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June 05, 2006

Central European Media Enterprises: Croatia For Sale?

This story from BroadbandTVNews.com caught my eye:

The Serbian Pink media group has set its sights on the Croatian national commercial station Nova TV. Speaking during a visit to Zagreb, the group’s owner Zeljko Mitrovic said he had sent a letter of intent to the owners of Central European Media Enterprises (CETV) backed Nova TV containing a “good offer” and that he would be opening a production company in Croatia this autumn. Pink’s interests currently include the national commercial station TV Pink and satellite channels Pink Plus and Pink Extra in Serbia, along with several TV stations in Bosnia & Herzegovina. Mitrovic added that Marija Nemcic, currently the head of the public broadcaster HRT, would head the group’s interests in Croatia.

CETV responded to press inquiries as follows:

"Wishing to comment on recent media reports in Croatia related to the possible acquisition of Nova TV, CME wishes to state that no offers were received officially and no talks are currently under way with any potential buyers of Nova TV," said the statement.....

I'd be shocked if CETV was willing to sell Croatia (and equally shocked if a Serbian entity bought a Croatian TV media outlet) because long-term upside in this asset is substantial. It could easily be worth several hundred million in the 2008/2009 time frame if EBITDA margins move anywhere close to other CETV markets. Nevertheless, let's take a closer look.

Croatia lost $16 million on the EBITDA line in 2005 and is projected to lose a similar amount in 2006. Losses should drop sharply in 2007 with the possibility of reaching breakeven late in the year. In 2005, when CETV had partial ownership, Croatia lost about $4 million. The company paid about $24 million for the station, so all in the total investment in the station so far is about $60 million.

Despite the losses, in my model I value Croatia at $0 by eliminating the losses from my EBITDA calculation. The reason I do this is because news such as this speculation about a possible offer for the station shows that value exists despite the losses. Sum-of-the-parts is an often derided valuation tool but here is an example of why it can be helpful.

According to my estimates CETV is trading at 10.2 times 2007 estimated EBITDA including the Croatia losses. If Croatia were to lose $10 million next year that means that including the losses in EBITDA reduces the theoretical enterprise value of CETV by over $100 million or $2.50 per share. Is that fair? I'd say obviously not given that apparently there is a buyer for the station.

CETV shares have fallen back in line with many emerging markets over the last few weeks. I think it is an excellent buying opportunity.

Posted by Steve Birenberg at June 5, 2006 02:30 PM in CETV