Nielsen (NYSE: NLSN) is the leading global provider of critical data and analytics on consumer viewing habits. The company is best known for its ubiquitous Nielsen rating, which provides an estimate of the total number of viewers for a particular television program. This rating is the de facto currency for global advertising decisions totaling hundreds of billions of dollars.
While pessimistic investors have long argued that increasing consumer fragmentation—driven by the wide variety of entertainment options now available—is an existential threat to the company, we continue to believe more platforms make Nielsen’s data even more valuable. A recent acquisition offer from a group of private equity investors for $16 billion helped validate our thesis.
Strengthening its Competitive Advantage
Nielsen is evolving its technology to fulfil a critical, unmet need for advertisers: comprehensive performance data that cuts across TV and digital channels. As the media industry grapples with growing competition, the proliferation of streaming, and a viewership base that is using multiple devices, there is strong demand for Nielsen’s measurement capabilities. Its current cross-platform tool combines advertising and content ratings across traditional and digital platforms to provide an independent and holistic measure of viewership. Soon, the company will officially introduce its one-stop-shop media measurement solution, Nielsen ONE, which is expected to provide the most comprehensive data in the industry. This tool will help Nielsen’s customers spend their advertising dollars more wisely by providing standardized performance metrics that cut across TV and digital channels.
Navigating Pandemic-Related Challenges
During the height of the pandemic, Nielsen was unable to enter households to conduct its research, which led to audiences being undercounted. As a result, the Media Ratings Council—an organization that maintains research standards for the industry—suspended Nielsen’s accreditation. While accreditation has never been a condition in its client contracts and this suspension had no impact on the company’s financial performance, the stock price suffered and struggled to recover. With the economy now reopened, Nielsen’s panels have been restored and its accreditation is expected to be reinstated soon.
Leadership Team Unlocks Value
In recent years, investors have failed to appreciate the value being created by Nielsen’s management team and the board of directors. After conducting a full strategic review, the leadership team sold its consumer goods data business in order to focus on its crown-jewel media business. The proceeds were used to pay down debt. The company also increased its long-term financial targets and has consistently achieved those goals. Lastly, Nielsen ONE is being tested and rolled out on schedule.
Ariel Thesis Validated
Sometimes, the disconnect between intrinsic value and a company’s stock price becomes so pronounced that private investors swoop in to close the gap. In the case of Nielsen, a consortium of investors plans to take the company private in an all-cash offer at a 60% premium to its unaffected stock price. As the stock price approached our estimate of private market value we took advantage of the substantially narrowed valuation discount and sold out of our position in the company, thus avoiding the weakening capital markets environment for deal financing.
Paramount Global (NASDAQ: PARA) is a worldwide media and entertainment company with a diversified portfolio of well-recognized brands, including CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, Paramount+ and Pluto TV. Its platforms capture the most television viewers in the United States. Paramount also has one of the industry’s most comprehensive libraries of TV and film titles. The company was formed in December 2019, when Viacom merged with CBS Corporation, becoming ViacomCBS, and later re-branded as Paramount.
Leading the Next Phase of the Media Transformation
As emerging technology continues to disrupt traditional media, streaming has become a dominant source of media consumption. Paramount has two primary competitive advantages compared to other streaming providers: varied distribution channels and one of the largest content libraries. The company has no plans to abandon over-the-air broadcast or cable television as they continue to generate significant earnings and cash flow. However, future growth will be driven by its three-tier streaming model, which enables the company to access a broad audience at a range of price points. Paramount is the only major media company to offer paid streaming (Paramount+), premium streaming (Showtime) and free streaming (Pluto TV) options.
Paramount is placing a greater emphasis on building out its streaming service, Paramount+. Nearly 40 million of Paramount’s 62 million global streaming users are Paramount+ subscribers, and the company is well on its way to reaching its goal of 100 million subscribers by the end of 2024. We believe Paramount+ has a strong competitive position as the new digital landscape takes form. Its content library includes popular TV franchises such as “Criminal Minds” and “CSI,” as well as newer hit shows, such as “Mayor of Kingstown.” Paramount+ also streams iconic films, such as “The Godfather” trilogy and its “Top Gun” franchise. This summer’s hit film, “Top Gun: Maverick,” is one of the only non-Disney movies to gross more than a billion dollars at the global box office. In addition to its expansive content library, Paramount+ differentiates itself through its live news and sports programming from the NFL, the NCAA and the PGA, among others.
The third tier of Paramount’s streaming model is Pluto TV, a free, ad-supported streaming TV service. Paramount was the first major media company to enter this market through the acquisition of Pluto TV in January 2019. It is the market leader in its category and delivered over $1 billion in advertising revenues in 2021, double that of the prior year. With its nearly 68 million monthly active users, Pluto TV is highly attractive to advertisers looking to reach a broad audience.
Paramount CEO, Robert Bakish, and his senior management team successfully executed the merger of Viacom and CBS in 2019—unlocking two iconic brands’ content and shifting the media distribution landscape. Since then, the leadership team has consistently demonstrated its focus on Paramount’s core competencies and, as a result, the company has been able to pay down debt faster. This is evidenced by the sale of non-core assets including CNET Media Group and its corporate headquarters building and its recent agreement to sell Simon & Schuster. The proceeds from these transactions will be used to make investments in the business and continue to reduce leverage.
Ariel believes the market is vastly underestimating Paramount’s unmatched portfolio of premium video content, as well as its film library and television production business. As of June 30, 2022, shares traded at $24.68, or a 52% discount to Ariel’s private market value of $51.
ZimVie, Inc. is a manufacturer of medical devices, specializing in spine and dental products. Its diversified portfolio of more than 20 brands includes devices to reduce pain, increase mobility and restore patient function in the spine, as well as dental implant solutions, biomaterials, and digital dentistry. In March 2022, Zimmer Biomet Holdings—a global medical technology leader—completed the spinoff of its former Dental and Spine business, resulting in the new independently operated, publicly traded company, ZimVie, Inc. (NASDAQ: ZIMV).
ZimVie targets a segment of the spine and dental market valued at $20 billion. They have a strong position in this segment—holding the #5 market share position in dental1, which accounts for 46% of the company’s revenue, and the #6 market share position in spine1, which comprises 54% of its revenue. Their global customer base spans 70 countries, with approximately 75% of revenue generated within the Americas, 13% in Europe, Middle East and Africa and 12% in other regions across the globe. Backed by 20 years of clinical evidence, the company has a strong track record of successful innovation.
A More Focused Growth Strategy
The spinoff from Zimmer Biomet Holdings allowed ZimVie to focus on high-return and high-growth opportunities within a more defined portfolio offering. Today, the Colorado-based company has approximately 300 research & development employees driving new, near-term product development. We believe this enhanced focus and increased investment in a more targeted set of products presents compelling opportunities for revenue and earnings growth, and ultimately, increased shareholder value.
Seasoned Management Team
Since its launch as an independent entity, the company has built an experienced management team with several members averaging 25 years, hailing from industry-leading companies such as Medtronic and Bausch + Lomb. The C-Suite team has made strategic investments in the automation and digitization of manufacturing, exited unprofitable geographies, and insourced manufacturing where returns were warranted. As new products continue to launch, these cost-saving measures should have the potential to benefit the profitability of the organization.
Positive Industry Outlook
During the pandemic, many elective surgeries were delayed as hospitals allocated beds for COVID-patients and faced staffing shortages. With vaccines and therapeutic offerings now readily available, more patients are returning to the healthcare system for procedures that were previously delayed. Additional macro trends—including the aging global population, adoption of new technologies, increased focus on dental health and aesthetics, and greater consumer healthcare awareness—are expected to continue to drive growth in the dental and spine markets.
As ZimVie continues to strengthen its foundation as a standalone organization, we expect the company to improve operating margins, pay down debt and provide competitive shareholder returns. As of June 30, 2022, shares traded at $16.01, a 56% discount to Ariel’s private market value.
1ZimVie Investor Presentation, May 5, 2022
The companies highlighted in the Company Spotlights were held in one or more of the following Fund portfolios during the quarter ending 2Q 2022: Ariel Fund, Ariel Appreciation Fund and Ariel Focus Fund. Investing in equity stocks is risky and subject to the volatility of the markets. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings or its strategy. Investing in small- and mid-cap stocks is more risky and volatile than investing in large-cap stocks. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market. The Funds are often concentrated in fewer sectors than their benchmarks, and their performance may suffer if these sectors underperform the overall stock market. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price. Investing in equity stocks is risky and subject to the volatility of the markets.
On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds. The information and our opinions were current as of August 2, 2022 but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased or sold to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.