« Viacom Third Quarter Earnngs Preview | Main | Charter: A Very Expensive Option »

November 01, 2005

Central European Media Enterprises: Takes Control of License in Slovakia

Central European Media Enterprises (CETV) broke a long string of losing days yesterday, rising 4%, or $1.77, to $46.49. The company reports earnings before the open on Wednesday but the trigger for Monday's advance was more likely the announcement that the company has increased its stake in its Slovakian operation and gained control of the broadcasting license.

For $28.7 million, CETV has raised its economic stake in TV Markiza in Slovakia from 70% to 80%. More importantly, CETV's stake in the company that owns the broadcasting license goes from 34% to 80%. I am expecting Markiza to produce about $24 million in EBITDA next year, up 12% from 2005....

In theory, buying 10% for $28.7 million values Markiza at $287 million, or 12 times next year's EBITDA. CETV closed at 11 times 2006 EBITDA on Monday so the deal is neutral to very modestly dilutive to valuation. However, one of the big risks to operating in emerging markets relates to license control. Over the years, CETV investors have always asked management about license control issues and rewarded the company when majority control of licenses was obtained. I don’t know how much of the $28.7 million to ascribe to the license control but it is clearly worth something and the market voted with its dollars by crediting the company much more than acquiring an additional 10% economic stake would warrant. CETV now has a 100% economic interest its operations in the Czech Republic, Croatia, and Slovenia. Romania is an 85% economic interest, Ukraine is at 60%, and Slovakia is at 80%.

One other benefit to Monday's deal is that Slovakia will now be consolidated into CETV's financials. This will increase the transparency of the numbers and make the financial statements a lot easier to analyze. Again, I'd ascribe some value to this fact but how much is impossible to measure.

CETV now controls the licenses in every country it operates in except Ukraine. On the last few conference calls, management has mentioned that it is working with its local partners and the government to acquire control. By all indications, the Yushenko government has no objections to foreign control of Ukrainian assets as most recently witnessed by the sale of the largest steel company in the country to Mittal Steel, which is controlled by Britain's richest man.

Third Quarter Preview

As far as the third quarter goes, segment revenue is projected to come in at $95 million with EBITDA at $10 million. The third quarter is seasonally quite small. For example, that $10 million EBITDA figure compares to full year pro forma expected EBITDA of $190 million. Consequently, small variations in revenues or expenses can cause a surprise relative to expectations rather easily. This has occurred in the past in both directions.

The real story coming out of the third quarter will be 4Q05 guidance. I think that the news could be good as I believe that expectations in Ukraine, Romania, and possibly Slovakia are conservative. The company might also provide comments about 2006 which I'd also expect to be constructive.

Posted by Steve Birenberg at November 1, 2005 11:38 AM in CETV