Metromedia Restructures Amid Shareholder Rancor
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INDIVIDUAL INVESTORANALYSIS
Metromedia Restructures Amid Shareholder Rancor
Research Analyst: Alex Yakirevich (1/20/00)
On Tuesday, Metromedia International Group (AMEX: MMG - Quotes, News, Boards) announced plans to restructure its telecommunications subsidiary, Metromedia International Telecommunications Inc (MITI).
Metromedia, a 1999 Magic 25 selection, intends to close several offices (in London, Moscow, and Stamford, Connecticut) and to lay off 120 MITI employees, leaving about 40 employees remaining in the division.
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It seems that the latest move offers too little too late.
It comes at a time when Mertromedia?s large shareholders are growing increasingly disenchanted with the stock?s performance. The stock closed Wednesday at $5.44, down 37% from a 52-week high of $8.69.
On January 6, Elliott Associates L.P. and Westgate International L.P., two institutional investors holding a total of 2.1 million common shares, published an open letter to management demanding specific actions to boost the stock price.
The letter highlights the fact that Metromedia failed to capitalize on favorable market sentiment toward comparable communications companies operating in the Eastern European region.
According to the letter, ?We [Elliott and Westgate] are highly frustrated at the Company?s abysmal stock price performance in recent years ? While the stock price of MMG decreased 13% in 1999, the stock prices of Rostelecom (ROS), Telesystem International Wireless, Inc. (TIWI), and Vimpel Communications (VIP) increased 306%, 201%, and 245%, respectively ??
The letter also offers several ideas about how to revive investors? interest in the stock. Specifically, the authors recommend authorization of the share buyback program and using as much as $40 million for that purpose.
Other suggestions include a proposition to conduct an IPO for Metromedia?s portion of the Chinese electronic-commerce venture as well as the sale or the spin off of the Snapper division.
We believe that all of these proposals look very attractive on paper. The question is: Is Metromedia prepared to consider them?
According to management, the company is effectively prohibited from repurchasing its shares under the indenture for the senior debt.
But if you look at Metromedia?s SEC filings, the indenture also limits the company in its ability to ?borrow additional money; make capital expenditure and other investments; pay dividends; merge, consolidate, or dispose of its assets; and enter into transaction with related entities.?
The filing also says that in case of non-compliance with covenants of the indenture agreement, Metromedia will be in default.
Okay, we understand that, but if the rules are so strict, how was the company able to pull the PLD Telekom acquisition without violating the ?no merger consolidation or disposition of assets? clause?
With respect to Snapper, management thinks that the division is a ?turnaround in-process? indicating that the Snapper saga is going to continue for the foreseeable future.
What is the point of trying to maximize the value of the non-strategic asset at the time when all the resources are needed to grow the telecom business and to strengthen Metromedia?s balance?
We think that having an international telecommunications company and a home-gardening equipment maker under the same roof is a very confusing and misleading idea for most investors.
Part of the reason the stock cannot breakout from the current trading range is the fact that the marketplace is still considering Metromedia primarily a manufacturing company. The disposition of Snapper, which, according to some estimates, is worth as much as $100 million, could change this perception.
Finally, management believes that the e-commerce venture in China is not mature enough for public markets. That could be true. However, isn?t it also true that the Chinese-government-backed venture, which facilitates e-commerce between state-owned companies, can, at least, be as appealing to investors as most Internet IPOs, some of which entering public markets with questionable ideas and business models?
All these considerations need to be carefully examined. Management?s silence is unlikely to calm growing discontent, and we believe that the recently published letter is only the first step in a series of moves institutions will take to get their point across.
Bottom Line:
For individual stockholders, any positive developments on this front could spell opportunity.
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