Keeping it afloat in Eastern Europe

Michael Hedges July 5, 2009 (follow on Twitter)

Not long ago Eastern Europe had the reputation as a major growth region for commercial media. Well-financed investors – strategic and financial – moved in. With revenue projections returning from the stratosphere a tougher look at means a smaller portfolio.

A flurry of activity surrounded the announcement last week that Central European Media Enterprises (CME) would be spinning its Ukraine and Bulgarian television operations into a “special vehicle.” The idea, coming at the end of the second quarter, was to get loss making operations off the books and primed for sale. CME’s first quarter results show revenue down 35% in Ukraine, 25% in Bulgaria and 15% in Croatia. The Croatian operations, never profitable, didn’t make the hit list.

For the Ukraine business, which includes Studio 1+1 and Kino, familiar names popped up as potential buyers, according to Russian and Ukrainian sources. Two were Alexander Rodnyansky and Boris Fuchsmann, founders of and former partners in Studio 1+1. Rodnyansky recently stepped down as president of CTC Media. Fuchsmann, according to local sources, was ready to bid for Studio 1+1. Rodnyansky said the movie business has his current attention.

Another was Russian media company ProfMedia, which according to Kommersant (Ukraine), made a bid during negotiations that began in May.  That deal collapsed because ProfMedia insisted on 60% interest and control. Studio 1+1’s debt was reportedly US$400 million. According to Russian and Ukrainian accounts (Itar-Tass, Kommersant July 3), ProfMedia also offered to broker a truce between CME and giant (and politically connected) Russian advertising sales house Video International after CME “prematurely” cancelled its sales deal last December. Video International is suing.

By the end of the week, CME had a deal with partner and board member Igor Kolomoisky. He’d take 49% of the Studio 1+1 group for US$100 million and a small TV station he owned separately. CME keeps an option to sell the remaining 51% of 1+1 to Kolomoisky for another US$300.

Kolomoisky made a US$110 million investment in CME two years ago, which came with a board seat and 3% of the company. In May Time Warner took a 31% stake in CME for US$240 million.

CME bought out Rodnyansky’s and Fuchsmann’s interest in Studio 1+1, largely with Kolomoisky’s money, to take 100% control over the broadcaster. At that time, former CME President Michael Garin called the Ukraine market CME’s “future” and said buying out the minority partners would strengthen operations. Rodnyansky had been CEO of CTC Media, which is part owned by Modern Times Group (MTG).

CME’s Bulgarian operations include Ring TV and TV2. To date, no motion has been reported on the Bulgarian television stations. Last month (June 19) an investment group headed by Karl von Hapsburg acquired 50% of Bulgarian channel TV Europe.

All of this appears to have moved rather quickly. Unquestionably, Ukraine’s TV advertising market is in difficulty. One report suggests Studio 1+1 losing US$100 in the first half of 2009. Neither management nor direction of Studio 1+1 will change, said Kolomoisky to Interfax-Ukraine (July 3).

“Our priority will be to strengthen our own production,” said General Director Alexander Tkachenko to Telekritika (July 3), “using the experience of other CME channels.”

In recent weeks CME President and COO Adrian Sarbu has consolidated company offices, effectively closing the London office and moving all executive positions to Prague. Company CFO Wallace Macmillan departed the company rather than move to Prague for personal reasons. Evidently, Mr. Sarbu felt the need to move quickly to hold on to liquidity lest not to threaten the stronger operations.

Handing over the reins at CME last December, retiring CEO Michael Garin called the company’s expansion his “lasting legacy.”  Further expansion is not on Mr. Sarbu’s agenda. He recently took a pass on TV Puls in Poland. Now it’s time to watch the shareholders happiness level.