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March 12, 2008

CETV Presents At Bear Stearns Conference

Central European Media Enterprises (CETV) shares have steadied since the sharp fall last week following announcement and pricing of their convertible deal. The timing on the convert was terrible coming in the midst of the market's meltdown. I think the fact that it included a complicated capped call transaction made folks shutter as complicated is a bad word in securities these days. The capped call requires use of about 13% of the deal size to purchase calls which will eliminate dilution between the conversion price of $105 and $151. According to management, essentially they converted a 3.5% up 25% convert into a 7.2%, up 80% convert. I trust these guys deeply so I'll accept that this was best way to raise money for buying out their partners in Ukraine and reloading for future deals including a rumored entry into Turkey.

After the close on Tuesday, CETV CEO Michael Garin presented at a Bear Stearns conference. I listened to the webcast and came away with these observations which are incremental to what I feel is a deep knowledge of this company:

(1) Garin said CETV would double through organic growth in “4 or 5 years.” Might be minor but the official guidance on this measure issued just two weeks ago is five years.

(2) Garin noted that CETV knows 80% of their revenue by the end of March and though it has not happened in the company's history if there were a shortfall they had nine months to adjust their cost structure.

(3) Regarding the convert, Garin noted the goal was to have two years of “activity” on their balance sheet. He said this required them to do a $400 million deal. The bankers came up with the idea to raise it to $475 million so they would have the funds for the capped call.

(4) Just prior to Q&A ,Garin addressed a bearish Merrill report on the company which centered on concerns about Romania’s economy. He said that based on the fact that they have received no resistance to price increases on advertising this year (most of the 2008 ad inventory has been sold since January 1st) they don’t see a problem for CETV. He also said based on their on the ground observations and actual trends they monitor in retail sales, Merrill is wrong about weakening in Romania's economy. CETV is forecasting local currency of 20-30% for TV advertising i Romania in 2008. Later in Q&A someone asked about Romania and to a room full of laughter, Garin said again that Merrill is wrong. I would add that CETV's COO is their long-time Romanian partner who is one of the most revered businessman and richest people in Romania. I am very confident that CETV has a better read on Romania than anyone at Merrill Lynch.

(5) Maybe most meaningful, Garin said that if they owned and managed Ukraine last year they would have made $50 million EBITDA instead of the $27 million reported. 2008 will be an investment/restructuring year in Ukraine so I don’t look for much more than 5% EBITDA growth but this comment does give you a sense of the upside in 2009 and beyond.

(6) In response to a question on free cash flow, Garin said they have about $100 million in FCF before capital spending. Capex in 2008 will be about $130 million so no FCF this year but maintenance capex is $65 million and that is where he thought they would be in 2009 when they would be FCF positive after capex again.

Put it all together and CETV remains the both growth stock in traditional media, fully financed, and deeply undervalued.

Posted by Steve Birenberg at March 12, 2008 02:05 PM in CETV