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February 27, 2006

Central European Media Enterprises Increases Stake in Romania at Attractive Price

One week ahead of its March 2nd 4Q05 earnings report, Central European Media Enterprises (CETV) announced an increase in its ownership of its operations in Romania. In a negotiated agreement with its partner, CETV is paying $27.2 million for an additional 5% stake in Pro TV. CETV will now own 90% of Pro TV. The remaining 10% ownership is subject to a previously negotiated put option whereby the Romanian partner can put at in 1% increments with price subject to an independent appraisal and a minimum floor of $1.45 million for each per cent of ownership.

CETV has been steadily increasing its ownership in all of its operations. I think this is an excellent expenditure of corporate resources as the prices have been good and increased ownership mitigates the risks of operating in emerging markets. CETV now controls a majority stake in all of its operating and license companies....

The latest deal in Romania implies a valuation for the entire Romanian operation of $544 million. I am expecting Romania to report EBITDA of $44 million in 2005 and $58 million in 2006. The multiples work out to 12.3 times and 9.4 times, respectively. Both are attractive prices relative to CETV's current trading multiples of 16 and 13 times 2005 and 2006 estimates. The price is also attractive given Romania's 84% CAGR for EBITDA since 2003 and expectations of continued growth in excess of 20% annually. I suspect the Romanian partner thinks a higher price is warranted but as a minority shareholder with no one else to sell to a discount price was the only option.

CETV reports before the open this coming Thursday. I'll have more comments closer to the report but I expect a strong quarter in the favorable seasonal period. The company has provided full year guidance only for 2005 but working backwards from the nine-month numbers allows some insights. I think the implied figures look conservative with the possibility of upside surprise based on strength in Romania and Ukraine. TV Nova in the Czech Republic accounts for about half of the company and represents the greatest risk. Ratings have been mixed but indications are that the total advertising market grew strongly in 4Q05. There is also some slight risk in currency translation in 4Q.

The company will likely provide full year guidance for 2006 for the entire company and general trends in each country when it reports. I currently expect 15% revenue growth and 20% EBITDA growth. Currency risk is more significant in the first half of 2006, especially in the Czech Republic. The company does go to great lengths to discuss and analyze its operations in local currencies. I think the key to the 2006 guidance will be TV Nova with the swing factor being how much investment is made in the Czech Republic vs. a strategy of harvesting growth for a year or two.

I remain optimistic on CETV shares with a target in the low $70s based on my outlook for 2006. I lightened up on my position a couple of months just under $60 as a portfolio management discipline exercise but still own a full position throughout my client and personal portfolios.

Posted by Steve Birenberg at February 27, 2006 08:44 AM in CETV