Earlier this month, the first Russian television network to sell stock in the U.S. made its debut on the Nasdaq. Its IPO offer-price was $3 below its initial planned midpoint of $17, but by the end of the day, shares of CTC Media
As a result, early investors in CTC pocketed an easy 21% gain in less than 24 hours of trading. That was even better than the 18% gain claimed by IPO traders in MasterCard
Good news for CTC investors? Hardly. Because while their investments might be worth more on paper today, their real investment -- the company itself -- is worth less that it could have been. CTC's June 1 IPO floated 24.7 million shares. By pricing those shares at $3 less than they have since proved to be worth (according to Mr. Market), CTC left $74.1 million on the table on IPO-day. Even worse for the company and its long-term investors, CTC's underwriters took advantage of their overallotment option. Thus, last week, Deutsche Bank
While it's true that CTC's pre-IPO shareholders lost out on the bulk of this loot, that's actually also a bad thing for the new shareholders. In the initial IPO, CTC itself sold only 7.2 million shares. The company sold another 0.7 million shares in the overallotment sale, for a total of just 7.9 million. The bulk of the shares sold on the two dates, 20 million in all, came from pre-IPO owners like Russia's Alfa Bank and Baring Vostok Capital Partners cashing out.
As a result, of the $380.5 million raised in the CTC IPO, new buyers gave $100 million to the company itself, and nearly three times as much to the people fleeing the scene.
Can this possibly get any worse?
Actually, it can. Check out the "Use of Proceeds" section of CTC's S-1 filing, and you'll see that of the $100 million or so that CTC expected to net from its IPO, the firm will be handing over $22 million to repay loans to -- you guessed it -- former owner Alfa Bank. So in the end, this $380 million event will net CTC less than $80 million cash.
Moral of the story: Before investing in any IPO, folks, heed the Foolish words of my colleague Nathan Parmelee: "When a company does go public, it is a financing event for the company. It is an opportunity for it to raise cash, and it's often an opportunity for owners and investors to realize a portion of their investment. By no means should an IPO be considered a noteworthy event for which investors should line up with their hard-earned dollars in hand. "
Is CTC's ship sinking?
So what we have here, folks, is controlling shareholders jumping ship and leaving new shareholders a bit light on cash in the hold. The question, then, is whether the good ship CTC can keep on sailing without a large cash infusion.
At last report, CTC had $13.5 million in cash and $18.2 million in long-term debt on its balance sheet. Even its meager share of the IPO proceeds should easily suffice to pay off CTC's entire debt at will.
As for the business itself, operating margins in the last fiscal year were 40%, down from fiscal 2004 but an improvement over fiscal 2003. And the revenues to which those margins are applied to generate profits have been on a tear, rising at an annualized rate of 57% over the last two years, powered by an oil-fueled rise in the Russian advertising market.
Bread and circuses
With a strong balance sheet and a rapidly growing business, the real question CTC's new investors need to ask is, "How long can this last?" After all, other successful businesses in Russia have been sunk without warning when they made the mistake of crossing the Kremlin. Remember YUKOS? If not, here's a grim reminder.
Even more pertinent than YUKOS, however, is the story of Russia's independent NTV network, which in 1999 and 2000 overtook state-run network RTR as Russia's No. 2 network on the back of biting -- and brilliant -- political commentary, and its reporters' courageous coverage of the war in Chechnya. NTV's success became its downfall, though. While its viewers loved the independent news reporting, the Kremlin did not. In 2001, it orchestrated the company's dismemberment and sale to loyal gas titan Gazprom. Sound familiar?
The result of NTV's political "indiscretion" is that today, state-run networks ORT and RTR are once again firmly entrenched as the country's No. 1 and No. 2 networks. What's left of NTV shares third place with CTC, with nearly identical "audience shares" of 11% and 10%, respectively. Where these latter networks differ, though, is in their trajectories. NTV remains in decline, while CTC is ascendant. One indication of its popularity is that despite owning just a 10% share of Russian TV viewers, the company commands nearly a 14% share of TV advertising dollars.
By continuing to stick to its strategy of serving up soap operas, sitcoms, and similar light entertainment to the masses, and eschewing NTV's political commentary, CTC can avoid the Kremlin's ire while garnering a disproportionate share of the growing pile of Russian advertising money. Although new legislation to reduce the proportion of broadcast time that can be sold for advertising may well slow CTC's revenue growth, so long as this legislation affects all networks equally, it should do little to worsen the company's competitive position in this market.
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