There was good news out of Central European Media Enterprises (CETV) on Monday as the company announced that it had completed its acquisition of a controlling interest in the license company for its station in Slovakia. Obtaining the interest will allow Slovakia to be consolidated which will greatly simplify the income statement and provide increased transparency to the company’s financial results. The transaction also brings another 10% in economic interest which means CETV now controls 80% of the economics. Local partners continue to own 20% of the operating company and 11% of the license company….

Beyond gaining control of the license company, which is always a concern in emerging markets, the acquisition allows CETV to take greater operating control at the management level. This could prove especially valuable as there is a lot of potential synergy with the company’s flagship station, TV Nova in the Czech Republic. Each stations signal bleeds across the border and language is shared. The ability to cross sell, cross promote, and share programming expense is all positive.
CETV is paying $29.5 million for control of the license company and the 10% additional economic interest. It is hard to judge how much of the price should be accrued to the license vs. the economic interest. However, the deal potentially values Slovakia at as much as $300 million and it is probably safe to assume at least $250 million. In 2005, Slovakia will report a little over $16 million in operating cash flow, down about 13% from 2004. The company made some poor programming decisions which hurt ratings. I am not overly troubled by the 2005 shortfall, as the CAGR in operating cash flow off the 2002 base is 23%. Additionally, with firmer ratings, improved cost controls, and the Nova synergies, I think Slovakia can rebound to 15%or higher growth in 2006.
CETV presently trades for 13 times 2006 estimated attributable station level operating cash flow. Enterprise value is $2.7 billion. Slovakia has just been validated as worth at least 10% of the entire company despite providing just 8-9% of total cash flow. Growth in 2006 on a same station basis should be close to 15% driven by Ukraine, Romania, and a rebound in the Czech Republic. I think the big risk is that 2006 turns out to be another year of investment in the Czech Republic which was over half of cash flow in 2005. Political turmoil in Ukraine and another larger acquisition are also risks. I remain confident in the story and think the shares could trade into the $70s if 2006 unfolds as another good growth year. CETV is unlikely to report 4Q05 and provide a 2006 outlook prior to late February, maybe inot early March.