Disclaimer: This is not investment advice. The below write-up describes an illiquid small-cap investment in a beautiful yet at times volatile country. The information presented may be inaccurate, outdated or wrong The author is long shares of RCS Mediagroup and his opinions may be biased. Please do your own research!
After publishing my portfolio update with a number of new postions, I ran a twitter poll to find out which company write-up might be interesting to people. The voting social public went for RCS Mediagroup of Italy, so here I am following up with the write-up, somewhat later than hoped for due to personal and professional duties.
I was made aware of RCS Mediagroup via Twitter by SchopenhauerCapital, dug a bit deeper and liked what I saw. As usual, this write-up is also done out of self-interest, i.e. to figure out strong and weak aspects of the investment thesis, solidify or abandon it. One reason why I think RCS is interesting to some people is that its products, the newspapers and magazines such as Coriere della Sera and Gazetta dello Sport in Italy and El Mundo and Expansíon in Spain are well-known too many people (at least in Europe) while the company is somewhat opaque and its reporting is Italian-only while there are no recent investor presentations. Since there is a lot of upside my Italian language knowledge, Google Translate has been a good friend for creating this report.
Business Overview & History
Rizzoli - Corriere della Sera (RCS) was has its roots in the early 20th century when Angelo Rizzoli founded A. Rizzoli & Co.
His company was merged with Corriere della Sera in the 1970s and went public in the 1990s. In August 2016, Cairo Coomunications, the company established ad rund by Urbano Cairo through a voluntary tender offer acquired almost 60% of RCS (at at 100% equity value of about 500mm EUR) . Urbano Cairo subsequently became Chairman and CEO of RCS.
So what does the company do?
RCS is a publisher of newspapers, books and magazines in Italy and Spain. The company also runs a few TV channels, a business school and organizes and markets various events, in particular sports events. In their reports, they split the business into 4 segments:
- Newspapers Italy: This segment consists of the daily national newspaper Corriere della Sera, a Milan-based leading quality newspaper of Italy (think the New York Times or Frankfurter Allgemeine of Italy). Corriere della Sera was founded in 1876. These days, they have a daily audience of 255K and is the most-read newspaper in Italy.
Gazzetta dello Sport, famously printed on pink paper every day, is the leading Italian daily sports newspaper. In a country crazy about Calcio, there is some demand from the tifosi to get up to daily follow on what is happening in the Serie A and Champions League, but also on Formula 1, Tennis and Cycling. The phenomenon of having a daily sports newspaper is also present in France and Spain, but less so in Germany and England where however the tabloids have an extensive sports coverage (half the paper can easily be on sports after a match day).
There is an ecosystem of TV Channels, Print and online publications built around both Corriere della Sera and Gazzetta dello Sport. The “Newspapers Italy” segment is the biggest revenue driver and both papers are somewhat iconic the standard source of information on national news / sport news in Italy.
- Magazines Italy: This rather small segment includes the publication of a number of weekly or monthly magazines in Italy with dedicated topics/target groups (architecture, travel, beauty, family).
- Sport & Events: RCS organizes major sports events, most notably the Giro d’Italia (the pink jersey of the leader reflects the colour of the paper), but also other cycling races (Milan-San Remo, Tirreno Adriatico) or the Milan Marathon.
- Unidad Editorial (Spain): The group is also active in the Spanish media business where it owns El Mundo, a daily national newspaper (second in the country after El Pais), Marca (daily sports newspaper) and Expansíon (business/economic newspaper).
The below table provides an overview on the business segments:
Is it a good business?
Over the past 30 years, the economic situation and the market perspective on publishing companies has completely turnedupside down.
When there was not internet, newspapers had a reputation to be among the best and most profitable businesses in the world. In my view, some aspects of this “great business” characteristics have changed while some others remain intact. I will dissect various of these aspects and see if thy still hold.
- It is not surprising which advantage of the business was eroded: Newspapers were the main source of information 30 years ago. Their value for their customers relative to their cost was tremendous. You paid a few euros or liras and were up to speed on the state of the world. It used to be pretty easy for newspapers to be relevant, even essential to their customers. These days, people have good alternatives. Access to instant information is ubiquitous and for free which has posed enormous challenges to newspaper businesses. Their old value proposition does not work anymore which has pressed on their circulation numbers and therefore circulation and advertising revenues. Operating leverage works both ways and so lower revenues can have an above-proportionate effect on margins.
- There were and still are economies of scale on the production side of the newspaper business. You have to edit your daily issue and produce content only once and there is little if any extra cost sharing it with more people. That variable cost even became less with digital offerings.
- Another positive of the business was and still is that is a capital-light. You may need a certain infrastructure but normally no large recurring capex spending – which is a plus particularly in inflationary times.
- Another aspect which to a certain extent is still there is customer loyalty and stickiness of a product. People check the same sources for news all the time. A number of your clients are subscribers and have some revenue visibility – though less than 30 years ago.
So what can a publishing company do? Essentially, they have to find a way to become relevant to their customers. How can that work? Produce and offer content that people value and consume. Think about yourself. What kind of media do you consume? As an example, I follow Germany’s Bundesliga and 1. FC Köln is my favourite team. There is one local tabloid (Express) which is regularly best-informed about what happens at the club. So, I consume their content and am sometimes willing to pay for it. I have a few newspapers and one specific weekly newspaper-run podcast I follow for German politics. And I have been a subscriber to the Economist for some time. So, in my opinion not all of the information business will be done on Twitter on Facebook going forward. You do not need newspapers for breaking news any more, but there is a market for quality / niche media products, oftentimes in different formats than print. I believe RCS has a chance to play here. Their big titles have a strong reputation, are well-known and get customer attention.
Moreover, the sports/event part of the business, in my view, is quite interesting. Being the organizer of, say, the Giro d’Italia may not be as great as the Formula One, but it is a unique, established and non-replicable event and the ways to make money out of it are basically the same (TV rights, marketing, merchandising,…). The segment was unsurprisingly hit very hard by Covid but is recovering.
Management & Shareholders
About 60% of RCS is owned by Cairo Communications while 10% are held by Mediobanca and 8% by the Della Valle Family (majority oweners of Tod’s SPA). Urbano Cairo, the company’s founder and controlling shareholder is also the CEO of RCS and therefore both owner top manager. Also, Cairo Communcations itself is a listed entity. We should therefore assess (1) relations between Cairo and RCS and if we should rather invest in RCS or Cairo and (2) Urbano Cairo’s incentives, capabilities and track record as a manager. Cairo is 65 years old and started his career in Berlusconi’s Finivest empire wherehe held various management positions beforer starting his own advertising broker at age 38. The company grew quickly and Cairo acquired a number of media, advertising and television companies aswell as 100% of Torino FC.
In June 2016, Cairo made an offer to purchase RCS in a tender offer at a price of 0.70 € per share, at the time a 17% premium to the market price. At the time, International Media Holding launched a bidding competition and bid 1.00 EUR/share but was outbid by Cairo with a share/stock combination, resulting in Cairo taking over a majority of the company at a valuation higher than 500M EUR.
Looking Cairo Group, which is also listed, RCS seems to be by far the most significant asset, producing >80% of revenues and pretty much all the profits. On the other hand, Cairo’s market cap is around 58% of RCS and given that it owns 60% of the company, you get everything else for free, including a net cash position. Also, you are in the same vehicle as Urbano Cairo personally, a situation which I like when it comes to holding situations (Odet/Bolloré and Picanol/Tessenderlo are other examples). On the other hand, RCS is the bigger, more liquid and more easily sellable entity. Both Cairo and RCS are paying generous dividends.
For almost a decade, the company had an ongoing court case with Blackstone regarding the sale of properties in 2014. Given that Blackstone asked for significant damages, this situation overhung the investment case. Fortunately is was cleaned up in July with RCS paying 10M EUR and repurchasing the Corriere della Sera building for 60M EUR in Milan’s Via Solferino 28.
Financials & Capital Allocation
Here is some Financial Data I took from TIKR since year 2009 - I like too at a timeline which includes the financial crisis and the Euro crisis. I went for a somewhat bigger set of numbers and hope they are readable. These numbers reflect positively on Urbano Cairo’s tenure as CEO. Some observations:
From 2009 to 2017, the business, measured both by total assets and revenues has been shrinking. During this period, the business was clearly suffering. The company was loss-making and highly indebted. It had to raise new equity capital in order to survive, shed a lot of employees and sold parts of its business. Pretty much all KPI numbers during this time look disastrous.
From about 2016/17, the time Cairo took over, there has been a remarkable change. This business was stabilized. Both total assets and revenues have been roughly stable during the period (with a slight Corona Dip).
Moreover, during this phase, the company continued to significantly reduce its net debt which currently stands at around 1.2x EBITDA. Note that this number unlike in the past now includes leasing liabilities following the adoption of IFRS 16 in 2019 (net debt jumped in 2019). So the company did a good job at delevering into a territory where financial leverage is not a problem. The repurchase of Via Solferino will use a good portion of the 2022 cash, yet may reduce the lease liabilities. Going forward, RCS has pretty much all of its free cash flow available at its discretion, that is share repurchase, dividends or acquisitions.
At the same time, cash generation has been high and stable. Since 2017, operating cash flow has been on average about 120M EUR per year. The company did not have to make any significant investments. Financing Cash Flows mostly reflect debt repayments. In 2021, a dividend was initiated which currently stands at 6 Cents/Share (for a yield of slightly more than 8%).
From 2017 onwards, the company also managed to generate EBITDA margins of 13-15% and double-digit ROEs.
A big question is what they will do with future cash flows. I agree with the strategy of delevering first, but they are largely done here. I like the dividend, but they are currrently paying out roughly a third of what they generate. Could they raise their dividend? Yes. Will they do buybacks? I do not know. They have not done them historically and there is also not a lot of free float outstanding. So one of the risks here is a stupid acquisition. I think Cairo is an astute businessman but he has also done bif wagers before. He might do another one here and get it wrong. Certainly a risk to keep in mind.
Valuation & Summary
Also in the table, you can see that Valuation Multiples are still pretty low. RCS trades at 4.4x EV/EBITDA, 5.6x EV/EBIT and a P/E of around 5. The company has around 517M shares outstanding for a market cap of 372M EUR as of this writing. You may also look at P/FCF which is also in the low single digits. The markets trades treats this like a dying company even though the recent history as been stable and cash-generative, cash is actually being returned to shareholders and the balance sheet looks comfortable.
RCS cannot expected to be a growth company but I do think that in a difficult industry, it does have some interesting assets, like unique newspaper brands and sports events which - if managed well - can provide stable cash flows and serve as a platform for new modern media products. The stable financial structure after the massive debt paydown and the capital-light model might allow for a higher dividends in a post-Covid world.
Main risks include a decline in revenues (dying dinosaur) and bad capital allocation by a manager who did a great operating job in the last few years but did have some hunger for acquisitions in the past aswell as a takeunder by Cairo Communication. Overall, I do not think that RCS Mediagroup is a bullett-proof investment - I can see well what might go wrong. Still, given the cheapness, the risk/reward looks quite favourable in my view which is why I have a small holding in the company.
RCS Mediagroup
Solid and balanced write up. If i am not mistaken 900k+ digital subscriptions and growing 👍