Description

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? 

• Low oil price: The decline in the oil price for the past 12 months has hammered the Russian economy, reducing the advertising budgets
• Russia-Ukraine war:  The conflict and the sanctions have also not helped Russian business confidence or consumer disposable incomes
• Rouble depreciation:  The two factors above have resulted in the Russian Rouble depreciating from a rather stable band of 30-35 against the Dollar (in 2013) to 57 today. CTCM does not have the pricing power to pass-through all of the effects of the depreciation to the advertisers and maintain its US$-earning power
• Mass media law:  In October 2014, Russia’s President signed a law “On mass media” which effectively says that media companies operating in Russia cannot have more than 20% foreign ownership. CTCM is 38% owned by Modern Times Group AB (Swedish media business). CTCM was given until January 2016 to comply with the law. In response, CTCM hires bankers (UBS) to figure out how to get the CTCM structure compliant under the law. UBS tries to finds buyers, but fails to shake up any actionable bids. In April 2015, CTCM’s board starts to look for buyers independently
• Low-ball offer from UTH: Yesterday (July 6th 2015), CTCM received a $200m cash bid for 75% of its operating assets. UTH is jointly owned by Alisher Usmanov and Igor Tavrin, and broadcasts the Disney Channel in Russia. The offer values the entire operating business at $266m, considerably below where the business traded prior to the announcement of the offer. The market panics; shares drop from $2.15 to $1.84. 

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? 

• Cash that’s already on the B/S. This was ~$110m as of Mar-15.  The business generated zero FCF in Q1. If we conservatively assume CTCM will burn $10m in Q2, then CTCM has $100m of FCFF on the balance sheet today
• $200m from UTH, less some transaction costs and tax (let’s say this is 30%), i.e. this is  $140m. 
• 25% stake in the operating assets which generated $130m of annual FCF pre-crisis, and ~$60m of FCFF in the last 12 months. Let’s say those cash flows are worth $1,400m to us. I believe this is conservative, as the business was valued as high as $2 billion before the Russia / Ukraine hostilities. In addition, there is no reason why UTH cannot eliminate at least a portion of CTCM’s head office costs (CTCM employs 1,133 people) which are duplicated at UTH, resulting in some savings. If $1,400m is a reasonable figure for the operational business, then the 25% stake is worth $350m. Let’s apply a further 10% discount for “stealing” (this is Russia and we are dealing with oligarchs, after all), and that gives us $320m.

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.

Risks

• Discussions with UTH are still in the early stages and the deal may fall apart. In that case, CTCM will have less than 6 months to find another solution to bring the structure into compliance with the Mass Media Law
• UTH may decide to re-trade to a consideration lower than ($200m)
• Russian FAS (Federal Anti-Monopoly Service) approval
• Crystallization of the value of the 25% stake in the operating assets: it is not guaranteed that UTH will pay dividends or that CTCM representatives will get a board seat
• Russia is not known for great corporate governance. UTH proprietors (Usmanov and Tavrin) may decide to pillage some of the value of the CTCM assets, so the $1,400m value of the business (my estimate) may ultimately turn out to be high. But I comfortable with this risk at this price 
  

Timeline: The UTH offer is being endorsed by CTCM's board, with exclusivity being the next move. I expect deal completion before Jan 2016.

Catalyst

Completion of the UTH deal

Dividend payment to realize the B/S cash and the UTH consideration (less taxes and transaction costs)