ABS at 15/share has no one to blame but itself; should restructure to create value

Yes, the non-renewal of the ABS congressional franchise to operate a free-to-air broadcast is a clear attack on the on press freedom and on democracy itself. When no less than the President of the Republic whose policy has been frequently criticized by the network announced that he will not move for the renewal of the network’s congressional franchise, it is undoubtedly a curtailment of the freedom of expression, of the free speech and of the free press. It maybe even evil to suggest or impress that the controlling interest, the Lopezes, should sell for the network’s congressional franchise to be renewed. While it is an attack on the constitutionally guaranteed freedoms, the government more particularly the Congress has done nothing illegal. It has been clearly provided for by the Constitution that the Congress has the sole prerogative to grant or deny any congressional franchise. What has happened is the weaponization of a political tool to attack the freedom of the press.

But hey, this is the Philippines. It is not unusual that everyday there is an attack on the freedoms and on the democracy. ABS should have known that the worst of the attack on the freedom of the press in a country where people get killed for exercising their freedoms is not the legal denial of a congressional franchise. It is not surprising that when ABS was ordered to shut down its free-to-air broadcast, there was a muted response from foreign democratic governments and foreign investors despite ABS crying wolf. Foreign investors and governments had long acknowledge such risks exists in the Philippines. They know how things in the Philippines are. They have priced in the risk already.

ABS should have priced in the risk long before this could have happened. The non-renewal of the franchise of ABS has put into question the competence of its top management. The renewal of the franchise should have been a non-event had ABS acted a long time ago. The non-renewal of its franchise has just accelerated the woes it is facing.

ABS has been addicted to advertising revenue from free-to-air broadcast. Around 50% of its revenue over the years has been coming from advertising mostly from free-to-air broadcast and advertising revenue provided ABS nearly its entire net income for the past years. Its windfall from advertising revenue over the years has allowed it to build a world-class studio and content creation capabilities in entertainment, sports and news. It also allowed them to accumulate cash and capital.

While advertising revenue has been profitable over the years there has been a shift in consumer behavior in the advent of broadband, mobile internet and digitalization. Less and less people are watching TV nowadays. Its inventory of advertisement space in dumb platforms like free-to-air broadcasts and pay-tv will no longer be valued as much now and more so in the future. And this trend should have been in the core in the minds of ABS management long time ago. The non-renewal of its congressional franchise for free-to-air broadcast has just accelerated the need to shift away from dumb platforms.

ABS has been slow to pivot to the new reality. ABS failed to restructure its business to cater to the trend. The windfall from the dumb platform could have transformed ABS into a digital company but the company failed to do so. It built a studio and a content powerhouse but its addiction to advertising revenue from free-to-air broadcast blinded it to still distribute it through free-to-air broadcasting . The trend that free-to-air broadcast was on the decline and the digital platform was on the rise is made crystal clear by the rise of NETFLIX. ABS should have taken the trend seriously and should have restructured the company fast for it to retain and grow its value but it did not. The risk that free-to-air broadcasting is losing value was already very clear and that fast actions had to be made to arrests the decline in value but nothing has been done by the management of ABS. Over the years ABS has been losing its value. Because of its inaction, its share price has been on a continued decline over the years.

The gradual erosion of free-to-air broadcast, that should have thrust ABS into action years ago, has just accelerated with the non-renewal of its congressional franchise for the free-to-air broadcast. ABS has no one to blame other that its incompetence and arrogance.

But it is not yet too late, it can still restructure now. ABS could have restructured the company by splitting into two – 1.) a company for businesses with ownership restrictions and therefore with a capital constraint and shall encompass the dying free-to-air broadcast, mass media, and real estate – the less valuable business, and 2.) the studio and content with the digital platforms which is without ownership restrictions and therefore without the constraint in capital raising – the more valuable business. With such restructuring the first company may have decline in value but the rise in value of the second company could have more than off-set the decline in the first company. The second company would have been for sure be valued as a digital company and since it has no restrictions in ownership it must have been in the attention of foreign investors.

ABS can still do the restructuring now. While it has a team facing its nemesis in Congress, that shouldn’t be the priority. It should have another team doing the most important thing right now – talking to bankers, lawyers and accountants to effect the restructuring. For sure the Lopezes can tap a lot of backers for this endeavor. Just recently KRR, the American private equity giant, made a tender for 6 to 9% of First Gen Corp , a Lopez controlled power generation company, at a 25% premium over the company’s last traded price before the tender offer. KKR has been on an investment spree and might help fund the restructuring of ABS.

If ABS will not restructure the minority shareholders could clearly get burned and the fault will be on the management. Should the Lopezes not restructure ABS, then they should take ABS for itself and buy out the minority shareholders at 30/per share enough for the minorities to slim down their losses.

If no restructuring will be made and ABS not taken private by the Lopezes, then they might have to contend with minority shareholder clamor for a sale of ABS. Government controlled private sector pension fund – Social Security System (SSS) might take the lead for such clamor. Government controlled pension funds may have ABS in their portfolio and in these times may have to seek value for their investments in ABS especially that they might have the need for good returns. At such point the Lopezes are already familiar of what will happen next and the President might just be victorious and the Lopezes made it happen.

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