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August 30, 2006

Ronald Lauder Sells Half Of His Control Position in CETV

Apparently, Ronald Lauder has decided to pay for his $135 million acquisition of Gustav Klimt’s Adele Bloch-Bauer I by monetizing half of his 15.8% stake in Central European Media Enterprises (CETV). Last June, it was revealed that Lauder was buying the Klimt and paying the highest price ever for a painting, easily exceeding the $104 million purchase of Picasso at a Sotheby’s auction in 2004. OK, it might just be coincidence that Lauder is raising $190 million through the sale of half his CETV stake. Nevertheless, for us CETV collectors, I mean shareholders, this event could prove as significant as the Klimt was purchase was to the art world.

Lauder is forming a partnership with top tier private equity firm Apax Partners. Apax will pay Lauder $190 million for 49.72% of the partnership which will have a 15.7% economic interest and 64.8% voting control of CETV. Lauder is putting virtually all of his personal and family holdings of CETV into the partnership. The 13-D filing indicates that Apax is paying $60 per share, a slight premium to CETV’s prior close of $58.26....

My initial thought on this news was that it was positive for CETV shareholders despite the fact that a major insider was selling at current prices. I have always feared that Lauder’s interests in CETV could diverge from minority shareholders. Bringing in a top tier private equity firm at a slight premium adds a new and powerful voice that would seem to be sympathetic to minority shareholders. Additionally, Apax isn’t in this for fun. Obviously, they expect to make a substantial return on their $190 million investment. Another media focused money manager I know sums it up well:

After reading more about this, I think it's a more than a "glass half full" event for the stock. A private equity firm taking a "pole position" in the B-stock (super voting) would indicate to me an eventual increased involvement by them and/or other private equity firms, and they are sophisticated enough to have closely looked at the plan, and obviously liked it. Lauder cutting his stake in half would otherwise be seen as a negative ("glass half empty"), but he sold to "smart money".

As I read through the 13-D, some questions arise about technicalities related to voting and blocking rights of Lauder and Apax. However, even if these technicalities cause concern -- I’m not sure they do -- I feel that minority shareholders are better served by this deal than by some other options Lauder had to monetize his CETV position.

If Lauder was determined to raise cash via monetizing CETV he could have sold the whole company. While putting CETV up for sale certainly would have brought a large and immediate premium, given the company's track record and growth opportunities, I suspect any deal would have left money on the table.

At a Univision (UVN) multiple, CETV would bring in over $100 per share but who is to say that the current deal environment would have gotten bids that high. $85 or $90 would be a huge win but I'm willing to bet that Apax didn’t buy in at $60 with an upside target of $90. In fact, for the next three years, Apax has the right to block a sale of CETV for les than $120!

Lauder could also have raised cash by selling his shares through a secondary offering. This clearly would have depressed the shares, probably taking them back to recent prices in the low $50s. And the lingering message would be that the most important insider was a seller.

So in the end, the Apax-Lauder deal seems like a good one. A "smart money" buyer used to private equity size returns is taking a significant stake. Apax is more likely to align its interests with minority shareholders than Lauder, who has signaled a willingness to be a seller at the right price, something many doubted.

Put it all together and I find the CETV story better today than yesterday. And the stage is set for a very interesting analyst meeting in New York on September 21. I'll be attending.

Posted by Steve Birenberg at August 30, 2006 11:55 AM in CETV