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April 30 (The following statement was released by the rating agency)
Fitch Ratings has revised Gazprom-Media Holding's (GPMH) Outlook to Negative from Stable and affirmed its Long-term Issuer Default Rating (IDR) at 'BB'. Its National Long-Term Rating was affirmed at 'AA-(rus)' with Negative Outlook.
GPMH is a diversified Russian media company, with most revenues and EBITDA generated by its free-to-air channels, with a resultant high reliance on advertising. The company's leading viewership market positions are supported by its strong control over content. Fitch expects GPMH to maintain strong EBITDA margins and positive cash flow generation.
KEY RATING DRIVERS
Leverage Drives Negative Outlook
Fitch expects higher debt on the back of its ProfMedia acquisition and EBITDA pressures driven by NTV-Plus's market repositioning are likely to increase leverage to above 1.3x net debt/EBITDA by end-2014 from 1.1x at end-2013 pro-forma for the ProfMedia acquisition. While the company retains flexibility for deleveraging this would likely be contingent on a financial turnaround at NTV-Plus.
GPMH has so far refrained from using its large cash cushion of RUB15.7bn on its balance sheet at end-2013 for funding its acquisitions and debt reduction. Fitch believes the company is likely to decide on the use of its cash balance by end-2014. Substantial shareholder pay-outs or additional acquisitions driving net leverage higher to above 1.5x net debt/EBITDA will likely lead to a downgrade.
Strong Competitive Positions
After its merger with ProfMedia at end-2013, GPMH strengthened its position as the largest free-to-air TV group in Russia. The company estimated that including ProfMedia channels it controlled 24% of all 18+ TV viewership in December 2013. GPMH's portfolio of general interest (NTV), entertainment (TNT, TV-3, Pyatnitsa) and thematic (2x2) TV channels is well-balanced, protecting against viewership volatility at individual channels.
The short-term outlook for the TV advertising market remains positive with ZenithOptimedia, an independent media consultant, expecting 6.5% growth in 2014. In the medium- to long term the TV market growth is likely to slow but we expect it to remain in the positive territory. We estimate GPMH is likely to perform largely in line with the market.
Dependence on Advertising Revenues
GPMH is highly dependent on advertising, which accounted for 82% of total revenue in 2013. Advertising revenue is cyclical and is strongly correlated with GDP, exposing the company to pronounced earnings volatility. This is, nevertheless, mitigated by the company's proven resilience in a downturn. As demonstrated in 2008-09, when the Russian economy contracted sharply, GPMH was able to quickly respond with significant cost-cutting and re-cycling of available content, which allowed it to maintain positive free cash flow.
NTV-Plus Turnaround a Challenge
NTV-Plus, GPMH's direct-to-home (DTH) underperforming subsidiary, changed its strategy in 3Q13 to actively expand into a new segment of low-paying customers in the European part of Russia. The company is well positioned to become a key player in the mass market segment. However, its prior and on-going investments in premium content may never be recouped while DTH competition in the mass market segment is high.
Market repositioning is likely to entail substantial one-off costs in 2014, in turn weighing on margins. NTV-Plus's longer-term success is not guaranteed. We expect NTV-Plus to remain a financial underperformer at least in the medium term.
Internet Rise Minor Threat
A rapid growth of the internet's share in the Russian advertising market to above 20% has not significantly hindered robust TV ad market growth so far. We believe significant further pressure from the internet is unlikely. Internet advertising can be often viewed as a complimentary product targeted at a wider range of customers rather than a direct TV substitute. TV remains the key platform of choice for large advertisers valuing a fast nation-wide reach.
Strong Control over Content
Fitch views GPMH's content strategy as reasonably balanced with an appropriate mixture of internally produced and outsourced content. Its acquisition of Central Partnership, a prominent domestic content production and distribution company, under the ProfMedia deal increased the level of GPMH's content self-sufficiency.
Russia has proven to be a market with clear preference for domestically-produced, including entertainment and series, content. This reduces dependence on foreign content and implies only limited FX risks. Also, this reduces the threat from fragmented TV viewership with smaller players suffering from sub-scale issues. This is because a fairly limited pool of domestic quality content is typically shared between few large channels with only the remainder available for niche channels.
Healthy Margins, Robust FCF
GPMH has maintained robust FCF generation on the back of healthy EBITDA margins - at well above 20% on average in 2010-2013. Fitch expects positive pre-dividend FCF generation to continue. However, FCF will be pressured by continuing investments in a new TV studio centre in 2014-2016.
Weak Parental Support
GPMH group is 100% owned by Gazprombank. Fitch believes that a media group cannot be viewed as a strategic asset for a bank, and therefore does not factor in any rating uplift for parental support. A sale of GPMH would be viewed as event risk, but the impact of a new shareholder may be limited.
Negative: Future developments that may result in a negative rating action include
- A significant decline in viewership share/TV ad market share
- An increase of net debt/EBITDA to above 1.5x on a sustained basis
- Generous shareholder distributions including both one-off payments and a change in dividend policy
Positive: Future developments that may result in a positive rating action include
-Stabilisation of net debt/EBITDA below 1.5x on a sustained basis, which would likely lead to a change of Outlook to Stable. This would likely be contingent on an improvement in NTV-plus' financial performance.