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March 23, 2009

CETV Sells 31% Stake to Time Warner Dramatically Improving Risk-Reward Trade-Off

Central European Media Enterprises (CETV), one of my long-time favorite stocks which I stupidly rode all the way down, soared on Monday following the announcement that it was selling a 31% stake to Time Warner (TWX) at a 20% premium to Friday's close. Apparently, I was not the only who believed that CETV had sunk to prices that deeply undervalued the company. Congratulations to Time Warner for taking advantage of unfortunate circumstances to move into the drivers seat of long-term control at a company with substantial upside when the global economy recovers.

With TWX effectively backstopping shareholders at $12, I have a hard time seeing downside in the stock below $10-11. As explained below, I can modest further driven event driven upside in the short-term with long-term value of $30 plus once Eastern European economies show signs of renewed growth. The risk-reward trade-off has dramatically improved so I would be a buyer on any weakness off Monday's spike.

Here is a link to an extensive archive of my research on CETV chronicling a ride up to over $100 and back down to $5.

CETV also announced weak 1Q09 guidance. This is no surprise but is below current analyst estimates. The ad markets in Eastern Europe froze early in 2009. Furthermore, currency compares are down 20-30% and the guidance is in the US dollars. Finally, 1Q08 was unusually strong in a seasonally weak quarter due to a management plan to smooth seasonality by pulling advertising from 2Q to 1Q....

Full year guidance will be provided in May when the company reports 1Q. I still think they can get close to $200 million in EBITDA this year, particularly if Eastern European currencies continue their recent recovery (up 10-20% from lows). But that does not really matter as TWX is betting that the company can get to $300 million or much more within a few years in which case the 2009 figure is irrelevant now that TWX has backstopped the value of CETV.

Dilution is steep but the current environment is unprecedented. If growth resumes, the stock can reach $30-40 in a few years pretty easily despite the dilution. In the short-term, look for announcements that would limit the cash flow outflows in Bulgaria and Ukraine this year. Finally, I hope the company buys back its converts at 50 cents on the dollar as that would be a great way to offset dilution by transferring enterprise value from debtholders to shareholders.

CETV will remain an event driven stock until fundamentals of Eastern European economies turnaround. Announcements on Bulgaria, Ukraine, or the convertibles can provide further upside in the near-term. In the long-term, $30-40 is very realistic once Eastern European economies resume growth. At $30 the company would have an enterprise value of $2.5 billion, hardly a stretch for a business that in 2008 reported adjusted EBITDA of about $370 million.

Posted by Steve Birenberg at March 23, 2009 02:26 PM in CETV