Private equity firm hops out of Hungary

Michael Hedges February 18, 2008

Broadcast outlets in Eastern Europe were a magnet for venture capital investment before the 2004 EU accession. Media deals in Hungary, Poland and the Czech Republic attracted first or second round financing from specialized investment funds. The tide is turning.

Accession Mezzanine Capital (AMC) announced its purchase of Hungarian radio broadcaster Danubius Rádió from Advent International recently (February 4). Advent International had purchased the company from GWR, now part of UK broadcaster GCap, for €30 million in 2003. GWR acquired Danubius Radio and local Budapest station Roxy Radio in 2000 when UK publisher Daily Mail and General Trust (DMGT) consolidated its holdings into GWR.  DMGT won a majority holding in Danubius Radio when the station was privatized in 1997. At that time the station was valued at €10 million.

At the time of the Danubius purchase Advent International was investing in a variety of European media and media-related ventures. In Hungary Advent acquired 100% of Danubius, 24% of Roxy Radio and 100% of the Danubius Sales House. Also in 2003 Advent acquired Radio 538 in the Netherlands, which it sold to Talpa Radio International in 2005. Minority interests in Radio Zet and Radio Kolor in Poland, acquired in 1999, were spun to Lagardère. Advent also sold its 75% stake in sports rights marketing firm Sportfive to Lagardère. Much earlier, in 1991, Advent International was a major investor in Henry Sloan’s ambitious Scandinavian broadcasting company SBS. Advent cashed out in the 1993 IPO before SBS made significant investments in Eastern Europe media. Sloan cashed out to KKR and Permira in 2005 for $2.5 billion.

A lot of money has changed hands through venture capital and private equity firms, most of it in huge deals (SBS, ProSiebenSat1, Sportfive). Advent International, with the Danubius Radio transaction, is out of the media business. It has gone where all good VCs are supposed to go: away.

Advent’s sale of Danubius Radio to AMC is interesting less for what did happen and more for what did not. AMC provided the debt financing to Advent for its purchase of Danubius. In other words: AMC was holding the note. What did not happen was a strategic investment by one of the major broadcasting groups. Hence, we use the term ‘mezzanine’ financing.

AMC is a mezzanine capital management firm. It offers that highly specialized, not often used financial tool placed, typically, between the venture stage and an IPO. With no strategic investors at the door and the IPO market rather cold, Danubius Radio and, not to forget, the Danubius Sale House are good, according to local reports, cash flow businesses with the investor, Advent, wanting to cash out. Or, they were forced to cash out by the holder of that senior subordinated debt, AMC. Local Budapest sources suggest the transaction is worth about 60% of the price Advent paid back in 2003. Those sources also suggest Danubius Sales House, expanded over the years into all forms of media and event marketing, captures about 25% of Hungarian ad traffic.

The good news, of course, is that financial tools appropriate for small and mid-sized media businesses in Eastern Europe are readily available. After the big deals of the last three years, private equity – the purely financial investor – is taking a back seat. The not-so-good news is that strategic investors – broadcast and media companies – have spent their capital and must operate and serve the debt on cash flow. So much for expansion.

Advertising growth rates in Eastern Europe – the new EU Member States, largely - are slowing to levels more normal for Western Europe. Hungarian ad market watchers suggest a 1% growth in 2008 over the previous year. Further east - Ukraine, for example - and in the smaller markets – Latvia, for example – ad growth rates are likely to remain in double digits until those markets see the same shift to maturity.

The really good news is that the broadcasters, themselves, have matured.