Nov. 3, when they traded at $24.97 per share, and shares in Disney are up 13.0% from their closing price of $97.85 per share on the same date. Over the long run, things haven't been so rosy. Although Disney shares are up around 20% over the past three years, it has been a roller coaster ride, with the stock reaching as high as $122.08 intraday on Aug. 14, 2015, and dipping as low as $86.25 intraday on Feb. 10, 2016.

Shares in Fox are actually down slightly amidst quite a few up and down periods, including an intraday low of $22.66 on Feb. 9, 2016.

Kagan, a media research group within S&P Global Market Intelligence, thinks the year ahead will show plenty of volatility in both stocks on news regarding what the DOJ is focused on at any particular time. There is no question that this is a favorable transaction for both companies. The question is when, or if, it will close.

Walt Disney Co. and 21st Century Fox, Inc. 3-year stock price