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March 08, 2007

Central European Media Enterprises: Entering Russia?

BroadbandTV News yesterday noted an unconfirmed report in a local Russian newspaper that Central European Media Enterprises (CETV) was negotiating to enter the Russian TV market.

The target is supposedly a music station that competes with MTV Russia. I have no idea if there is any truth to this rumor but if it were accurate, I'd expect CETV to convert the station to more of a general interest channel. CETV does operate specialty channels in Romania and the Czech Republic but those stations are flanker channels to the core general interest channel that is a dominant #1 in prime time ratings.

On its most recent quarterly conference call, CETV specifically identified six countries where it was looking to expand: Russia, Poland, Hungary, Bulgaria, Turkey, and Ukraine. CETV already operates a leading station in Ukraine and is in the start-up phase on two smaller stations. CETV presently has no interest in any of the other countries. CEO Michael Garin stated that CETV is looking for major channels but in large markets like Russia and Turkey acquisition of a niche channel was possible. In hindsight, this comment was likely made to prepare investors for something long the lines of the rumored Russian deal....

CETV can easily finance an acquisition of several hundred million dollars using debt. Year end debt was just over $500 million compared to attributable EBITDA of $200 million. I am presently projecting 2007 EBITDA of around $300 million although management has yet to issue guidance. It is possible that some stock could be used in the acquisition as well.

CETV might have to finance another deal as well. Settlement of a court case involving CETV's local partner in Ukraine has cleared the way for CETV to acquire its partner's interest. There is no guarantee a deal will get done but both parties have expressed an interest in public. A deal in Ukraine could also cost several hundred million.

I think CETV can handle both deals. Ukraine requires no new management time or effort. Russia would be a new market but CETV has some experience in Russian TV via Ukraine and the company went to a regional management structure last year.

Investors would likely cheer both deals. Entry into a large market like Russia opens up another leg of growth for CETV while the Ukraine deal might allow for increased margins, would bring control of the broadcasting license, and would increase attributable EBITDA and free cash flow.

I think CETV shares have acted well given the recent market action. Potential news on the acquisition front and updated guidance due in May provide near-term catalysts. I remain very enthusiastic about CETV shares with a $90-100 2007 price target. Long-term, based on management's forecast of a doubling in company revenues in 4-5 years, I think the shares could double or triple from current levels.

I'll post more on the Russian rumors if any of my contacts can add clarity.

Posted by Steve Birenberg at March 8, 2007 11:40 AM in CETV