Metromedia International MTRMP W
April 16, 2007 - 10:44am EST by
pat110
2007 2008
Price: 49.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 200 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Summary of Opportunity

Metromedia International Group 7.25% Cumulative Preferred Stock presents a special situation investment with minimal downside and upside of approximately 40% to 50%.  The catalyst to realizing the 40% is liquidation of the company’s remaining operating assets, comprised mainly of the leading cellular provider in the Republic of Georgia.   Other assets include a local phone company and an internet provider in the Republic of Georgia.  The Preferred has a current value in range of $70 to $76 per share, including a liquidation preference of $50, plus accrued and unpaid dividends of approximately $26 per share.    The Preferred, trading at $49, is at slight discount to the liquidation preference alone.   In the next twelve months, $5.50 will be added to the value in dividends since they accrue on all outstanding principal and deferred dividends.  Therefore, the additional value accruing on current trading value is roughly 10%, bringing the twelve month out expected return to 50%.   
 
In total there is $205 million face value and $107 million of unpaid dividends related to the Preferred.   I estimate the current value of the remaining assets of Metromedia to be in the range of $430 to $500 million, which represents 2.1 to 2.5 times asset coverage compared to current $200 million trading value of the 7.25% Preferred issue.    
 
Background
 
Metromedia International was created in 1990 by John Kluge to acquire and develop communications licenses including wireless cable, cellular, paging, radio and mobile radio in Eastern Europe.  At one time Metromedia International owned 10 cable networks, 21 radio stations, telcom assets in western and central Europe and the leading CLEC in St. Petersburg, Russia, among other assets.  In 1995, Metromedia merged with other Kluge controlled assets including Orion Pictures film studio and Fuqua industries.  The merger was to provide sources of additional cash flow to support the build out of Eastern European communication assets.   As with many telcom and media businesses, it was financed with large amounts of debt, which ultimately led to financial distress.  In 2002 at the height of the problems, John Kluge resigned and a new CEO/CFO and COO were hired.   The new team initiated a restructuring plan that involved the sale of assets to fund short-term liquidity needs and to fund continued investment in the final core telcom assets in Georgia.  For example, in 2005 Metromedia sold its interest in ZAO PeterStar (leading CLEC in St. Petersburg Russia) for $215 million in cash.  This sale allowed Metromedia to redeem its last remaining debt issue of $158 million face amount of 10.50% Senior Notes and to further invest in the telcom assets in the Republic of Georgia. 
 
As of October 31st, 2006 Metromedia, at the holding company level, had $17 million of cash and no debt.  The Company projects that its current corporate cash and continuing dividends from Magticom, its most significant investment asset, will continue to meet its needs for liquidity. 
 
Magticom
 
Metromedia owns 50.1% of Magticom, one of the largest wireless telecom companies in Georgia, 21% of Telecom Georgia (an internet long distance provider) and 26% of Telenet (a high-speed data and internet service provider in Georgia). 
 
Magticom is the largest telephony operator in Georgia and one of two companies serving the market with 60% market share.  The competitor, Geocell has approximately 40% share.  Magticom utilizes a national GSM network.  Its services are sold on a prepaid basis.  Current capabilities include text messaging, IP which allows email, pictures and internet browsing and push to talk services.  Magticom has roaming agreements with over 150 mobile operators worldwide. 
 
In February 2005, Metromedia and Dr. Jokhtaberidze (Metromedia’s partner in Magticom) acquired a 14.5% interest in Magticom owned by Western Wireless’s at a price of $43 million.  As a result, Metromedia’s ownership increased to 50.1% and it became able to exert operational oversight of the company.   Dr. Jokhtaberidze is the son-in-law of Eduard Shevardnadze, the former Soviet Foreign Minister and president of the Republic of Georgia. 
 
With Metromedia’s oversight, Magticom significantly increased capital expenditures spending $27 million in 2005 and $60 million in 2006.  The money mainly was used for enhancements to its network and technology infrastructure to exploit it’s 2.1 GHz spectrum license acquired in 2005, which has positioned Magticom has having one of the premier “3G” networks in the world .    In recent years, capital expenditures have been internally funded from operating cash flow.   Magticom expects to have no need for additional outside investment.  Currently Magticom has no debt.   As of October 31, 2006 Magticom had $21 million of cash.  Magticom has a history of also paying excess cash as dividends to its owners.  With Metromedia now overseeing operations, the focus has shifted from dividends to investing in the business. 
 
Financials and Valuation
 
Metromedia has been slow to file financial reports because controls are not up to US GAAP and SOX standards.  In December, Metromedia was able to file a 2004 K-1.  They continue to work on 2005 and 2006.  In October 2006, Metromedia did file a financial review of Magticom for 2005.  With operating control of Magticom, Metromedia is overseeing a management and operational restructuring of Magticom.   A new “ERP” system has recently been implemented that will aid in meeting US GAAP reporting and internal controls.  What is evident by the available reports is that 1) Magticom has been generating cash and that cash has been used to invest in the business and pay dividends to owners.

 
Magticom Financials
 
 
 
 
 
 
 
 
 
 
Company
Estimate
Pro-Forma
 
2002
2003
2004
2005
2006
2007
 
 
 
 
 
 
 
Revenue
 $   46,600
 $     72,004
 $ 102,014
 $146,131
     $168,051
     $184,856
Growth
 
55%
42%
43%
15%
10%
EBITDA
 $   32,100
 $     51,876
 $   73,274
 $  97,805
     $115,000
     $126,000
Growth
 
62%
41%
33%
17%
10%
 
 
 
 
 
 
 
CAPX
 $   18,900
 $      20,000
 $   12,000
 $  27,400
 $ 60,000
 
Cash
 $     7,600
$       17,800
 $   28,410
 $  35,600
 $17,000*
 
Dividends Paid
 
 $        2,830
 $   38,888
$  48,889
$       0
 
 
Rev/Sub
 $  13.47
 $        14.28
 $     14.39
 $    14.65
 
 
Min/Sub
110.8
108.2
97.90
94.29
 
 
Ave/Subs
        281,800
          406,800
             530,500
        621,958
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Valuation
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated 2007 EBITDA
 $126,000
 $           126,000
 
 
 
 
 
 
 
 
 
 
 
Multiple
6X
7X
 
 
 
 
 
 
 
 
 
 
 
EV
 $ 756,000
 $           882,000
 
 
 
 
 
 
 
 
 
 
 
Metromedia 50.1%
 $ 380,000
 $           442,000
 
 
 
 
 
 
 
 
 
 
 
Other Assets (Est)
 $   50,000
 $             50,000
 
 
 
 
 
 
 
 
 
 
 
Metromedia EV
 $ 430,000
 $           492,000
 
 
 
 
 
* As of October, 2006. 
 

EBITDA for 2006 is Metromedia’s guidance given that it gave in October 006 with the release of preliminary 2005 financial results for Magticom.  EBITDA for 2007 is my estimate.  I have lowered growth further for the following reasons: 1) to provide for a margin of safety and 2) to account for the fact that the cellular market in Georgia is maturing and 3) the main competitor, Geocell, has been improving its service quality and coverage and its network and systems are now at approximate parity with Magticom.  Additionally, with parity, the two are competing more on price, which is having a negative effect on revenue per sub.   
 
Failed sale of Magticom and other Georgian assets of Metromedia

In October 2006, Metromedia made public a deal to sell its 50.1% stake in Magticom and its ownership of other minor Georgian assets for $480 million.  The purchaser was a group led by a Dubai investment firm and two other partner firms, one with substantial other investments in the former Soviet republics.  Metromedia’s plan was to liquidate after the sale.  The Company struck a deal with 80% of the Preferred holders that paid the Preferred between $68 and $71 share, depending on ultimate liquidation proceeds, which was a slight discount to par plus dividends due.  Common holders were estimated to receive $1.58 to $1.63 per share after estimated liquidation costs of $24 million.   In December 2006, the buyer elected to cancel the contract. 
 
During the period when the assets were under contract, hedge funds holding common stock raised a proxy battle for a shareholder vote on the transaction because they were not happy with the deal.   The Funds included Black Horse Capital, D.E. Shaw, Esopus Creek Value LP and Mellon HBV Alternative Strategies.   They were not happy with the following: 1) the Georgian assets were not shopped to a wide range of buyers 2)  Preferred holders were to get a premium over the current market price at the expense of common stockholders, and 3) the deal negotiated with Preferred holders deducted all costs and expenses from amount available to common.  To there credit they also suggested that the $24 million of wind down costs was excessive (let’s hope management was sandbagging).  I guess they chose to ignore the fact that the Preferred is senior to the common.   In mid December, the court did rule that the sale needed to be approved by common stockholders; however, it was already a moot point but would seem to set up any future deal for a shareholder vote. 
 
Hedge Funds own most of the Preferred, lead byFarallon Capital Management among others, so Preferred holders are well represented by a strong lead dog.   The Preferred class also has rights to elect two board members.  Current representatives are Wayne Henderson and David Gale. 
 
Risks

Incomplete current financial information
 
Republic of Georgia is an emerging country with a legal system and telecom regulatory environment that is different from what we know and experience in the US. 
 
The Georgian parliament continues developing legislation and frameworks for regulation of the telecom sector.  Magticom continues to be negatively impacted by regulators insistence on encouraging “new market entrant” competition.  Although so far, this has only resulted in minor local small competitors. 
 
Currency risk, Magticom conducts is business in Georgian Lari.  Metromedia has a practice of converting excess Lari to US dollars. 
 
Many others.

Catalyst

Sale of last remaining business and liquidation of company.
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