FOCUS: Analysts say MTS would not spare cash on ivi to grow into digital giant

By Yekaterina Yezhova

MOSCOW, Apr 22 (PRIME) -- Major Russian mobile operator MTS is said to be negotiating a full purchase of the country’s leading online cinema ivi for 20 billion rubles. Analysts said the deal could be worth its high price because it would contribute to the operator’s digital evolution and would be easier than starting a cinema from scratch.

“The 20 billion ruble price amounts to over 20% of MTS’ capex planned for 2019, but the acquisition would be consistent with MTS’ digitalization strategy and would give the operator exposure to a fast-growing market that is still at the very beginning of its development with a 45% growth in 2018 to 11 billion,” investment company Aton said in a research note.

MTS told media it was unaware of the deal, and ivi declined to comment.

Investment company Freedom Finance junior analyst Alexandra Ovchinnikova said in a research note that ivi has a 36% market share and a film library of over 62,000 units. User payments amounted to 2.8 billion rubles as of the end of 2018, accounting for 71.8% of revenue. Advertising revenue stood at 1.1 billion rubles, or 28.2% of income as compared to 62.5% a year earlier.

The analyst expects the online cinema market to grow to 21.5 billion rubles by 2020 from 11 billion rubles in 2018. ivi’s revenue increased 62% in 2018 to 3.94 billion rubles, as calculated under International Financial Reporting Standards (IFRS).

Oleg Tumanov launched ivi in 2010. Owner of OOO Ivi is Cyprus-registered Ivi.ru Media Ltd., whose main holder is a unit of investment company ru-Net, which has a 22.7% common stake. Baring Vostok owns a large stake of preferred shares. Media also reported that not all ivi’s shareholders are happy with the price.

The price seemed high to investment company UralSib Capital, which sees the acquisition as moderately negative for MTS’ quotes. The operator’s common shares have edged down 0.63% since an April 9 media report about the deal and closed the April 19 session at 259.85 rubles on the Moscow Exchange.

Ovchinnikova said the price is fair because “last year the company was valued at 15.7 billion rubles and its revenue steadily expands by more than 50% per year.”

Investment company Sberbank CIB said that ivi could be a valuable addition to the operator’s non-mobile portfolio of services. MTS bought ticket services Ticketland.ru and Ponominalu.ru in 2018.

“The potential deal could allow MTS to supplement its core business with new revenue drivers. That said, it could also pressure MTS’ free cash flow generation, similar to what we saw as a result of its M&A activity in 2018,” Sberbank CIB said in a research note.

MTS’ IFRS revenue rose 8.4% in 2018 to 480.3 billion rubles. Free cash flow shrank 23.3% to 54.8 billion rubles, and the net debt widened 13.9% to 232.8 billion rubles.

Group of companies Finam analyst Leonid Delitsyn said that MTS, like other connection operators, looks for new drivers to raise revenue, and one of such factors is evidently content, especially in the Internet. “The online market almost lacks large assets that could significantly increase the 480 billion ruble revenue of the country’s major operator,” he told PRIME.

“The deal, which would add 1.5% to MTS’ revenue this year if ivi’s current high growth rates maintain, could perfectly fit the strategy of the operator, which develops its own ecosystem and transforms into a digital company from a traditional mobile operator.”

Ovchinnikova at Freedom Finance said MTS has already entered the markets of information security and e-sports, and it actively works on streaming services. “The operator launched an e-sports platform supporting a streaming service. Own original content is a huge industry trend of the 2019 year,” she said.

“I think blocking of illegal resources and the omnipresence of devices, mainly smartphones, for video watching will propel progress of streaming services.”

A purchase of an online cinema would be better for MTS than a launch of a new service, whose design and start is costly and lengthy. Besides, clients should be won on the highly competitive market, where other players already have reputable names, the analyst said.

Delitsyn at Finam estimated expenses on creation of a noticeable online cinema at about 500 million rubles, but it would be just another competitive market player, not a leader. “The operator needs a project with a large paying audience, which would raise its revenue,” he told PRIME.

(63.9602 rubles – U.S. $1)

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