CENTRAL EUROPEAN MEDIA CETV
August 16, 2011 - 10:15am EST by
bedrock346
2011 2012
Price: 13.45 EPS $0.00 $0.00
Shares Out. (in M): 64 P/E 0.0x 0.0x
Market Cap (in $M): 866 P/FCF 12.6x 9.7x
Net Debt (in $M): 1,274 EBIT 113 163
TEV ($): 2,140 TEV/EBIT 18.9x 13.1x

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Description

 

Every few years the market presents an extraordinary opportunity to go long or to short Central European Media ("CETV").  This market is treating CETV as a proxy for all that ails Europe, namely the PIIGS.  That said, the two main countries that CETV operates in Romania and the Czech Republic are actually in Germany's manufacturing orbit and are and have been used as effectively swing manufacturing capacity for that country.  For more historical detail about the company and how it got here, I encourage readers to go back and read my long post around $5 and short post at just under $40.

The recent decline in worldwide markets may become reflexive and create a worldwide double dip (or not), but current stock levels discount much of this risk and give nothing of the truly positive catalyst on the horizon which is a buyout of CME by Time Warner (TWX).  TWX originally bought CETV shares for $12 from the public and $15 for Ronald Lauder's super voting shares during the heart of the 2008-9 financial meltdown when the company's operations were in danger of hemorrhaging money.  While I believe the board panicked at the time as they had ample liquidity until 2012 maturities, the investment did give investors confidence in the company and the stock and brought on non Lauder cronies on to the board. Less than a year ago, Time Warner increased their stake to just under 50% by buying shares from a private equity investor in the $19 range.  Despite the company's various ups and downs, the business has stabilized and the company seems capable of finally generating just under $200mm in EBITDA this year and $250mmin EBITDA next year.  At current trading levels, you are creating that forward EBITDA at about 8.4x.  The company once generated $300mm of EBITDA and that no longer seems so farfetched, especially under the hands of Time Warner, which has a stated desire to grow international operations. It is also worth noting that the company has made massive investments in programming and new media that appear about to pay off - especially on the programming side.  Those assets could bring a huge positive swing to operating cash flow.

The company has leading broadcast stations in the Czech Republic, Romania, Bulgaria, Croatia, Slovakia and Slovenia.  They have also invested heavily in new media and bought for a massive price, the content company of CEO, Adrian Sarbu.  Since CETV was the major if not only client of this company, I believe the board felt they had to buy it to get rid of the conflict of interest with their CEO, Adrian Sarbu.  Since Time Warner came on the board, their does appear to be a vast improvement in governance. No more massively diluted deals for stations.   Most of the acquisitions have been for small, related new media and or content companies.  CETV appears to be sticking to its knitting for the first time in a long time.  While Sarbu is not my favorite CEO and the growth and margins have been slow to rebound (he is not the world's greatest cost cutter), his relatively new CFO appears honest and competent and has done an excellent job of pushing out the company's debt maturities.

The results are starting to pay off, the company just reported it first decent quarter in recent memory. Bulgaria, which was once a money losing black hole, is doing very well. Croatia, Slovakia and Slovenia are also doing well. Romania is still a basket case but that has been true for a while and maybe a source of EBITDA opportunity in the future should it get better.  It is worth remembering that there is always one or two markets that struggle.  The Czech station is not a dominant as it once was but still generates massive EBITDA .

My base case operating assumption is that CETV should generate about $250 of EBITDA  in 2012 and that should trade for no less than 10x or about $18 a share in a transaction with Time Warner or anyone else. There is about $250mm of SGA and other operating costs and I would think that at least $50-100mm of that could go away as the company is not run leanly.  The valuation is incredibly sensitive to the multiple as one multiple point equals about $4 a share in value.  The risk to a deal is that management and the board clearly want more value in a sale.  After all, they sold stock to TWX at these levels in the heart of the crisis and TWX just paid over $19 a share for a non controlling block.  More likely is that Time Warner will have to get comfortable that they can take EBITDA to $300m+ and be willing to pay 10x that number.  Given all the costs and SGA, this doesn't appear to be a stretch of the imagination.  Those numbers would yield a price in the mid 20s which is what I think could happen over the next 12-18 months.  In the meantime, the stock is trading at a reasonable if not dirt cheap level that hasn't been seen since the depths of the financial crisis and the business is in much better shape both operationally and financially.

Catalyst

As described above, TWX has said they want to own international assets and added to their stake above $19 recently.  Barring that, some stabilization of the European crisis could make the stock trade back at least to the mid teens (the stock was in the $18-20 range just a few weeks ago).  Also, any material profitability out of Romania and the content side of the company could also have a positive Impact. From a trading standpoint, the risk is that markets (and CETV's revenue) could deteriorate further and the stock can trade to mid single digits.  I believe the bigger long term risk is that Lauder will insist on a price more like $30-40 a share which will probably squelch a deal.  The stock actually traded up nicely on the back of last quarter's numbers.  Time will tell, but I believe this is a great entry point for what will be the final innings of the CETV/TWX mating dance or at least an interesting play on a European stabilization.
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    Description

     

    Every few years the market presents an extraordinary opportunity to go long or to short Central European Media ("CETV").  This market is treating CETV as a proxy for all that ails Europe, namely the PIIGS.  That said, the two main countries that CETV operates in Romania and the Czech Republic are actually in Germany's manufacturing orbit and are and have been used as effectively swing manufacturing capacity for that country.  For more historical detail about the company and how it got here, I encourage readers to go back and read my long post around $5 and short post at just under $40.

    The recent decline in worldwide markets may become reflexive and create a worldwide double dip (or not), but current stock levels discount much of this risk and give nothing of the truly positive catalyst on the horizon which is a buyout of CME by Time Warner (TWX).  TWX originally bought CETV shares for $12 from the public and $15 for Ronald Lauder's super voting shares during the heart of the 2008-9 financial meltdown when the company's operations were in danger of hemorrhaging money.  While I believe the board panicked at the time as they had ample liquidity until 2012 maturities, the investment did give investors confidence in the company and the stock and brought on non Lauder cronies on to the board. Less than a year ago, Time Warner increased their stake to just under 50% by buying shares from a private equity investor in the $19 range.  Despite the company's various ups and downs, the business has stabilized and the company seems capable of finally generating just under $200mm in EBITDA this year and $250mmin EBITDA next year.  At current trading levels, you are creating that forward EBITDA at about 8.4x.  The company once generated $300mm of EBITDA and that no longer seems so farfetched, especially under the hands of Time Warner, which has a stated desire to grow international operations. It is also worth noting that the company has made massive investments in programming and new media that appear about to pay off - especially on the programming side.  Those assets could bring a huge positive swing to operating cash flow.

    The company has leading broadcast stations in the Czech Republic, Romania, Bulgaria, Croatia, Slovakia and Slovenia.  They have also invested heavily in new media and bought for a massive price, the content company of CEO, Adrian Sarbu.  Since CETV was the major if not only client of this company, I believe the board felt they had to buy it to get rid of the conflict of interest with their CEO, Adrian Sarbu.  Since Time Warner came on the board, their does appear to be a vast improvement in governance. No more massively diluted deals for stations.   Most of the acquisitions have been for small, related new media and or content companies.  CETV appears to be sticking to its knitting for the first time in a long time.  While Sarbu is not my favorite CEO and the growth and margins have been slow to rebound (he is not the world's greatest cost cutter), his relatively new CFO appears honest and competent and has done an excellent job of pushing out the company's debt maturities.

    The results are starting to pay off, the company just reported it first decent quarter in recent memory. Bulgaria, which was once a money losing black hole, is doing very well. Croatia, Slovakia and Slovenia are also doing well. Romania is still a basket case but that has been true for a while and maybe a source of EBITDA opportunity in the future should it get better.  It is worth remembering that there is always one or two markets that struggle.  The Czech station is not a dominant as it once was but still generates massive EBITDA .

    My base case operating assumption is that CETV should generate about $250 of EBITDA  in 2012 and that should trade for no less than 10x or about $18 a share in a transaction with Time Warner or anyone else. There is about $250mm of SGA and other operating costs and I would think that at least $50-100mm of that could go away as the company is not run leanly.  The valuation is incredibly sensitive to the multiple as one multiple point equals about $4 a share in value.  The risk to a deal is that management and the board clearly want more value in a sale.  After all, they sold stock to TWX at these levels in the heart of the crisis and TWX just paid over $19 a share for a non controlling block.  More likely is that Time Warner will have to get comfortable that they can take EBITDA to $300m+ and be willing to pay 10x that number.  Given all the costs and SGA, this doesn't appear to be a stretch of the imagination.  Those numbers would yield a price in the mid 20s which is what I think could happen over the next 12-18 months.  In the meantime, the stock is trading at a reasonable if not dirt cheap level that hasn't been seen since the depths of the financial crisis and the business is in much better shape both operationally and financially.

    Catalyst

    As described above, TWX has said they want to own international assets and added to their stake above $19 recently.  Barring that, some stabilization of the European crisis could make the stock trade back at least to the mid teens (the stock was in the $18-20 range just a few weeks ago).  Also, any material profitability out of Romania and the content side of the company could also have a positive Impact. From a trading standpoint, the risk is that markets (and CETV's revenue) could deteriorate further and the stock can trade to mid single digits.  I believe the bigger long term risk is that Lauder will insist on a price more like $30-40 a share which will probably squelch a deal.  The stock actually traded up nicely on the back of last quarter's numbers.  Time will tell, but I believe this is a great entry point for what will be the final innings of the CETV/TWX mating dance or at least an interesting play on a European stabilization.

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