Description

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”.

Variety: Nearly Half of U.S. Consumers Frustrated by Streaming Explosion, Study Finds

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.

More investors have taken notice recently when Viacom paid $340M to purchase Pluto 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.

According to Tuesday’s announcement, Pluto TV is averaging 12 million engaged viewers a month. The Pluto TV app is available across a range of living-room OTT and mobile devices. But the company’s most important distribution end point is smart TVs, where it competes with add-supported platforms like Roku, Xumo and Tubi TV to be the native streaming app folks see when they first turn on their set. About 60% of Pluto TV’s viewing comes from smart TVs.

Roku, for example, says it now has a monthly audience of 27 million for its platform, with many of those users watching the AVOD-based Roku Channel.

“Advertisers have a real opportunity [with AVOD] to make connections with a younger [demo] likely to have higher incomes,” said Anna Bager, EVP of industry initiatives at research firm IAB.

IAB found the largest AVOD audience segment is 18- to 34-year-old adults, including households with kids, that skews male. Nearly three-quarters (73%) of those who regularly stream video say that they watch ad-supported OTT. Moreover, 45% of streamers report they watch ad-supported OTT the most. More than half (52%) of AVOD viewers are cord-cutters or cord-shavers, with 42% citing “convenience/flexibility” and 38% citing “better content” as reasons to watch. Additionally, AVOD viewers spend less time watching cable than SVOD viewers. AVOD viewers report watching more OTT video than they did a year ago.

Magna Predicts US OTT Ad Revenues Will Double By 2020

• Magna said Friday that its 2018 forecast for US OTT ad revenues came in short. The agency predicted OTT ad revenues would hit $2 billion in 2018, but they actually hit $2.7 billion at a 54% year over year growth rate.

• As a result, Magna is revising its OTT ad spend forecast upwards, predicting 39% growth to $3.8 billion in 2019 and 31% growth to $5 billion by 2020.

Now, I would argue a big reason this growth is happening and will continue, is that the independent digital video hardware prodivers have a vested interest in make sure there are viable alternatives to to the major media conglomerates such as Netflix, YouTube (Google) Disney, NBC Universal, etc. Up until now many have become too reliant on Netflix. According to Roku’s reported financials: in 2008, Netflix accounted for 100 percent of Roku’s streaming hours. Now it’s down to a third. Unfortunately, Roku (et al.) don’t make any money from Netflix. So they have been doing all they can to promote a plethora of free ad supported streaming channels; making sure they are given prominent real estate on the smart TV home screen, having the apps of these tiny obscure digital nets pre-installed on devices, etc.

Examples of Top Free Channels

The Roku charts have a good list of the top names in the space; some you may never have heard of: The Roku Channel, Pluto TV, Tubi - Free Movies & TV, Sony Crackle, FilmRise, HappyKids.tv

The AVOD Industry is Ripe for a Roll-Up Strategy

William Rouhana, Chairman and CEO of major AVOD player Chicken Soup for the Soul Entertainment, made an cogent case for consolidation amongst these digital networks on his company’s Q4 earnings call on 3/29/2019. (Emphasis mine)

“First of all, in terms of aggregating and deal size, I think we're looking at what will probably be barbell strategy. There are lots of very small players out there, who we can aggregate, really for very little. And they add increasing audience access to additional content and more real estate, which allows people who are migrating to find us. Over time, we will have to rationalize those various networks, put them together and turn them into a identifiable group of networks where people know what they're getting when they go there. But that's a process that will take place over a period of time. The other end of the barbell is the larger players, who really have to try and figure out where they're going to go next. I think we represent a great potential partner for many of those people. “

“I think the growth will be extremely high just because of the trend. But add to that our strategy of rolling up these smaller networks, which really cannot compete, because there is no way that advertisers can go hundreds of networks placed there advertising.”

To ride this growth wave that should lift the tides of many boats, if you take nothing away from this write-up you should probably buy both Chicken Soup for the Soul Entertainment, Inc. (CSSE), and Cinedigm Corp. (CIDM) because there’s a more than large enough universe of potential acquisition targets for them both to profitably roll-up the industry.

Why Future Today is A Great Asset

If you hadn’t heard of Future Today Inc., you wouldn’t be alone. But it is one of the larger channel networks online and the combined entity with CIDM would have material scale. The acquisition increases Cinedigm’s OTT footprint to over 7.6 million Monthly Active Users and 67 million total app installs and is expected to be immediately accretive.

From the deal’s press release:

Future Today Inc owns and operates more than 700 content channels with more than 60 million app installs, and manages more than 200,000 film, television and digital content assets that currently receive more than 85 million video views per month in a variety of categories including entertainment, movies, food & lifestyle, animation, and kids.

Future Today has several proprietary brands which have become market leaders in the ad-supported marketplace, headlined by flagship channels Fawesome.tv focused on general entertainment movies & television shows, and HappyKids.tv, the #1 free kid’s channel providing age-specific edutainment in the connected TV market.

Most surprisingly, Future Today generates positive net income and healthy cash flow, with revenues increasing by almost 150% in calendar year 2018 to an estimated $23.9 million in full year revenues. Before one-time expenses related to the announced deal, it’s 2018 EBIT margin was 17.6%, up from 1.1% in 2017. They operate very efficiently; with about 24 full-time employees in the U.S. and India. Future Today has produced over 3,000 original videos using its content-production capabilities in India, and Cinedigm hopes to leverage that lower-cost production model for other divisions of the company.

Here is my mini-model of Future TV. Years 2017 and 2018 from the filings associated with the deal (filed yesterday). The out-year projections I made using Magna industry growth forecasts for the AVOD market. I also assumed Future TV maintains incremental EBIT margins of +40%, very close to what they had pre-deal of 37% in 2018.

Major Controlling Shareholder to Help Drive the Roll-Up

As you can tell from the past write-up on CIDM on VIC, this is very much a changed company. Back in 2017, CIDM sold a majority ownership stake to Hong Kong’s Bison Capital in $40 million deal in order to get much needed funds to clean up it’s balance sheet. (Cinedigm had retired all of the $64 million in Convertible Notes that previously existed on its balance sheet, Over the course of 13 months.) Bison’s ~58% stake (pro forma for deal financing), obviously hurts the liquidity in the stock, but they’ve taken a long-term approach to creating value here so I’m willing to go along for the ride.

More background on Bison:

“Bison Capital is a Hong Kong-based investment company with a focus on the media and entertainment, healthcare and financial service industries. Founded by Mr. Peixin Xu in 2014, Bison Capital has made multiple investments in film and TV production, film distribution and entertainment-related mobile Internet services, including Bona Film, Xunlei and Weiying Technologies.

Leveraging its unique OTT and independent content distribution capabilities, Cinedigm is now working closely with Bison to develop plans and forge partnerships to release entertainment content and develop OTT channels in China while, reciprocally, releasing Chinese content and new OTT channels in North America.”

[Note to reader - I am not pitching growth from the Chinese market as a material reason to own the stock. I don’t profess to have any edge in that area so if it works, consider it upside]

Valuation

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 digital streaming 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.  

Catalyst

Deal expected to close no later than June 30. Post close, expect CIDM so get the story out to investors and give more details on the planned integrations. As mentioned above, given the wide disparity in the cost structures of the two separate companies, expect more streamlining of management, personnel and corporate overhead.

Expect investors to focus on updates on the standard streaming video KPI's; monthly active viewers, content libraries, etc.