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February 06, 2008

CETV Gets The Rest of Ukraine

Central European Media Enterprises (CETV), announced very good news yesterday. CETV will purchase the minority interests in its lead station in Ukraine, Studio 1+1. CETV will immediately take its 60% interest to 90% and has a put call option exercisable a year after closing for the remaining 10%. The 30% piece is being purchased for $220 million. The 10% piece has a rising price starting at $95 million and scaling to a minimum of $109 million after one year subject to an independent valuation.

Based on my estimate of 2008 EBITDA at 1+1, the multiple is 19 times in a range of 17 to 25 for the two step transaction. This is a high price but it provides full control and thus requires a premium. Full control is worth a lot to CETV as it dramatically reduces emerging market risk related to underdeveloped legal and regulatory systems. More importantly, full control in the past has meant a big bump in revenues and profit margins as CETV's proven and superior management team applies its full expertise. The most recent example is Slovakia where EBITDA will be triple the 2005 pre-full ownership base in 2008.

CETV still retains risk associated with emerging markets. Many investors use it as a proxy for emerging markets exposure. This leaves the stock vulnerable to sharp sell-offs in emerging markets such as what occurred in January. However, there is no question that the fundamental outlook for growth is superb. The stock is a bargain at 11 times my 2008 EBITDA estimate as long as you can stomach well above average volatility in market downturns.

Posted by Steve Birenberg at February 6, 2008 11:17 AM in CETV