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Shorting Nielson(NLSN)

Guest ValueCarl

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Guest ValueCarl

I am just starting to wrap my head around this investment question/thesis I had begun to ponder yesterday about a company whose traditional services, "Watching T.V.," is fast becoming a miscalculating relic as eyeballs travel to the internet(IP TV) and are easily tracked by their IP addresses to or by content owners and distributors without the need for a middleman such as this. Accordingly, I began to seek out data from their 10K. Board member input will be appreciated for delving into its cash flows and financials. . I'll fire the first few shots.



To begin with, I start with the premise that a nearly 100 year iconic brand name, non public company decided to go public while seeking to insulate its owners from the changing shift I suggested above-pass the hot potato exit strategy-while selling to a group of hedgies that seem to have saddled it with significant debt before dropping the bomb on the public. The Blackstone Group, part of this investor consortium, for example, took its little PIGGIE to the market right before the credit market implosion, and has only recovered half of its original upset price. Nice pay day for Stephen Schwarzman notwithstanding. There are some other dark horse investors who I have had bad experience with over many years as well, including Thomas H. Lee, not always friendly to "equity owners."  




They seem to have migrated or acclimated to online viewing habits; however, I am not sure how useful their technologies including patents are while seeing that they are heavily dependent upon Tata over in India for their technology "brain trust," it appears.


It's the debt stupid, that really concerns me in addition to the concentration of customer revenues being dependent upon a handful of select clients. Their customer retention rates seem to dovetail with the amount of years "pay t.v." has evolved, i.e., 30 years. As traditional pay t.v. including cable cord cutting continues, does Nielson go the way of the Do Do Bird with it?  


I see a company that is so debt laden relative to a changing paradigm exposing everything it once did to great market loss without opportunity, and having come to market to buttress these facts. Growing CAPEX requirements and EBITDA covenant ratios add additional stress to this already cumbersome balance sheet whose debt seems to be a great albatross moving forward.    


Is summary, shorting Nielson is feeling better to me today than yesterday.        




<Our Company was founded in 1923 by Arthur C. Nielsen, Sr., who invented an approach to measuring competitive sales results that made the concept of “market share” a practical management tool. For nearly 90 years, we have advanced the practice of market research and media audience measurement to provide our clients a better understanding of their consumer. Our Company, incorporated in the Netherlands, was purchased on May 24, 2006 by a consortium of private equity firms (AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners). Subsequently, David Calhoun was appointed Chief Executive Officer. Mr. Calhoun has repositioned the Company and focused on building an open, simple and integrated operating model to drive innovation and deliver greater value to our clients. In January 2011, our Company consummated an initial public offering of our common stock and our shares began trading on the New York Stock Exchange under the symbol “NLSN”.>


<What Consumers Watch

Our Watch segment provides viewership data and analytics primarily to the media and advertising industries across television, online and mobile devices. For the year ended December 31, 2010, revenues from our Watch segment represented approximately 33% of our consolidated revenue. This segment has historically generated stable revenue streams that are characterized by multi-year contracts and high contract renewal rates. At the beginning of each year, approximately 90% of the segment’s revenue base for the upcoming year is typically committed under existing agreements. Our top five clients represented 27% of segment revenue for the year ended December 31, 2010 and the average length of relationship with these same clients is more than 30 years. No customer accounted for 10% or more of our Watch segment revenue in 2010.>


<Considering the result of only the aforementioned transactions, our total indebtedness of $8,558 million as of December 31, 2010 will be reduced to approximately $7,149 million. Although we continue to have a significant amount of indebtedness, we believe we will have available resources to meet both our short-term and long-term liquidity requirements, including our senior secured debt service. We expect the cash flow from our operations, combined with existing cash and amounts available under the revolving credit facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, restructuring obligations, and capital spending over the next year. In addition we may, from time to time, purchase, repay, redeem or retire any of our outstanding debt securities (including any publicly issued debt securities) in privately negotiated or open market transactions, by tender offer or otherwise. It is possible that continued changes to global economic conditions could adversely affect our cash flows through increased interest costs or our ability to obtain external financing or to refinance existing indebtedness. Refer to the subsequent events section below for a discussion of certain capital markets activities occurring subsequent to December 31, 2010.>


<4. Subsequent Events

On January 31, 2011, the Company completed an initial public offering of 82,142,858 shares of its €0.07 par value common stock at a price of $23.00 per share, generating proceeds of approximately $1,804 million, net of $85 million of underwriter discounts.



Table of Contents


Notes to Schedule I (continued)

Concurrent with its offering of common stock, the Company issued $288 million in aggregate principal amount of 6.25% Mandatory Convertible Subordinated Bonds due February 1, 2013 (“the Bonds”), generating proceeds of approximately $277 million, net of $11 million of underwriter discounts. Interest on the Bonds will be payable quarterly in arrears in February, May, August and November of each year, commencing in May 2011. The Bonds will be mandatorily converted into between 10,416,700 and 12,499,925 shares of Nielsen’s common stock on February 1, 2013 at a conversion rate per $50.00 principal amount of the bonds of not more than 2.1739 shares and not less than 1.8116 shares depending on the market value of Nielsen’s common stock (the average of the volume weighted-average price of Nielsen’s common stock for the 20 consecutive trading days immediately preceding February 1, 2013) relative to the threshold appreciation price per share of $27.60.

The Company remitted and utilized substantially all of the combined net proceeds of approximately $2,081 million associated with the aforementioned transactions to certain of its subsidiaries to settle the Advisory Agreements in place between the Sponsors and certain of such subsidiaries and to redeem and retire certain issuances of the Company’s subsidiary long-term indebtedness.>



<Covenant EBITDA Attributable to TNC B.V.

Our 2006 Senior Secured Credit Facilities contain a covenant that requires our indirect wholly-owned subsidiary, Nielsen Holding and Finance B.V. and its restricted subsidiaries, to maintain a maximum ratio of consolidated total net debt, excluding certain TNC B.V. net debt, to Covenant EBITDA, calculated for the trailing four quarters (as determined under our 2006 Senior Secured Credit Facilities). Currently, the maximum ratio is 7.5 to 1.0, with such maximum ratio declining over time to 6.25 to 1.0 for periods after October 1, 2012.

In addition, our 2006 Senior Secured Credit Facilities contain a covenant that requires Nielsen Holding and Finance B.V. and its restricted subsidiaries to maintain a minimum ratio of Covenant EBITDA to Consolidated Interest Expense, including interest expense relating to TNC B.V., calculated for the trailing four quarters (as determined under our 2006 Senior Secured Credit Facilities). Currently, the minimum ratio is 1.75 to 1.0, with such minimum ratio varying between 1.75 and 1.0 to 1.50 to 1.0 for subsequent periods.

Failure to comply with either of these covenants would result in an event of default under our 2006 Senior Secured Credit Facilities unless waived by our senior credit lenders. An event of default under our senior credit facility can result in the acceleration of our indebtedness under the facility, which in turn would result in an event of default and possible acceleration of indebtedness under the agreements governing our debt securities as well. As our failure to comply with the covenants described above can cause us to go into default under the agreements governing our indebtedness, management believes that our 2006 Senior Secured Credit Facilities and these covenants are material to us. As of December 31, 2010, we were in compliance with the covenants described above.>










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Guest ValueCarl

Hmm, very nice. A most efficient way of monitoring from the business perspective in cyberspace, its own customers' needs, wants, and desires according to their own web site designs which are fluid; therefore, subject to change according to new information as it is received.


Beyond business owned websites, how does a business "advertiser" decide where to maximize its ad dollars in an all IP world? Does a generic "Honda" advertising still work for a limited audience not time governed-ubiquitous or anytime, anywhere viewing-while watching Glee on Hulu, for example? Or, can Honda know their target audience, or potential target audience a great deal more intimately through the power of the internet; therefore, saving ad dollar expenses during the process?    


Without a doubt, "patented" CDN proprietary, analytic measuring tools as Ben Graham points out, places two other revenue generating segments of their business operations, well beyond "What Consumers Watch" on their dumb em down boxes at RISK. 



<Online Audience Measurement Services

We are a global provider of internet media and market research, audience analytics and social media measurement. We employ a variety of measurement offerings to provide online publishers, internet and media companies, marketers and retailers with metrics to better understand the behavior of online audiences. Our online measurement service has a presence in 46 countries including the United States, France, South Korea and Brazil – markets that account for approximately 80% of global internet users. Through a combination of patented panel and census data collection methods, we monitor and measure the internet surfing, online buying and video viewing (including television content) of online audiences. We provide critical advertising metrics such as audience demographics, page and ad views, and time spent – as well as quantify the effectiveness of advertising by reporting online behavioral observations, attitudinal changes and actual offline purchase activity. We track, measure and analyze consumer-generated media including opinions, advice, peer-to-peer discussions and shared personal experiences on over 100 million blogs, social networks, user groups and chat boards.


Mobile Measurement Services

We provide independent measurement and consumer research for telecom and media companies in the mobile telecommunications industry. Clients, principally mobile carriers and device manufacturers, rely upon our data to make consumer marketing, competitive strategy and resource allocation decisions. In the United States, our metrics are a leading indicator for market share, customer satisfaction, device share, service quality, revenue share, content audience and other key performance indicators. We also benchmark the end-to-end consumer experience to pinpoint problem areas in the service delivery chain, track key performance metrics for mobile devices and identify key market opportunities (e.g., demand tracking for device features and services). While mobile internet consumption is still nascent, we are expanding quickly in this area to capture internet, video and other media on mobile devices. As the mobile industry continues to grow, there is an opportunity for us to measure media and data content on mobile devices worldwide and to integrate mobile measurement with other media platforms. We offer mobile measurement services in 10 countries worldwide, including the United States, where we are the market leader, and are focused on expanding our presence in developing markets such as Brazil, China, India and Africa.>




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Guest ValueCarl

If the ads are not pertinent to a user's personal interests and tastes while invading their "personal space," be it through a PC, laptop, or other mobile gadget, in an attempt to overburden viewers with superfluous ads ON NET, The Networks can risk losing mind share even if their content is best of breed. On the other hand, one can see how the experience of watching online might be enhanced, if the ads in between viewing times are significant to the end users' lives making for a more fluid, happy experience. The last thing that should occur to the internet is a repeat of by transplanting the "DUMB EM DOWN BOXES" representative of traditional media over T.V. to the IPTV model. Should they embark upon such a plan of advertising overload, one can see how content might end up being priced no differently than Apple is pricing "music" by the song or album, without commercials. In that case, the content will be paid for by the exact demand that meets it while being priced according to its costs to deliver it including production and distribution expenses in conjunction with anticipating a fair profit, i.e., no advertising supplements.     


As Ben Graham keeps pointing out, the internet will be significantly smarter as a result of intelligent designers than current content owners are willing to anticipate-consistency bias-so they better change their models sooner rather than later.  ;)         




The online audience is still small compared with television, but it's growing. Networks hope that by showing more ads, they can make about as much money per viewer online as they do on the tube.


It's a change from the early days of online video. When ABC started putting full episodes of its shows online in 2006, fans could zip through the hour-long dramas "Lost" and "Desperate Housewives" in about 45 minutes. One short ad played a few times per show.


Limiting commercials kept people from going to unauthorized websites to watch pirated copies of shows. It also helped networks reach new audiences in college dorms and teenage bedrooms.


Now, as online audiences grow, networks see an opportunity to make more money. A recent episode of "Hawaii Five-O" carried six and a half minutes of ads online. That's less than the 16 minutes on TV but double what an hour-long show carried on CBS.com a year ago.


Online video has improved in recent years with faster Internet connections and better technology. The advances have led some people to give up on regular TV -- and hefty cable bills that come with it -- and watch only online.


The websites of ABC and NBC and some cable channels offer a range of recent episodes online, as does Hulu, a site owned by the parent companies of ABC, NBC and Fox.


Other networks offer live sports online. ESPN puts events on ESPN3.com for viewers who get Internet service through certain providers. And NBC put hundreds of hours of live competition online during the 2008 and 2010 Olympics. NBC agreed Tuesday to pay $4.4 billion for the rights to televise the Olympics through 2020.

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I don't know much about how this company operates, but couldn't it just shift it analytics to online and mobile instead? Also, just because traditional TV viewership is decreasing, I don't see their market research being affected much. Will their sample size be smaller? Sure, but enough to make the sample not reflected of the population? Not so sure...

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Guest Hester

I don't know much about how this company operates, but couldn't it just shift it analytics to online and mobile instead? Also, just because traditional TV viewership is decreasing, I don't see their market research being affected much. Will their sample size be smaller? Sure, but enough to make the sample not reflected of the population? Not so sure...


I don't know much about them either, but aren't online analystics much easier to measure than T.V?  For example, why would Youtube need Nielsen? One of Facebook's strengths is they know so much about their users, which can market to companies, as one previous comment noted.


Even without the technological risk, this company is selling for a very very rich multiple. 16-17 EV/EBITDA ratio, by my liberal estimates. And most of EBITDA is eaten up by interest and capex.


Compelling idea, thanks.

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Guest ValueCarl

Companies with such large debt, in the wake of more troublesome macro events which one might deduce we are heading into again, are prime candidates. A more defensive approach versus straight out shorting inclusive of the financing expense for doing so during the loan period, might be examining the cost of puts relative to how cheap or expensive they are at this juncture.  ;) In theory, the put buying strategy removes the risk of "unlimited loss" for which a security may rise to infinity given enough time, causing such shorts to be wiped out in the process. As a general rule, I do not like shorting, but I like this short play especially while considering some of the more nefarious operators under its covers. ;D   

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Guest ValueCarl

The strategy is explained here in a corporate video.




Key to this strategy for Level 3 is proving how it can make delivering video to any device a simpler and more cost-effective business strategy for its wholesale customers, says Wade Clark, media solutions analyst for Level 3.


That includes encoding the content to match the device to which it is delivered and storing that content in the most appropriate place, whether that is in one of Level 3's supermodes or in edge storage locations on the CDN.


"Where the content is stored is, as always, based on requests for that content," Clark says. "We will deliver it off the optimal CDN edge -- typically but not always the closest edge to the customer."


The post-consumption analytics are intended to show the video service provider how many consumers are viewing what type of content, over what type of device. They aren't intended to be a ratings system, per se, although Level 3's wholesale customers can use those as they see fit, including to prove to advertisers how often sponsored content is being viewed, Clark says.


"Cable companies want to remain compelling to their subscribers, who have a lot more video choices now," Tierney comments. "That's where analytical tools which help them understand the behavior of consumers, can be helpful. "


Different service providers will take different approaches to delivering video to TVs, PCs and mobile devices, and the ability to detect and analyze new consumer viewing patterns will inform the way those approaches are designed, she says.



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Guest ValueCarl

When I met with an Internet Founding Father, Dr. Leonard Kleinrock, a couple of years ago, he agreed with me that, network and content owners would need to enter into symbiotic relationships "sharing" revenue sources like "advertising" if the internet was to be sustained and capitalized correctly over the long term.


Although I do not see (3)'s intelligent network design inclusive of analytic ad tools and logistics being incorporated in this deal, ultimately, the archaic, antiquated, legacy regulatory scheme from copper days gone-by, where traffic is being exchanged for "free" X networks who never contemplated the internet must cease and desist if the internet is going to reach its full promise of ubiquitous VIDEO X the globe. Either way, I am fearful, very fearful for Nielson shareholders.


BROOMFIELD, Colo., June 23, 2011 /PRNewswire/ -- Level 3 Communications, Inc. (NASDAQ:LVLT - News) today announced that it has signed an agreement with Extreme Reach, a leading provider of video advertising solutions based in Needham, Mass., to support its production and distribution of digital video advertising. Extreme Reach will leverage Level 3's advanced Internet services in a new facility located in Burbank, Calif. that will facilitate the company's in-house production services and capabilities. 


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