CTC Media merger arbitrage

CTC Media (NASDAQ: CTCM) was, until recently, the owner of four television channels in Russia. Because of a new “Mass Media Law” in Russia the US-based company was forced to basically sell its whole business because the law limits foreign ownership of television broadcasters in Russia. The operating business in Russia was sold successfully before the end of the year, and the final tranche of the purchase price was received earlier this month.

CTC Media logoBecause the purchase price was subject to adjustments based on the operating performance and other factors the company could at the time of the transaction only provide that the estimated payout would be between $1.77 and $2.19/share. With all the money now received, there is more clarity on the final amount, and the company now estimates that it will be “at the lower end of the upper half of the range approved by stockholders of $1.77 to $2.19 per share”. I think this should mean that shareholders will most likely receive at least $1.98/share and probably a little bit more. With the stock currently trading at $1.85, that means a possible return of >7.0%, a lot of money for a merger arbitrage deal that sounds like almost completed.

The reason for the fact that there is still a big spread is because the company is waiting for a license from the Office of Foreign Assets Control of the US Treasury Department. They need this because a 25% owner, Telcrest, who in turn is owned by Bank Rossiya, is subject to US sanctions. Because of that, the deal was structured in such a way that this shareholder will not be cashed out and remains a part-owner of the TV stations. The market obviously doesn’t like this, but I don’t really see a reason why getting a license from the US government for the completion of this deal would prove to be problematic. Stopping this deal would punish everybody expect the blocked shareholder, and he doesn’t get anything when the deal is approved. His stake will remain blocked. Punishing innocent (US) shareholders can’t be the purpose of the sanction, but I guess you never know…

What I do think is that you are getting paid more than enough to take this risk.

Disclosure

Author is long CTCM

10 thoughts on “CTC Media merger arbitrage

  1. Arne

    Hi, there must be something I don’t see here:

    CTCM US

    shares outstanding 156,1m
    Telcrest shs held 25,3%*156,1=39,54
    Shs eligible for cash 116,56m
    Cash received from Russia 150,5+42,5=193
    Cash/share 193/116,56=1,65 usd

    …yet the statement says 1,77-2,19 usd/sh, which implies 206-255 musd as distributable cash. Surely the company has some cash on top of the recent sale (150,5+42,5musd)? I was wondering if there is a way to find out how much they had from before, less the cash they will leave in the company “net of cash reserves that will be appropriate to be retained by the Company in light of potential liabilities and obligations.” (quote from their press release)

    Regards
    Arne

    Reply
  2. Arne

    Hi again, sorry for the spam!

    I took a look at the q3 report, it says cash at end of period 84musd (p15 in the presentation). Maybe this figure should be reduced with 15m (p6 in the presentation) to be left as working capital, if you believe they did not burn more cash during q4/2015?

    Thus, 193 (exit proceeds) + 84-15=262musd/116,56 shs = 2,24usd/sh ~ almost the same as the upper range of 2,19?

    Regards
    Arne

    Reply
    1. Alpha Vulture Post author

      I think you are on the right track there, but I think you can never do a better estimate than management in a case like this. You simply don’t know how much cash was at the holding company, how much was at the operating level, how much will remain behind tied up as working capital, how much costs there are to complete the deal etc. But think it is fair to say that what management is saying seems to be consistent with how much they received and how much cash the company already had.

      Reply
  3. Artem

    Alpha Vulture, great idea. Do you know whether cash proceeds will be treated as capital gain and return of capital for tax purposes? Thank you!

    Reply
    1. Alpha Vulture Post author

      I don’t know, and don’t really care because as a non-US investor I don’t pay a capital gains tax. I would have to guess I would go for a return of capital. I would expect them to pay a liquidation dividend since in the merger they sold their operating sub, so the listed stock itself is not being acquired.

      Reply
  4. Pingback: CTC Media, Inc (CTCM) | Cigarrfimpar

  5. KK

    Thanks for the analysis. I read the statements and I couldn’t figure out if the cash was coming out as a dividend (which would incur a withholding tax). What’s your read on the return of cash?

    Reply

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