CETV announced a $425 million convertible offering after the close yesterday with a $50 million green shoe. Proceeds will be used to acquire another 30% of its operations in Ukraine, bringing control and 90% ownership. Given its strong balance sheet, CETV didn’t need to raise this money to fund the $210 million Ukraine purchase so it is probably fair to assume that they are getting close on another acquisition. Over the weekend, there was an article in the Financial Times indicating that they were in position to partner with new local owner of Turkey’s leading commercial TV station group. In addition on its last conference call, management made it pretty clear that they would be purchasing additional operations in Ukraine. Both of these deals could be dilutive to current valuation assuming that the acquired assets are in start-up phase or under earning. However, Ukraine and Turkey are huge markets in terms of population that are enjoying rapid GDP growth and advertising growth in the range of 20-40%. In other words, CETV would be buying the next leg in its growth profile beyond the current leg that has been driven by the Czech Republic, Romania, Slovakia, Slovenia, and initial forays into Ukraine.
More assets in Ukraine, a new market in Turkey, and the pending turn to profitability in Croatia (70% revenue growth but an operating loss in 2007), would provide enough upside to sustain 20-30% growth for another five to seven years. In the meantime, Romania remains a 20% growth market, CETV ‘s second largest operation, the Czech Republic, has another year of 15% local currency growth, and Slovakia has 15% local currency revenue growth but huge upside in margins. CETV EBITDA is up 85% since 2004. Well financed acquisitions in high growth markets offer a great chance to extend the run. That makes the sharp drop on the convert deal an opportunity for new long positions in CETV.