Shares of CTC Media (CTCM, Financial) have dropped precipitously over the past few weeks, from over $9 to under $7, as a new law surrounding ownership of mass media companies in Russia has quickly gained steam.
If passed, this law will have significant consequences for non-Russian shareholders of CTC stock - that's us.
However, it also makes CTCM one incredibly cheap stock. At $7, the stock has a 7.2 P/E ratio, an absurd 25.6% earnings yield, an equally eye-popping 20.5% free cash flow yield, and a juicy dividend yield of 10.1%!
Given this, it would behoove us to carefully look at the risk posed by this new media law and weigh those risks against the upside potential evident in the stock's valuation statistics.
The Impact of the Law On CTC Media
The proposed law limits foreign beneficial ownership of Russian mass media businesses to no more than 20%. The proposal has gained significant steam, passing Russia's lower legislative house, the State Duma (analog to the U.S. House of Representatives). It now must pass the upper house, the Federation Council (think the Senate), and then be signed into law by President Putin. If passed, the law as written requires the 20% requirement to be met by January 1, 2016.
While CTC does not believe the law would affect their operating businesses, it would clearly affect their ownership structure. Currently this is:
39% owned by Modern Times Group (MTG), a Sweden-based media conglomerate.
36% is floated on the NASDAQ and primarily owned by U.S. and European interests. 25% is owned by Telcrest, which is a Russian-controlled investment group.
So, 25% of CTC is already Russian-owned, and MTG would have to do whatever it is needs to do with its share.
What I'm concerned about is the 36% floated on the NASDAQ. That represents our share in the company. What could CTC Media do to reduce that by at least 16%, and still provide value to those shareholders, should the law pass?
Option 1: Outright Sale
Easily the simplest solution here would be an outright sale of all of CTC Media to a Russian interest. This is not a particularly large company - just $1.1 billion at its current market cap, so even a sub-$2 billion bid should easily close the loop. Telcrest, MTG, and "us" would all sell our stake, and the upcoming law would have no affect.
One name that immediately comes to mind is Gazprom, Russia's largest company, which deals primarily in energy but already has a massive media group including NTV, the third-largest network in Russia (CTC is 5th). $2 billion is a drop in the bucket to this company, which generated over $153 billion in revenues in 2012 and nearly $39 billion in net income.
Option 2: Partial Sale
Another option would be a partial sale of the foreign interest in CTC to a Russian entity. This would be a nice way for a domestic investment group or smaller media company to increase its media exposure while not busting the bank.
One potential option here would be for Telcrest to increase its ownership interest in CTC by buying out all or a portion of the NASDAQ float. But there are numerous other financial and media groups in Russia that would probably be interested in making a smaller investment to purchase some of the foreign-owned component of CTC.
Option 3: Tender Offer
A tender offer is another solid possibility, given the fact that CTC is debt-free and a very strong free cash flow generator. A tender offer is where a company offers to buy back stock at a set price from shareholders, and shareholders then get to decide whether to sell their shares or not.
Just one scenario would have CTC offering to buy back 20% of their floated shares at $10 a piece, which is a substantial 43% premium to current share prices. That would cost the company around $315 million, some of which could be covered with its $194 million cash balance and some of which could be financed at reasonable rates without putting the company into financial stress.
Option 4: New Class of Shares
The final potential option I'd like to ruminate on is a dual-class share structure. In this scenario, CTC sets up a new class of shares for foreign investors, ones with far reduced voting power than Russian-owned shares.
This has been utilized throughout history, usually so that founders can maintain voting power without locking up a lot of their money in the company. One example is DISH Network, which has regular Class A shares with one vote a piece, but also Class B shares with 10 votes a piece. Of course, founder Charlie Ergen owns almost all of the Class B shares. While his Class B ownership is only 32% of the total shares, it represents voting power of almost 78%! (Too be fair, Ergen also owns a large amount of class A shares, too).
In this scenario, CTC's NASDAQ shares could be converted to minority voting shares, and Russian-owned shares would have magnified voting power. This would technically meet the definition of "beneficially owned", meeting the law's restrictions.
Certainly, there are legal issues to haggle about in this option, and it may not even be feasible, but it is a possibility.
Conclusion: Not Necessarily a Doomsday Scenario
Given this set of options, and many I'm sure that smarter people than I are considering, I don't see this law as doomsday for non-Russian investors in CTC Media. Certainly not enough to warrant a 40% sell-off in the stock over the last 6 weeks or so.
In fact, let's not forget that there is no guarantee the bill will pass the upper house, be signed by Putin, OR maintain its current form before coming law!
This is, was, and will always be a high-risk stock, just given the geopolitical risks involved. Who could have predicted this law blindsiding investors in the stock so quickly? However, given a much wider range of potential outcomes than just "you lose all your money", I believe CTC represents a reasonable gamble at its current share price, as long as you limit the stakes.
