On March 15, 2019, Cinedigm announced a piece of transformational M&A, in announcing they are acquiring Future Today Inc, one of the world’s largest AVOD channel networks. New CIDM has approx. 64M shares outstanding (37.8M shares fully diluted, plus 10M shares to Future TV shareholders, 16.67M in private placement to Bison Capital). At today’s share price of $2.00, that’s a market cap of $128.9M. Add $66.4M in net debt, for an Enterprise Value of $195.3M post deal. Assume my Future TV earnings mini-model estimate of $13.2M of Pre-Tax earnings in 2020. Next, I assume, CIDM can grow its $29.9M revenue (2018) Content & Entertainment Business revenue at half the AVOD industry growth rate of Future TV, and half their EBIT margins. Using a 25% tax rate, that’s a PF Adj. Net Income of $14.6M in 2020, or $0.23 per share. That means assuming you value everything else in CIDM at zero, you could buy its combined streaming business for 8.8x 2020 earnings. I believe the business is worth at least 15x 2020 after-tax earnings given the roll-up ability. My 2020 price target for CIDM is $3.40, for 70% upside from today.
This write-up is one of 2 long pieces I’m doing on micro-cap advertising video on demand. It’s a funny coincidence that two companies I followed ended up doing transformational M&A that will essentially double each respective businesses with a few weeks of each other.
Why does this opportunity exist?
With a market cap of only $129 million (fully diluted, post-deal close), CIDM is clearly a microcap, and exhibits many of the typical market inefficiencies found with this asset class; low liquidity, investment case remains under the radar because the stock is too small to attractive sellside coverage / larger institutional investors.
CIDM is a classic case of a company with a larger, but declining revenue business segment masking another smaller, but more rapidly segment. The Company continues to shift its strategy toward building a portfolio of revenue streams in the OTT business as it’s cinema equipment business winds down. (For the sake of this valuation we are ignoring the cinema equipment business and focusing on streaming media strategy which is core to the long thesis.)
Plus, there is a HIGH degree of ambiguity around what exactly the financials of combined Cinedigm streaming business will look like given that the deal has not closed and management has not given many details, so you have to make your own pro forma adjustments to the capital structure and financials. I’m ok with ambiguity so that’s why I tend to focus on micro-caps.
Brief Overview of CIDM’s streaming business
Cinedigm got its start helping smaller theater chains convert to digital projection, but now it is known for operating OTT channels and providing premium feature films and series to digital platforms including iTunes, Netflix and Amazon; cable and satellite providers including Comcast, Dish Network and DirecTV; and major retailers like Walmart and Target.
"Building our stake in the rapidly surging AVOD business is a top priority for Cinedigm, and the acquisition of Future Today instantaneously transforms our company into the world’s largest provider of premium AVOD content by adding an established, fast-growing and active platform that includes a high volume of some of the most highly sought-after premium OTT programming,” Cinedigm Chairman and CEO Chris McGurk, said in a statement following the announcement of the deal.
CIDM's suite of existing digital channels includes CONtv, for the Comic Con Network; Dove, a family channel; and Docurama, a channel dedicated to factual content.
Future Today will dramatically expand its OTT footprint — bringing 5.2 million monthly active users and a high-scale, ad-supported VOD business. That’s in addition to Cinedigm’s 2.4 million monthly actives for its own OTT networks
Before we get into why the accretive deal with Future Today sets up the company to become an aggregator of digital networks, first we must do an overview of one of the lesser known, but rapidly growing sectors of the advertising market, advertising video on demand.
Understanding the AVOD Opportunity
Understanding the massive secular tailwinds driving growth in this sub-sector of the streaming media industry, is among the most important thing to get the transformational nature of this acquisition to CIDM.
[Note to reader - This This industry overview is central to the investment theses for both CIDM as well as CSSE, so this section is in both write-ups in case you only end up reading one.]
AVOD = Advertising Video on Demand. Much ink has been spilled reporting on the streaming wars currently underway amongst the major SVOD (subscription video on demand) players such as Netflix, Amazon, HBO (etc.). However, after over a decade of rapid growth, the industry’s growthiest days are most certainly behind the SVOD players, as the major services are more likely than not close to market saturation in North America. Netflix’s recent decision to raise prices is a telltale sign that we’re well past the initial land grab phase.
Somewhat ironically, at the same time there’s a proliferation of even more SVOD services from the major media players with deep pockets and big catalogues who were initially late to the dance are now making up for lost time. In the coming 12 months (or sooner) new services will be launched by Disney, Time Warner, NBCUniversal, among others. Some are calling this “subscription fatigue”.
Plus, it’s not cheap to carry all these services (the point of cutting the cord was supposed to be saving money, after all), so consumers naturally will have only enough share of wallet for 2 - 3 services. That has driven millions of eyeballs to a new crop of AVOD services which allow viewers to watch free linear television over the web. Advertisers have been pouring money into this format because it has some of the best of both worlds of digital and linear TV.
Founded in 2013 and privately backed with $51.8 million in funding to date from investors including Scripps Networks Interactive, Sky and Samsung Venture Investments, Los Angeles-based Pluto TV is an ad-supported, free-to-consumer streaming service, delivering a range of digital channels in the searchable format of a traditional linear TV programming guide.