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August 23, 2005

SBS Buyout Has Implications for Central European Media Enterprises

Yesterday's SBS Broadcasting buyout deal at 15 times 2005 management guidance for EBITDA has ramifications for valuation on Central European Media Enterprises (CETV). CETV is a faster growing company than SBTV because it is fully dedicated to higher growth emerging ad markets in Central and Eastern Europe. Consequently, I would argue that CETV would sell for a higher multiple on 2005 estimates than SBTV. Alternatively, CETV could sell based on forward estimates...

...On the flip side, CETV has more leverage than SBTV, operates in less developed and more risky political economies, and does not have full control of all of its license companies thus potentially restricting the ability to upstream cash to the corporate level.

At 16 times estimated pro forma attributable 2005 EBITDA after corporate overhead, CETV would be valued at the current price of $51 (it is pro forma for this year's acquisition of TV Nova which doubled the size of the company and it is attributable because there are significant minority interests in Romania, Slovakia, and Ukraine). A 16 EBITDA multiple on 2006 CETV estimated attributable EBITDA after corporate overhead works out to $60 per share assuming about $100 million free cash flow over the next 18 months.

I've tried to build in some conservatism by leaving the full amount of corporate overhead in the calculation. This means that the cost is valued at the 16 multiple and that a buyer would achieve no synergies. If CETV were to be bought I think it would be more likely that it would be a strategic buyer that could reduce corporate overhead since there would be some duplicative costs.

CETV's controlling shareholder, Ronald Lauder, was recently profiled in the Financial Times and indicated the company is not for sale. The article did state, however, that CETV had discussed a transaction whereby News Corporation would have become a significant shareholder. I suspect the transaction was an acquisition of a station in Central Europe where News Corp would have contributed financing and/or its own assets in the region which include broadcast TV assets in Bulgaria.

I am holding all client positions in CETV solely based on fundamentals looking to the seasonally strong fourth quarter to provide the next major catalyst. I've always felt CETV could end up in the hands of a major television conglomerate such as News Corp, Viacom, or European companies like RTL and Bertlesman. The buyout of SBS merely establishes the theoretical value of CETV, providing a baseline valuation that is at least in line with the current price and projected 2005 financial results.

Posted by Steve Birenberg at August 23, 2005 04:16 PM in CETV