Value Library

The following is an excerpt from the ABC Perspective - January 2005 - Pg. 3

CANWEST GLOBAL COMMUNICATIONS

CanWest Global Communications is an international media corporation, founded by I.H. Asper. CanWest’s diverse holdings include Global Television, the well-known national broadcasting network and the CH network. International operations include media assets in New Zealand, which were recently spun off as CanWest MediaWorks. In Australia, CanWest owns a large stake in Network TEN, a top-ranked national television network. CanWest is also Canada’s largest newspaper publisher, producing the National Post, a handful of major metro dailies and several smaller daily, weekly and community newspapers.

Our investment thesis is based on the Company’s net asset value using a sum of the parts calculation. CanWest’s core operations, including Canadian television and newspapers are valued using a conservative cash flow multiple. We value the publicly traded Network TEN and CanWest MediaWorks NZ at current market prices. Finally, we deduct CanWest’s debt load to arrive at a net asset value. On a per share basis, we believe that CanWest’s net asset value is in the $17 to $19 range. In fact, the value of Network TEN and CanWest MediaWorks alone is approximately $14 per share. At our cost price, we were able to purchase CanWest Global at a price that implied a negative value for the Company’s Canadian media assets. Clearly, this was an opportunity that could not be missed.

With the shares trading well below net asset value, several catalysts materialized and triggered a rebound in the stock price. CanWest refinanced $940 million of senior secured credit facilities at lower interest rates, saving $8 million in annual interest payments. The initial public offering of the New Zealand TV and radio operations was well received and the shares appreciated approximately 45%. The wholly owned Ulster Television subsidiary, an Irish television network, was sold for $145 million. Finally, CanWest exchanged the onerous “PIK” notes that yielded 12 1/8% with 8% senior subordinated notes at only a 1% premium. The theme is quite apparent: surface value in hidden assets, monetize non-core assets and reduce the debt load.

We believe that CanWest Global can maintain this positive momentum into 2005 for several reasons. Canadian television and newspaper publication results are expected to improve on a year over year basis. International assets are expected to continue to generate excellent results. The financial results will also benefit from a declining debt load and lower interest payments. Finally, the possibility of creating an income trust with CanWest’s newspaper assets has been discussed in investment circles. This theoretically could add $2 to $3 per share of value. We look for the shares to move closer to our calculated net asset value over the course of the year for all of these reasons.

SEA CONTAINERS LTD

Sea Containers Ltd (SCL) is a Bermuda based company operating in four distinct businesses. The first is leasing of cargo containers, principally through GE SeaCo SRL, a 50/50 joint venture with General Electric Capital. The second is ferry operations, which provides passenger and freight ferry services between Finland, Sweden, Estonia, Germany and Russia, in the English Channel between England and France, and in the northern Irish Sea between Scotland and Northern Ireland. The third is the operation of a high-speed passenger train service between London and Scotland known as the Great North Eastern Railway (GNER). The fourth is ownership and management of hotels, restaurants, tourist trains and river cruise ships through Orient-Express Hotels Ltd (OEH) in which SCL owns a 42% equity interest.

We purchased shares in SCL based on the Company’s attractive share price relative to its net asset value. SCL’s investment in OEH is alone worth over $10 per SCL share, which implies the market is valuing the rest of SCL’s businesses at less than $8 per share. SCL shares appear undervalued based on a number of other methods. For instance, the stock currently sells at a 42% discount to its June 30th book value of $30.82 per share and at just nine and three times this year’s earnings and cash flow per share of $1.90 and $6.80 respectively.

We feel that SCL’s large discount to book value/NAV can partially be attributed to investors concern pertaining to the GNER franchise which is set to expire in April 2005. In January 2004, the British Strategic Rail Authority announced it would invite bids from all interested persons to operate the rail service franchise for a new term of seven to ten years. Given that there is no guarantee that the contract will be awarded to GNER, investors appear to be taking a “wait and see” approach. Another cause of concern for investors has been the rising price of crude oil, a major cost for the container and ferry businesses.

As many investors focus on the fate of the GNER franchise and the price of oil, a number of positive trends are emerging. Room bookings at OEH were up 23% in 2004 as global tourism continues to improve and GE SeaCo’s container business is experiencing strong demand due to an increase in world trade, particularly between China and the western world. We feel the share price could eventually move higher to reflect the underlying value of the company’s rich asset base. A potential catalyst could be the sale or spin off of its investment holding in Orient Express Hotels or the sale of its channel ferry business, which has been problematic in recent years.

Irwin A. Michael, CFA