Magic 25 Portfolio
Magic 25
Nov 29, 1999
OUTLOOK 2000: Metromedia
(11/29/99)
It was a difficult year for Metromedia (NYSE:MMG - news) . The company's communications joint ventures in Russia faced several challenges. The country continued to battle economic crises and its currency remained weak, directly contributing to Metromedia's poor top-line performance. Revenues generated by the communications group declined from $7.6 million in the first quarter to $6 million in the third quarter ended in September.
The company's telecom operations in China also suffered a major setback as local regulatory authorities ordered termination of Metromedia's existing projects in that country. Investors reacted swiftly to the news driving the stock down as much as 21%, to around $5.
The Snapper division had its fair share of challenges as well. While it continued to represent the largest portion of consolidated operations, the unit's top-line performance has been subpar. Thanks to fluctuations in demand for lawn mowing equipment and snowblowers, revenues steadily declined quarter to quarter.
Despite the adverse business environment, management continued to stir the company in the right direction. First, Metromedia's communications business was successful in expanding its existing subscriber base. Some of the better performers were cellular and cable TV ventures in Russia, which delivered 138% and 40% subscriber growth in the September quarter.
Moreover, several important milestones have been reached during the year, which should position Metromedia for the long-term success. Among them, the acquisition of PLD Telekom and the e-commerce venture in China.
PLD, a Russian telco, gives Metromedia access to the telecom market in one of the highly industrialized regions of the country. Leveraging Metromedia 's cable TV assets and PLD's fiber-optic footprint, the combined entity is well positioned to provide end-to-end telecom services to businesses and retail customer in North Western Russia.
Meanwhile, the agreement with China Products Firm, which we highlighted in our update on June 3, positions Metromedia to become one of the leading e-commerce players in the Chinese market.
2000 will be also challenging for Metromedia primarily due to adverse macro-economic conditions in core markets, primarily in Russia. That country is entering a year of presidential elections, and increasing political and economic instability would not be surprising.
We also expect Metromedia to remain on the acquisition path, especially in light of recently-reported tentative agreement with Chinese authorities regarding telecom ventures. Under the settlement, Metromedia can recover as much as $86 million, which will probably be re-deployed either in China or in other emerging markets.
Additional funds for continued expansion could come from the sale of the Snapper division, which we expect to take place next year.
Investing in Metromedia is not for those looking to turn a quick buck. But those who are willing to wait should eventually be handsomely rewarded. Analyst: Alex Yakirevich
Updated on 11/29/99 with MMG at $4.68
Recommended on 11/16/98 at $4.94
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