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July 16, 2008

Rupert Selling. Is CETV Buying?

Central European Media Enterprises shares continue to sink as investors fret about economic conditions in its markets, Romania and Ukraine in particular. Volume has picked up over the last few days after most of the decline since mid-June was on below average volume. Merrill Lynch likely contributed to yesterday's downside and activity with a new report on emerging markets broadcasters in which price targets were lowered based on the crushing price declines for broadcast televisions stocks throughout the globe. Worth noting is that Merrill raised their estimates for CETV this year as 2Q business appears to be holding up just fine. Merrill did very slightly reduce estimates in 2009 on the basis of cost inflation related to rapid general inflation in many Central European countries. This may be a valid point although Merrill chose to brush off the ability of CETV to raise prices in the same inflationary environment to compensate.

Something else that may be impacting the stock is a report from theflyonthewall.com yesterday that News Corporation has hired Lehman to evaluate the value and potential transactions for its stations in Latvia, Bulgaria, and Serbia. NWS also owns stations in Poland and Turkey. CETV is a logical buyer for Bulgaria, Serbia, and Poland and has been rumored to be interested to be interested in Turkey. I suppose it is possible that yesterday's NWS news led some investors to sell CETV in fears of a large, dilutive acquisition. I have more confidence in CETV management and do not expect them to complete any deal that does not make financial for shareholders. Their deal making track record is long and successful.

That said, if Rupert were willing to do a deal close to current public multiples, CETV and NWS are in a very good position to find a mutually beneficial transaction....

....CETV has scale and experience to build the small operation in Serbia and enhance the already successful, larger business in Bulgaria. Poland is a new investment for NWS but CETV used to be there in the 1990s and would like to get back in with the right deal. Basically, CETV has a better chance than NWS to create real value given their lengthy and successful operating experience.

NWS could theoretically get a sizable piece of CETV's equity which in the short run would eliminate capital sucking businesses from its own financials, easing a concern of investors. If NWS sells at a decent price, its new equity in CETV could rise quickly particularly from the currently depressed price. In the long run, NWS benefits from CETV's expertise and scale and gets the inside track if Ronald Lauder and Apax Partners ever want to sell their control stakes.

In the near-term, fear of a deal might be another headwind for CETV. At current prices, I think that fear plus worry about fundamentals is way overdone. I bought again yesterday just under $80 after also buying just under $87 about ten days ago. Some good news or just a big buyer could put this stock back towards $90 awfully quick if history is a guide. Earnings should be out near the end of the month or early August. The numbers will be good and management is undoubtedly looking forward to defending their stock.

Posted by Steve Birenberg at July 16, 2008 10:50 AM in CETV