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October 06, 2005

Recent European M&A is Good News For Central European Media Enterprises

Consolidation in European media continues at a frantic pace. Last week, Liberty Global (LBTYA) announced its acquisition of leading Swiss cable company Cablecom. On Monday, NTL Incorporated (NTLI) and Telewest (TLWT) announced their long awaited merger. Additionally on Monday, shareholders of SBS Broadcasting (SBTV) approved the sale of the company to private equity investors for 46 euro per share. Finally, on Sept. 30, Scandinavian company Modern Times Group announced the purchase of 50% of TV Prima, the No. 2 television broadcaster in the Czech Republic....

....With the exception of the NTLI-TLWT deal, each of these acquisitions was completed at a premium multiple of earnings before interest, taxes, depreciation and amortization. I think this indicates the relative immaturity of European media assets compared to U.S. media assets. Potential growth rates over the next several years are higher, especially in Western European cable, Central and Eastern European television broadcasting, and Nordic pay and free-to-air television.

A Pure Play
With the SBTV deal set to close this month, Northlake's only long position in the European media sector is Central European Media Enterprises (CETV). CETV is the only pure play on Central and Eastern European advertising and consumer spending with leading TV stations in the Czech Republic, Croatia, Romania, Slovenia, Slovakia and Ukraine. Pro forma for a full year of ownership of TV Nova in the Czech Republic, CETV should produce 2005 revenue and EBITDA of $537 million and $189 million, respectively. Pro forma year-over-year revenue growth should be about 18%. Pro forma EBITDA growth will be about 9%, held back the inclusion of the more mature Czech assets. Long-term EBITDA growth should be in the midteens, as rapidly growing Romania and Ukraine become a bigger part of the mix and Croatia moves from start-up losses to profits. TV Nova in the Czech Republic should also see its growth accelerate due to passage of a recent law that phases out advertising on the No. 2 and No. 3 ranked state-owned TV stations. CETV has a market cap of $1.5 billion, and daily dollar volume is about $7.5 million.

Recent Pullback

CETV shares have pulled back from their recent spurt that followed the buyout of SBTV. SBTV sold for over 15 times 2005 EBITDA providing a floor for CETV's valuation in the low $50s. The pullback accelerated on Tuesday and Wednesday, probably as investors became aware of Modern Times entry into the Czech market. Modern Times is a successful and experienced broadcaster in Northern and Central Europe so some fears of a stronger competitor for CETV's dominant TV Nova are reasonable. Central and Eastern European markets also declined sharply on Wednesday including a fall of over 3% in Russia. There also could be some fears about dollar strength as the euro fell below $1.20.

Attractive Valuation

I think the price paid by Modern Times for TV Prima provides further support for CETV shares. Prima produced 2004 revenue and EBITDA of approximately $58 million and $11 million respectively, compared to revenue of $208 million and EBITDA of $99 million for Nova. 50% of Prima was purchased for about $120 million, valuing the entire company at $240 million equating to about 20 times 2004 EBITDA. CETV is trading at 15, 14, and 12 times 2004, 2005, and 2006 EBITDA, respectively, and purchased Nova for less than 10 times 2004 EBITDA just six months ago.

Growth Potential

Clearly, the superior growth rates in Central and Eastern Europe and CETV's great success have increased the competition and pricing for acquisitions in the region. Growth via acquisition remains one of CETV's key strategies. However, after acquiring TV Nova and Croatia in the past year, CETV doesn’t need additional acquisitions to reach critical mass or drive growth over the next several years.

Buying Opportunity

I think the correct viewpoint is that media stocks perform best when M&A activity is high. In Europe, that is clearly the case. CETV's valuation has been validated by recent acquisitions activity while the company's growth outlook remains very bright, with 4Q05 estimates built on arguably conservative management guidance. Consequently, I think the current pullback in CETV shares will prove temporary. I plan to use recent weakness to establish intitial positions for new Northlake clients and round up any positions already held that are on the small side.

The next big event for the company shouuld be when CETV reports third-quarter earnings and provides detailed fourth-quarter guidance in mid-November. The company is also looking at acquiring a TV station in Turkey according to recent press reports. News on this acquisition or any other deals is possible at any time.

Posted by Steve Birenberg at October 6, 2005 09:08 AM in CETV