Alfa puts $1bn price tag on its 25% stake in Russia's CTC Media

By bne IntelliNews May 2, 2011

Ben Aris in Moscow -

In a sign of the growth potential of Russia's advertising market, Alfa Group has slapped a $1bn price tag on its stake in the country's largest commercial broadcaster CTC Media.

Russia's leading financial-industrial conglomerate Alfa said on April 28 that it's in talks to sell its 25.3% stake in CTC (pronounced "STS" - the company uses the Cyrillic version of its name in print) to Russia's National Media Group, but has first offered the stake to fellow shareholder Sweden's Modern Times Group, which is owner of 38.3% of CTC shares, at a price of just over $27 per share, or $1.07bn. That's an 18% premium to Wednesday's closing price on Nasdaq and almost double what the shares IPO'd at in the summer of 2006.

Modern Times has until May 25 to respond, though analysts say it's unlikely that the Swedish firm will acquire Alfa's stake because Russian legislation restricts the stake held by foreign investors in television companies at 50%.

More's the pity for the Swedes, because CEO Anton Kudryashov claims that CTC is not only the most successful commercial TV company in Russia, but the most profitable media company in the world, and it looks set to benefit from the surge in advertising spending over the coming years. "In terms of ad spend, Russia is already the ninth biggest market in the world, the fifth largest in Europe and, if current growth continues, it will be the largest in Europe as soon as 2013," Kudryashov told bne in an interview just before the news broke that Alfa is looking to sell its stake.

Television is by far the most important media channel in Russia. In a country that spans half the globe, sets in the front room remain the main source of news and entertainment for millions of Russians living in the far-flung regions and the only way that multinationals can cost-effectively sell their fast-moving-consumer-goods (FMCGs) to the entire 142m strong population. The upshot is that while TV advertising typically accounts for a third of the total ad spending in the West (in the UK online ad spending recently overtook that for TV), in Russia half of every ruble spent on advertising goes on TV ads.

Russia's total ad spending in 2010 was $4.2bn - more than 10 times that of Ukraine's, the second largest in the region with a third of the population - and has been growing by 25-30% a year. The crisis took the edge off this ballistic growth, when the total ad spending in Russia fell 18% in ruble terms in 2008 and by more than 40% in dollar terms, but Kudryashov reckons it will have recovered all the ground lost by the end of this year.

And there's still a lot of room for growth: in the West the total amount of GDP spent on ads is typically equivalent to 1.0-1.5%. Russia's spending hit a peak in 2008 of 0.7%, but fell back to 0.5% in 2010. "The Russian market is large in size, but still immature in nature," he says. "In the West, cars and financial services are amongst the top-five biggest spenders, but in Russia these products only account for 2% of the total spend - of course this will be a major source of growth as these areas develop."

All this makes CTC a valuable proposition. Nadeem Moulvi, an equity research analyst, picks CTC as one his top-10 growth stocks. He says the company should grow its profits at an annual rate of 60% compared with the 19% growth rate of the wider US broadcasting and cable TV industry. The company is debt free and has maintained a net profit margin of 24% during the past five years, he says.

Pure entertainment

CTC began life as a small broadcaster in St Petersburg in 1994 and only went nationwide in 1996. Things started to move fast for the company when Modern Times bought out the founders in 1999 and then brought in Alfa in 2003. This investment cycle culminated in an IPO on Nasdaq in 2006 that raised $200m, which provided the funds for a rapid expansion and a string of acquisitions including two more broadcasters - Domashny, the only channel in Russia to specifically target women, and DTV, which specialises in reality tv - as well as some production companies to produce content in-house.

CTC focuses solely on entertainment, broadcasting a mix of domestically produced content - which makes up two-thirds of its programming - and international shows, targeting viewers aged 6-54, especially younger audiences. Kudryashov says the station made a conscious choice to carry no news or socially orientated programming. "News is not dangerous, but it does require a lot of coordination with the supervising authorities," says Kudryashov. "News is expensive, as you need a big staff and the state can lose money on news production, we can't."

While it's hard to compete as a news broadcaster, it is easier to cater to the demand for pure entertainment. With its in-house production and extensive market research, this is where CTC has a market advantage, which allows it to capture the advertising spending.

This is a crucial advantage in Russia's highly competitive TV market. There are 20 free-to-air channels, but the top five account for 68% of the audience share and 80% of the advertising revenues, says Kudryashov. By 2003, the broadcaster had built up an 11% audience share and taking into account its small channels CTC is the third or fourth largest channel in the country, reaching over 100m people and nine out of every 10 households in the country.

The main challenge has been to keep up with the changing tastes of Russia's viewing audience. A year after the Soviet Union collapsed, a wave of Brazilian and Mexican soap operas appeared on Russia's airwaves and were a smash hit; shows like Mexico's telenovelas "Simply Maria" and "The Rich Also Cry" could clear the streets of Moscow for a particularly dramatic instalment.

These days, tastes have become more sophisticated, says Kudryashov, and CTC either makes or buys two-thirds of its content domestically, with the rest being mostly Hollywood blockbusters. Many of the home-grown shows are adaptations of successful formulae developed overseas and transposed into a Russian cultural setting. For example, CTC bought a license to produce the sitcom "Born not pretty" based on the popular Colombian telenovela that is better known as "Ugly Betty" in the West. "Nowadays, there is more and more demand for original Russian produced content, but the problem is where to get it from. Production is not mature and there are not enough writers to create the content needed to meet the demand," says Kudryashov.

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