CENTRAL EUROPEAN MEDIA CETV S
September 18, 2009 - 2:02pm EST by
bedrock346
2009 2010
Price: 38.23 EPS -$0.09 $0.56
Shares Out. (in M): 61 P/E -447.0x 67.8x
Market Cap (in $M): 2,345 P/FCF 45.5x 29.0x
Net Debt (in $M): 839 EBIT 79 129
TEV ($): 3,184 TEV/EBIT 40.3x 24.7x
Borrow Cost: NA

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Description

  

Central European Media (CETV) owns broadcasting assets in Eastern Europe.  On February 26th when the stock was at $5.62, I wrote about CETV as a compelling long. I now believe that after going up almost 7x in value, it represents a compelling short.   We have arrived at a teachable moment for the longs and I believe they are about to be schooled. Here is the summary of the facts: 

 

  • - CETV invests approximately $1billion in enterprise value for Ukrainian broadcast assets that it agrees to sell back to the original owner for $300mm a year later.
  • - CETV invests approximately $200mm for Bulgarian broadcast assets that it can't even give away a year later.
  • - CETV abruptly fires the CEO who had saved the company from bankruptcy and then later abruptly fires his replacement, who took the company from minimal EBITDA to over $300mm a year.
  • - CETV hires an insider and close friend of Chairman, Ronald Lauder, as new CEO and then pays over $100mm for his content company.
  • - CETV massively dilutes holders after a 90% drop in the stock and allows a 25% premium for the super voting shares - owned by the chairman.
  • - Despite a much lower share price because of dilution, CETV now trades at approximately the same enterprise value it had before the crash even though its EBITDA has been halved.
  • - CETV's long standing CFO abruptly quits.

 

The stock has worked far better and faster than I thought it would.  The business on the other hand is much worse - tracking closer to a mid $100mm level of EBITDA (down from my $200mm estimate). Revenue has collapsed almost 40% in the most recent quarter, dropping anywhere from 22% in the Croatia republic to 90% in the Ukraine.  The company has made only a half hearted effort to cut costs - aiming at reductions of just 10%-- less than almost any other company I follow.  For a company that faced potential liquidity issues, this lackluster effort is stunning.  In addition, the company bought the new CEO's (Adrian Sarbu) Romanian production company (which sells content to CETV) for about $110mm.  According to CETV, in 2008 (when times were good and they had a sweetheart deal with CETV, providing the bulk of their revenue) Sarbu's company did about mid teens in EBITDA.   I suspect the business is at best break even now.  7x peak EBITDA for the CEO's business strikes me as a bit rich.  Sarbu also received a huge compensation package on top of the buyout.  

 

Adding insult to injury was the massively dilutive sale of equity to Time Warner.  When I wrote my long report in February, the share count was 42mm.  Fearing a liquidity crunch (even though none was imminent for several years if ever), the board decided to sell 14.5m Class A shares for $12 a share and 4.5mm super voting Class B shares (that only Chairman, Ronald Lauder, and Apax own), for $15 a share - representing 45% dilution to holders. This deal happened after the stock dropped over 90% in less than a year.  It is worth noting the large (25%) premium paid for the super voting shares by Time Warner.  Part of the bull thesis is that Time Warner will eventually buy CETV for a big premium, which may very well happen though I doubt from these levels. Based on the precedent of this deal, a disproportionate share of the value may go to these super voting shares and not to ordinary Class A holders. 

 

Around the time of this transaction, the longtime CFO left.  The company had just fired CEO, Michael Garin, who had helped grow CETV from minimal EBITDA to over $300mm during his tenure.  Before Garin, the board had fired Fred Klinkhammer, who saved the company from bankruptcy when CETV's most valuable assets were seized.

 

While none of these things, in and of itself, makes CETV a short, they do demonstrate poor corporate governance on top of the terrible capital allocation that saw the company pay $1 billion for the Ukraine after the credit markets had collapsed and approximately $200mm for Bulgaria - a station which they can't even give away now.  And the Ukraine?   A scant year after the billion dollar purchase, it's in the process of being sold for $300mm to the same gentleman who stuffed CETV for $1billion.

 

The most optimistic operating scenario that I can come up with assumes that the company can get to the $400mm in EBITDA they were supposed to generate last year.  They actually did about $300mm - and won't make anything near that amount again for several years.    But let's say they do get back up there eventually.  A generous 10x multiple on that number will give you a $3.0billion enterprise value. Subtract $840million in net debt and you have about $2.2billion in equity value or near $35 a share. I do not believe they will get that level of cash flow for at least 3 years.  The credit bubble pumped up Eastern Europe's economies in a way that is unlikely to be repeated. CETV commanded a higher multiple than U.S. TV networks because it wasn't so threatened by the internet and pay TV.   But the fragmentation of media is working its way into CETV's markets as well.  In addition, the $400mm of EBITDA was predicated on massive growth in the Ukraine - an asset they will either sell all of for $300mm or, at best, keep half. An asset, which is currently hemorrhaging over $60mm in EBITDA.

 

10x the $200mm in EBITDA that they won't hit this year would yield a $19 price per share which I think is much closer to the high end of fair value.  Due to the dilutive acquisitions and dilutive offerings, CETV's stock price seems much lower than the $100+ it traded in it glory days, but its enterprise value is actually almost the same as it was pre Lehman, while the EBITDA it generates has been cut in half.  At $5-6 in February, the stock was a long dated call option on solvency and recovery for some truly good assets.  Here it is a massively overvalued macro play/short squeeze. At $5 CETV was my largest long. At $38, it is my largest short.

 

Catalyst

So why is the stock running? CETV is one of the few liquid ways to play an Eastern European recovery and I think is being used akin to a 2x levered etf by momentum players. If the markets reverse or even stall, I think the stock could easily go back to the mid teens - around the levels where TWX invested.  I also believe that the company is obsessed with deleveraging and could do a large equity offering. After all, they were willing to sell shares at $12 and $38 is a long way from $12.  Finally, Bloomberg lists the share count as 50.5mm. It is actually over 61mm.  The difference represents 2 turns of EBITDA - a meaningful amount that I would guess many longs are not aware of.

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    Description

      

    Central European Media (CETV) owns broadcasting assets in Eastern Europe.  On February 26th when the stock was at $5.62, I wrote about CETV as a compelling long. I now believe that after going up almost 7x in value, it represents a compelling short.   We have arrived at a teachable moment for the longs and I believe they are about to be schooled. Here is the summary of the facts: 

     

     

    The stock has worked far better and faster than I thought it would.  The business on the other hand is much worse - tracking closer to a mid $100mm level of EBITDA (down from my $200mm estimate). Revenue has collapsed almost 40% in the most recent quarter, dropping anywhere from 22% in the Croatia republic to 90% in the Ukraine.  The company has made only a half hearted effort to cut costs - aiming at reductions of just 10%-- less than almost any other company I follow.  For a company that faced potential liquidity issues, this lackluster effort is stunning.  In addition, the company bought the new CEO's (Adrian Sarbu) Romanian production company (which sells content to CETV) for about $110mm.  According to CETV, in 2008 (when times were good and they had a sweetheart deal with CETV, providing the bulk of their revenue) Sarbu's company did about mid teens in EBITDA.   I suspect the business is at best break even now.  7x peak EBITDA for the CEO's business strikes me as a bit rich.  Sarbu also received a huge compensation package on top of the buyout.  

     

    Adding insult to injury was the massively dilutive sale of equity to Time Warner.  When I wrote my long report in February, the share count was 42mm.  Fearing a liquidity crunch (even though none was imminent for several years if ever), the board decided to sell 14.5m Class A shares for $12 a share and 4.5mm super voting Class B shares (that only Chairman, Ronald Lauder, and Apax own), for $15 a share - representing 45% dilution to holders. This deal happened after the stock dropped over 90% in less than a year.  It is worth noting the large (25%) premium paid for the super voting shares by Time Warner.  Part of the bull thesis is that Time Warner will eventually buy CETV for a big premium, which may very well happen though I doubt from these levels. Based on the precedent of this deal, a disproportionate share of the value may go to these super voting shares and not to ordinary Class A holders. 

     

    Around the time of this transaction, the longtime CFO left.  The company had just fired CEO, Michael Garin, who had helped grow CETV from minimal EBITDA to over $300mm during his tenure.  Before Garin, the board had fired Fred Klinkhammer, who saved the company from bankruptcy when CETV's most valuable assets were seized.

     

    While none of these things, in and of itself, makes CETV a short, they do demonstrate poor corporate governance on top of the terrible capital allocation that saw the company pay $1 billion for the Ukraine after the credit markets had collapsed and approximately $200mm for Bulgaria - a station which they can't even give away now.  And the Ukraine?   A scant year after the billion dollar purchase, it's in the process of being sold for $300mm to the same gentleman who stuffed CETV for $1billion.

     

    The most optimistic operating scenario that I can come up with assumes that the company can get to the $400mm in EBITDA they were supposed to generate last year.  They actually did about $300mm - and won't make anything near that amount again for several years.    But let's say they do get back up there eventually.  A generous 10x multiple on that number will give you a $3.0billion enterprise value. Subtract $840million in net debt and you have about $2.2billion in equity value or near $35 a share. I do not believe they will get that level of cash flow for at least 3 years.  The credit bubble pumped up Eastern Europe's economies in a way that is unlikely to be repeated. CETV commanded a higher multiple than U.S. TV networks because it wasn't so threatened by the internet and pay TV.   But the fragmentation of media is working its way into CETV's markets as well.  In addition, the $400mm of EBITDA was predicated on massive growth in the Ukraine - an asset they will either sell all of for $300mm or, at best, keep half. An asset, which is currently hemorrhaging over $60mm in EBITDA.

     

    10x the $200mm in EBITDA that they won't hit this year would yield a $19 price per share which I think is much closer to the high end of fair value.  Due to the dilutive acquisitions and dilutive offerings, CETV's stock price seems much lower than the $100+ it traded in it glory days, but its enterprise value is actually almost the same as it was pre Lehman, while the EBITDA it generates has been cut in half.  At $5-6 in February, the stock was a long dated call option on solvency and recovery for some truly good assets.  Here it is a massively overvalued macro play/short squeeze. At $5 CETV was my largest long. At $38, it is my largest short.

     

    Catalyst

    So why is the stock running? CETV is one of the few liquid ways to play an Eastern European recovery and I think is being used akin to a 2x levered etf by momentum players. If the markets reverse or even stall, I think the stock could easily go back to the mid teens - around the levels where TWX invested.  I also believe that the company is obsessed with deleveraging and could do a large equity offering. After all, they were willing to sell shares at $12 and $38 is a long way from $12.  Finally, Bloomberg lists the share count as 50.5mm. It is actually over 61mm.  The difference represents 2 turns of EBITDA - a meaningful amount that I would guess many longs are not aware of.

    Messages


    SubjectWhat was the reason given for firing Klinkhammer
    Entry09/19/2009 12:31 PM
    Membertyler939

    From your write up, it sounded like the first replacement did a very good job.  To play devil's advocate, maybe they were right to fire the first CEO (because the replacement did a better job) and maybe the new CEO will do even better.


    Subjectbbg sharecount is correct
    Entry09/21/2009 09:55 AM
    Membercyrus538

    the bloomberg sharecount is correct -- where there are two classes of shares they report the more liquid class a.  the equity value bloomberg has is correct and corresponds to 50.5m class a + 10.8 class b.


    Subjecttoday
    Entry10/14/2009 10:38 AM
    Memberroc924

    bedrock,

    Nice call on this one so far. Do you know why the stock is down 10% on heavy volume today?

    roc


    Subjectukraine
    Entry10/24/2009 08:22 PM
    Memberad188

    hearing deal needs to be renegotiated ... if so, 09 looks like this: TW in @ 12/shr for30%ish of the company, sign deal with Ukraine board member to please wall str, then issue 440m EUR of 11%+ HY bonds into cap mkts froth, then cut guidance and drop UKR deal... untrustworthy mgmt, and why they dont issue 5m shrs of equity at these prices, I dont understand...


    SubjectRE: Ukraine
    Entry10/27/2009 09:29 AM
    Memberroc924

    From the Q

    RESTRICTED AND UNRESTRICTED SUBSIDIARIES

    Our Coverage Ratio is currently below 2.0 times, therefore our Restricted Subsidiaries are restricted from making payments or investments in total of more than approximately EUR 80.0 million (approximately US$ 117.1 million) to our Unrestricted Subsidiaries or to any other operations that are not restricted subsidiaries. We have made US$ 9.5 million of such payments since we issued our Floating Rate Notes in 2007 and as at September 30, 2009 we have capacity for approximately US$ 107.6 million of additional payments or investments in the Unrestricted Subsidiaries in the event our Coverage Ratio fell below 2.0 times.

    If a funding need arises for our Unrestricted Subsidiaries, and we are prevented from re-designating our Ukraine and Bulgaria operations as Restricted Subsidiaries, those operations would be required to raise debt on a stand-alone basis, attract additional equity funding, divest some or all of their assets or enter bankruptcy proceedings.

    What do you think? Will they have enough cash to fund the unrestricted subs?


    SubjectRE: upgrade
    Entry11/10/2009 10:25 AM
    Membermrsox977

    Goldman upgrade today.  Good opportunity to add to the short...   This remains very overvalued.


    SubjectRE: S&P Downgrades Credit
    Entry11/11/2009 09:04 AM
    Membermrsox977

    Seeing this morning that S&P just lowered their credit rating on CETV to B-   If you have access to the S&P report it would be nice to read.  Thank you.


    SubjectText of S&P Credit Downgrade
    Entry11/12/2009 05:52 AM
    Membermrsox977

    S&P Lowers Central European Media Enterprises To 'B-';Otlk Neg
    2009-11-11 14:07:47.188 GMT

        -- Bermuda-based TV broadcaster Central European Media Enterprises
    expects its 2009 EBITDA to fall by more than 75% year on year.
        -- We think CME's liquidity and credit measures will likely cease to be
    in line with our 'B' long-term rating on the company during the coming
    quarters.
        -- We are lowering our long-term corporate credit rating on CME to 'B-'
    from 'B'.
        -- The negative outlook mainly reflects our view that expected continuing
    challenging trading conditions for CME may result in substantial negative free
    cash flow and therefore materially weaker-than-expected liquidity by year-end
    2010.

    PARIS (Standard & Poor's) Nov. 11, 2009--Standard & Poor's Ratings Services
    today said it has lowered its long-term corporate credit rating on
    Bermuda-based emerging markets TV broadcaster Central European Media
    Enterprises Ltd. (CME) to 'B-' from 'B'. The outlook is negative.

    We also lowered to 'B-' from 'B' the issue ratings on CME's $475 million
    senior secured convertible notes due 2013, EUR200 million notes due 2016, and
    EUR150 million notes due 2014. At the same time, we assigned a 'B-' rating to
    the recently issued EUR240 million add-on notes due 2016, and withdrew the 'B'
    rating on the EUR245 million notes due 2012, which were repaid using the
    proceeds from the EUR240 million add-on notes.

    "Our downgrade incorporates CME's latest announced guidance on significantly
    lower-than-anticipated full-year 2009 revenues and earnings, along with the
    already weak operating performance posted in the first three quarters of the
    year," said Standard & Poor's credit analyst Melvyn Cooke. "We consequently
    expect CME's liquidity and credit measures to weaken materially in the next
    few quarters, to the extent that they would likely no longer be commensurate
    with our previous 'B' rating."

    We believe that CME's adjusted consolidated gross leverage is likely to jump
    to over 20x at year-end 2009, versus 3.7x at year-end 2008, and that it could
    remain very high throughout 2010. We also think CME's liquidity could decrease
    meaningfully in 2010, owing to continued substantial negative free cash flow
    during the year, despite ongoing refinancing activity and potential
    improvements in some of the company's advertising markets.

    CME reported a 33% fall in consolidated revenues and an EBITDA loss of $14.4
    million for the third quarter of 2009, as well as 37% and 86% drops, year on
    year, in consolidated revenues and EBITDA in the first nine months of 2009.
    The company has indicated its belief, however, that its operating performance
    has bottomed out, and that it should be able to generate consolidated EBITDA
    of between $60 million and $70 million for full-year 2009. EBITDA in this area
    would still represent an over 75% plunge against the 2008 figure, and would be
    materially lower than our expectations underpinning our previous 'B' rating on
    CME.

    "The negative outlook reflects our perception that CME's liquidity could
    materially weaken throughout 2010, given the anticipated sizable operational
    challenges the company's local operations will face to restore adequate
    profitability over the next few quarters," said Mr. Cooke.

    We also think that the timing and breadth of meaningful improvement in CME's
    various advertising markets in 2010 and 2011 is uncertain. In addition, we
    have factored in the refinancing of the Czech and Slovenian facilities and
    significant gross adjusted leverage reduction for CME in 2010, versus the
    current level, through EBITDA growth. A cash balance in excess of $100 million
    at the "restricted" group at year-end 2010 will be crucial to maintain the
    current ratings. We have not incorporated the possibility of a distressed
    exchange offer in the medium term in our outlook.

    Downward rating pressure could arise if we perceive faster-than-anticipated
    deterioration in CME's liquidity position in the next few quarters, either
    resulting from higher-than-expected cash burn or from an aggressive financial
    policy.

    We could revise the outlook to stable if CME were able to stabilize liquidity
    at a level significantly above our expectations by year-end 2010, meaningfully
    improve operating performance and cash burn, and decrease gross adjusted
    leverage during the period.


    Subjectupdate
    Entry01/20/2010 11:08 AM
    Memberroc924

    Bedrock,

    Any updated thoughts on CETV?

    Thanks,

    roc


    SubjectRE: update
    Entry01/20/2010 01:30 PM
    Membermrsox977

    I see this as another shorting opp, but I defer to Bedrock...


    SubjectRE: This is how they will lose Ukraine cash
    Entry01/26/2010 03:06 PM
    Membertyler939

    Any thoughts on why they may do this (any ulterior motives)?


    SubjectAnything new?
    Entry05/02/2010 08:57 PM
    Memberroc924
    Bedrock, any updated thoughts on CETV? What do you think about the bTV/News corp deal? Thanks, roc

    SubjectRE: Author Exit Recommendation
    Entry06/30/2010 10:34 AM
    Membercross310
    Great call Bedrock. Whats next?
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