It has been said that the fall of the Berlin Wall had little to do with political philosophy and everything to do with economics. Simply put, nobody wanted to wear Bulgarian shoes or drive a Hungarian car any longer. Some 15 years later, it seems what they really wanted was to see Baywatch and Beverly Hills90210.
Central European Media Enterprises (CME)
TV Nova is no B-grade star -- Nova has an all-day audience share of over 43% and takes in 72% of all of the TV ad dollars (or koruna, rather) spent in the Czech Republic. Upon the deal's closing, CME will basically own 56% of the station and maintain the right to increase that stake up to 100%.
TV Nova's revenue for 2004 should come in at about $222 million, with net income of $64 million. When you stack that next to CME's trailing 12 month revenue of $156 million and trailing net income of $13 million, you begin to clearly see the importance of this deal.
A real-life soap opera
Getting to this point has been anything but smooth sailing for CME. The company actually founded TV Nova back in 1994, but in a bitter dispute with a Czech partner, it was essentially robbed of all its properties in the Czech Republic. Making matters worse, competitors such as Bertelsmann and SBS Broadcasting
Despite this bleak outlook, Ronald Lauder wasn't about to quit. In addition to filing a major suit against the Czech government for essentially standing idly by and letting CME's partner run off with the goods, the company instituted an aggressive bonus system that rewarded local managers for meeting and exceeding performance targets. These efforts have worked out well.
Better yet, it looks as though CME will get the last laugh in the Czech Republic. CME won its suit against the Czech government to the tune of $358 million and is purchasing TV Nova, but what's more, the company's former partner is in trouble for tax evasion, and the whole debacle has turned into a hit sitcom on Slovenian TV.
Even with all of that drama aside, there is much to like about CME's prospects. It owns the top stations in Romania, Slovenia, and the Slovak Republic, as well as the No. 2 station in Ukraine. Additional stations in Croatia, Romania, and Slovenia aren't as highly ranked, but they are showing signs of growth.
Demographics are also on the company's side. As people become wealthier, they tend to watch more TV, and all of the company's host countries are posting solid economic growth. With Slovenia and the Czech and Slovak republics having recently joined the European Union, and Croatia and Romania listed as candidates for membership, there is reason to believe that the market for television advertising in Eastern Europe has a lot of growth ahead of it. After all, European consumer-goods companies like DaimlerChrysler
Not only does CME have room to grow every station in its own country (except, perhaps TV Nova), but it also still has the option of expanding into other countries, such as Poland and Serbia. As the company grows, it will be increasingly able to take advantage of certain synergies by producing programming that can be shown in multiple countries with a shared language and by negotiating better terms for broad-appeal events, like sports programming.
From trading over the counter for less than a quarter per share back in 2000, CME stock has come back to a lofty perch. With a trailing price-to-earnings ratio of 76 and a forward P/E of 30, CME is not a deep-value story. That said, CME's valuation isn't out of line with its industry. By the same token, sales continue to accelerate (up 64% year-over-year for the last quarter), and the addition of TV Nova will boost results across the board.
As the company's prior travails with the Czech Republic would suggest, there are definite risks to playing media mogul in Eastern Europe. Although their populations are educated and their basic infrastructures are adequate, these countries have governments that aren't used to dealing with a free and independent media. Consequently, "crony capitalism" and backroom dealing is often still a problem.
What's more, Byzantine local laws force the company into a complicated hierarchy of equity affiliates and holding companies. Should one or more of the company's local partners decide to back out or cause problems, it could create big headaches for shareholders. Going forward, though, the desirability of being part of the European Union should help sway these governments toward establishing a more capitalist outlook on governance and fair play.
It's not just governments that CME has to worry about, though. Bertelsmann and SBS remain strong competitors, and other players like News Corp.
Another risk in the CME story is basic economic risk. While ad spending never goes to zero during recessions, there is a correlation between economic growth and growth in advertising budgets. Should one or more of the countries in which CME operates run into economic troubles, its national ad market will suffer. Fortunately, CME has spread its risks over a large number of growing economies, and that should help the company weather the occasional economic downturn.
The company's corporate ownership structure also gives reason for pause. Shares are divided into Class A and Class B, with Ron Lauder owning essentially all of the Class B shares. While holders of the Class A shares (the ones that trade publicly) are permitted to vote, each Class B share is worth 10 votes, so Mr. Lauder essentially controls the clicker in terms of shareholder votes.
CME operates in places that most Americans may have never visited, but that doesn't mean there aren't real growth opportunities in those far-off lands. Growing ad markets and market-leading stations are a powerful one-two punch for any television operator. That said, the unusual ownership structure, inherent operating risks, and somewhat mixed valuation picture of CME add more than a touch of risk to the story.
Nevertheless, I think this is one of the few opportunities that investors have to play on the growth of Eastern Europe without handing over large fees to mutual-fund managers. The business model is time-tested, and the allure of TV is known to all of us. If prosperity leads the Eastern Europeans to become couch potatoes, CME will be there to entertain them. Investors with a tolerance for risk might want to tune in.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.