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 $21
million of cash. Magticom has a history
of also paying excess cash as dividends to its owners. With Metromedia now overseeing operations,
the focus has shifted from dividends to investing in the business.
Financials and
Valuation
Metromedia has been slow to file financial reports because
controls are not up to US GAAP and SOX standards. In December, Metromedia was able to file a
2004 K-1. They continue to work on 2005
and 2006. In October 2006, Metromedia
did file a financial review of Magticom for 2005. With operating control of Magticom,
Metromedia is overseeing a management and operational restructuring of Magticom. A new “ERP” system has recently been
implemented that will aid in meeting US GAAP reporting and internal
controls. What is evident by the
available reports is that 1) Magticom has been generating cash and that cash
has been used to invest in the business and pay dividends to owners.
Magticom Financials
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Company
Estimate
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Pro-Forma
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2002
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2003
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2004
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2005
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2006
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2007
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Revenue
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$ 46,600
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$ 72,004
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$ 102,014
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$146,131
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$168,051
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$184,856
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Growth
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55%
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42%
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43%
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15%
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10%
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EBITDA
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$ 32,100
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$ 51,876
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$ 73,274
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$ 97,805
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$115,000
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$126,000
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Growth
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62%
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41%
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33%
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17%
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10%
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CAPX
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$ 18,900
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$ 20,000
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$ 12,000
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$ 27,400
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$ 60,000
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Cash
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$
7,600
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$ 17,800
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$
28,410
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$
35,600
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$17,000*
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Dividends
Paid
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$
2,830
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$ 38,888
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$ 48,889
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$ 0
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Rev/Sub
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$ 13.47
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$
14.28
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$ 14.39
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$ 14.65
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Min/Sub
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110.8
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108.2
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97.90
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94.29
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Ave/Subs
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281,800
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406,800
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530,500
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621,958
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Valuation
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Estimated
2007 EBITDA
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$126,000
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$
126,000
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Multiple
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6X
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7X
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EV
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$ 756,000
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$
882,000
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Metromedia
50.1%
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$ 380,000
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$
442,000
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Other
Assets (Est)
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$ 50,000
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$
50,000
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Metromedia
EV
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$ 430,000
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$
492,000
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* 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.
Sale of last remaining business and liquidation of company.