The column I posted last week providing an overview of Central European Media Enterprises already requires updating. In it I mention that CETV was likely to increase its 60% ownership of Studio 1+1, the #2 TV station in Ukraine, within the next year. As it turns out late last week, the company took a major step toward completing this important strategic goal.
After the close on Thursday, the company announced that Igor Kolomoisky, CETV’s newest Board member and one of the richest men in Ukraine, had secured a “valid right” to purchase an additional 21%. Upon Kolomoisky’s completion of the acquisition, an agreement is in place for CETV to purchase the stake for an amount not to exceed $140 million. Although there is no guarantee Kolomoisky’s right will turn into an acquired asset, based on the company’s past history of gaining incremental ownership in its operations, I expect the two-part transaction to be completed reasonably soon.
This announcement is very positive for CETV for two reasons. First, moving the stake up to 81%, along with September’s announcement that the company had secured control of the license, should allow CETV to exercise greater management control over 1+1. When ownership stakes turned into control in other countries, most recently Slovakia, revenue and EBITDA growth accelerated sharply….

….Second, the $140 million price implies a valuation of $700 million for 1+1. This year 1+1 will be lucky to operate at breakeven after producing $30 million in EBITDA in 2006. Ratings issues and the uncertain political environment and parliamentary elections in Ukraine are the culprit for the 2007 performance. Most investors value CETV using EBITDA multiples. With Ukraine operating at breakeven, this valuation method implies no value to 1+1 while the Kolomoisky deal values the 81% stake at $560 million or $13 per share. Alternatively, the $700 million value for the whole stake works out to 23 times 2006 EBITDA while CETV trades at 13 times 2007 EBITDA.
Given this analysis, it is no surprise that CETV spurted 8% last week and closed at an all-time high on Friday. I expect good news at the analyst meeting and think plenty of upside remains.