|Shares Out. (in M):||156||P/E||6.8||4.6|
|Market Cap (in $M):||287||P/FCF||0||0|
|Net Debt (in $M):||-108||EBIT||55||100|
CTC Media Inc (ticker “CTCM”) is a NASDAQ-listed media business that owns and operates TV channels in Russia and Kazakhstan. The company generates its revenue and FCF through fees from advertisers, who contract with CTCM due to CTCM’s strong viewership (CTCM runs two of the most watched TV channels in Russia, and produces a significant amount of original content).
CTCM currently trades at $1.84 ($287m market cap; $186m EV), or trailing 1.4x EV/EBIT and 3.4x P/E. CTCM lost more than 80% of its market value in the past 12 months.
How did CTCM get so cheap?
In short: there is a lot of perceived uncertainty here. Emotion among existing CTCM investors runs high. Analysts have all but thrown in the towel. In short, the market believes that Putin and UTH have stolen the company right under them. Some may even be expecting that CTCM will be delisted. Blood is in the streets, as they say.
Why is there an opportunity here? Source of variant perception
What UTH is proposing is to buy 75% interest in the local operating subsidiaries. CTCM will sell 75% of its interest in each of the operating subsidiaries (CTC Network, Domashny Network, etc), and will get $200m from UTH (less some transaction costs). Nothing will happen at the holdco (CTCM) level. CTCM will continue to be a listed vehicle, albeit one that no longer operates or controls anything. UTH’s acquisition of the operating subsidiaries neatly puts CTCM into compliance with the Mass Media Law. Of course, UTH gets an excellent deal (a steal), no quesiton about that. But in this situation, it had all the leverage.
So what’s left for CTCM shareholders?
Therefore, CTCM can be thought of as a vehicle consisting of $100m+$140m cash ($1.53 per share) distributable to shareholders via a dividend at the completion of the UTH deal, and an extra $320m ($2.05 per share) of intrinsic value for CTCM’s 25% ownership in its former assets, now to be run by UTH. Total intrinsic value therefore is $3.58, or 95% upside vs current share price of $1.84.
Two other things to consider
The nature of the assets themselves. The Mass Media Law was born out of the Russian Government's mentality that media outlets owned by foreigners are tools for foreign propaganda of the Russian population. In the case of CTCM, this could not be further from the truth. CTCM’s programming has generally been either neutral or friendly to Putin and his politics. Some market participants may think that because CTCM is partially owned by a Swedish company, it is liberal. That is inaccurate.
Russia risk. In the end, the underlying operational assets are some of the best media assets in a country of 140 million. Russia is not going to disappear or go anywhere. And Russians love to watch television, and will continue to watch television.
Timeline: The UTH offer is being endorsed by CTCM's board, with exclusivity being the next move. I expect deal completion before Jan 2016.
Completion of the UTH deal
Dividend payment to realize the B/S cash and the UTH consideration (less taxes and transaction costs)
|Entry||06/06/2016 06:35 PM|
Last month, listed shares were cancelled in exchange for a consideration of $2.05. Not the outcome I was hoping for. The delta between my original base case ($3+) vs the final result ($2.05) was driven by two main factors.
First, we received no value for the holdco's 25% stake in the operating assets. Instead, the deal ended up being structured in an unfavorable way. Telcrest (a 25% holder, ultimately owned by Bank Rossiya, a Russian bank that is understood to be tightly connected to the Russian establishment) retained the interest in the operating assets, whilst the remainder of the shares got cancelled in exchange for $2.05. The deal got approved against many reservations (and 'no' votes). There were sanctions-related factors at play here that raised the probability of them structuring the deal this way, and in retrospect, these were not handicapped sufficiently.
Second, operating performance in the interim was worse than expected, with correspondingly worse cash-flow build.
With a 11% cum. return, things (arguably) could have turned out worse. This process has been a reminder on the fragile nature of corporate governance dynamics and how value can be diverted even when the entity is US listed and has a semi-independent board. The commenters who focused on the Russia-related corporate governance risk nailed it.