|Shares Out. (in M):||42||P/E||2.0x||6.0x|
|Market Cap (in M):||237||P/FCF||1.9x||6.9x|
|Net Debt (in M):||1,000||EBIT||209||131|
Central European Media is the preeminent TV broadcaster in Eastern Europe. Its core markets are the Czech Republic, Romania, Slovakia and Slovenia - all of which are profitable. The company has noncore markets in the Ukraine, Bulgaria and Croatia that lose money. The stock is hitting new lows today on a very poorly presented earnings call and the implosion of Eastern European markets. While the risks are known, I believe that there a short term catalysts that could get the stock to double and longer term I believe that the company is worth between $20 and $50 a share. There are no near term liquidity concerns. The nearest debt maturity is in 2012. The stock is essentially a long dated call option on a return to some normalcy in their markets by 2012.
Yesterday, CETV announced an in line quarter net of some one time items in the Ukraine. However, they said that they would tolerate $100mm in losses in the three money losing countries (EBITDA loss plus capx and future programming commitments) in 2009. They also announced that they would use a technical window to file a debt and equity shelf registration. The prospect of funding large losses and issuing equity at multiyear lows has panicked the markets on top of the Eastern European jitters that were already present. I do not believe the company intends to issue equity at these levels and think that if worse came to worse - money losing stations will be sold or shut down. The company generated about $300mm in EBITDA last year. I project that it will do about $190mm this year. The company is slashing costs about 20% and is cutting Capx back to $50-65mm.
At the heart of the problem is the $475mm convert that was issued last year to buy the half of the Ukraine that was not owned and to buy money losing startup operations in Bulgaria. These money losing assets (including Croatia), will generate about $60mm in negative EBITDA. If they were sold or shut down for zero benefit (the Ukraine was bought for $1billion a year ago and would likely get some positive if nominal value now), EBITDA would be about $250mm. At 6x my $250mm, the company would trade for about $12 a share. I believe that EBITDA will eventually return to $300mm as these are the leading and dominant stations in their markets. There is still a wide gap between per capita as spending in CETV's core markets and Western Europe. That gap will narrow over time. The company also owns leading new media assets in its home markets - reducing the risk of disintermediation. At 6 x $300mm, the value for the common would be about $19 a share. At 10x the $300mm, the value for the common would be about $47 a share.
The company has about $100mm in cash and an additional $300mm in availability. There are no debt maturities until 2012. There are no maintenance covenants, but there is an incurrence covenant that could be breached in the back half of 2009. The only consequence of that breach would be no additional debt on top of existing facilities. Given the company's current $400mm of liquidity, there should be no need for additional debt.
While all of the eastern European economies are hurting, most of CETV's core markets have and should hold up relatively well - the one exception is Romania. Mitigating the risk of a Romanian meltdown is the core Czech station that generated over $200mm in station EBITDA last year. Industry insiders have told me that even in this climate, that asset could still be sold for about 5x station EBITDA or $1billion - paying off all the debt and giving equity holders an unleveraged interest in the rest of the markets. Even if this estimate proves optimistic, it does give some sense for what the sum of the parts might be.
The company is controlled by Ronald Lauder and the private equity firm, Apax. Years ago when the company's Czech station was stolen, Lauder stepped into help the company and preserve equity value. Should events worsen, the same thing could happen today.
In the short term, any improvement in the Euro or EU support for Romania would likely send the shares materially higher as happened last year when the shares went from $9 to $25 on the strength of the Euro. I am not counting on this happening. A shut down or sale of the money losing assets could easily double the stock as core EBITDA is more like $250mm in 2009 and it would remove the losses that investors hate and fear of an equity offering. The company has drawn down on local currency revolvers and is thinking about buying its covert for about 40 cents on the dollar. As an aside, the convert is yielding about 30percent and is another and safer way to play this investment - I own it as well. If they spent $50mm they would create about $75mm in equity value or almost $2 a share and most likely improve sentiment towards the stock. The most likely outcome in my view is that the company muddles along with its $400mm in liquidity and that in the next few years as their markets stabilize, the company goes back to earning about $300mm in EBITDA and the stock trades back to $20-50 and possibly higher given the leaner cost structure.
|Entry||02/28/2009 07:21 PM|
Converts are 36cents on the dollar but are low coupon (3.5%) and rallied from mid 30s to mid 40s as stock went from 9 to 25 last year. they are now mid 30s again. I think they are money good under most scenarios but i think if we have any near term good news (imf bailout of romania, insider buying, convert buyback), you will do better in the common.
The big difference between them and CBS et al is that their countries are small and they have local language news and libraries that are hard and expensive to replicate. 40 percent or so share in core markets. They do their own fragmentation with multichannel approach. Czech republic only has about 10mm people, hard and expensive to break in. Unlike CBS, it is a much more vertically integrated dominant franchise. Stock is trading at $6 not because of dis intermediation but because of E. Europe meltdown and debt.
When the stock was at $100 this was most of his wealth. At $6, EL and art is most of his wealth, but this has happened to him once before and he has supported the company. APAX paid $60 about 3 years ago.