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March 02, 2005

More Good News From Central European Media Enterprises

On March 2, 2005, Central European Media Enterprises (CETV) shares rose over $6 after the company announced it had acquired an additional 29% interest in TV Nova to add to its pending acquisition of a 56% interest. Both deals are projected to close in the second quarter of 2005. The original deal, announced last December 13, called for CETV to acquire 56% of TV Nova for $642 million, composed of $529 million in cash and 3.5 million shares of CETV, then valued at $32.29 per share. The additional 29% is being acquired at an effective cost of $0 as any payments made to the seller will be deducted dollar for dollar from the $642 million purchase price on the 56% stake....

During the December conference call discussing the acquisition, and in subsequent investor meetings, CETV CEO Michael Garin explained that upon filing of its 2004 10-K, details of the company's ability to cheaply increase its ownership in TV Nova would be revealed. He hinted that all or part of this 29% stake was tied up in legal proceedings and would be available to CETV upon resolution. The company has not filed its 10-K yet, but obviously the legal issues were resolved.

In the December 13, press release CETV stated that in 2004 TV Nova was projected to have revenues of $222 million and EBITDA of $100 million (EBITDA is also known as operating cash flow and equals earnings before interest, taxes, depreciation and amortization. It is a commonly used measure on Wall Street, especially for media companies and in mergers and acquisitions). Using just the original 56% stake implies that TV Nova was being valued at $1.15 billion, implying a multiple of 11.5 times EBITDA for what is arguably the most successful TV station in Europe with an all day audience share over 40% and an EBITDA margin of 45%. While more mature than other Central European television markets, the Czech Republic is likely to sustain an 8% to 10% growth rate in advertising for the next several years assuming the economy grows in line with expectations.

At the time of the announcement, I liked the deal (link to earlier post) and thought it was reasonably priced. TV Nova almost doubled the size of CETV making it a much more substantial company in the eyes of investors. The deal also resolved the issue of how CETV would use its debt free balance sheet and $200 million cash balance. Management had made it clear that it was seeking large acquisitions, so the purchase of a sizable, well established station in a country that is looking more Western European every day added stability and credibility to the CETV story. Effectively, CETV is trading a lower, but still well above average, long-term growth rate for stability in its financial results and reduced political risks.

The latest deal means that CETV is acquiring 85% of TV Nova for $642 million, lowering the multiple to just 8 times even after considering the run-up in the value of the 3.5 million shares. An 8 multiple on trailing EBITDA for a high quality asset growing at 10% per year or more is very attractive by Wall Street standards and less than the multiple for the stocks of very mature television broadcasters in the United States.

Wednesday's jump of $6 is not surprising given that the company acquired $30 million in EBITDA for nothing. At Tuesday's close, CETV was trading at 15 times 2005 estimated EBITDA, similar to multiples for slower growing Hispanic TV assets in the United States. While some of the recent run in CETV shares was in anticipation of an announcement of this sort, the new deal adds at least $400 million in value to CETV (13 multiple of $30 million) or $12 per share against 33.5 million pro forma shares.

My new target on CETV based on 2005 pro forma estimated EBITDA of $155 million is $59 assuming a 15 multiple. On 2006, assuming EBITDA grows 16% and the multiple contracts to 14 times, a target of $75 is achievable. I plan to buyer so CETV again if it pulls back a few dollars and remains steady and time passes so we are closer to 2006.

Those of you who have read this far probably have nothing against valuing media companies on EBITDA multiples. However, for those who do, John Tinker an analyst I know at ThinkEquity just posted a pro forma 2006 EPS estimate of $2.52 INCLUDING 85% of TV Nova, while European based Deutsche Bank analyst Wlodek Giller had a 2006 estimate of $2.45 BEFORE the additional 29% interest is acquired for nothing. Assuming a 25% tax rate on $36 million in 2006 TV Nova EBITDA (2 years of 10% growth), his estimate should rise by 80 cents. The mid-point of the two estimates is $2.88, placing CETV at 18.4 times 2006 estimates today. At my current 2006 target of $75, the multiple would be 26 times, not out of line for a growth stock in my opinion, and a slight discount to Univision's 2006 multiple of 27.7 times.

Posted by Steve Birenberg at March 2, 2005 04:35 PM in CETV