Squirrelly Deals Attract the Nuts

Michael Hedges August 21, 2006

A Ukraine court dealt a blow to Central European Media Enterprises (CME) ruling on a long- standing case to determine just how much of Studio 1+1 the company can own.

Igor Kolomoisky  - Ukrainian businessman – took to court Alexander Rodnyansky – filmmaker and “custodian” of shares in Studio 1+1 not controlled directly by CME. Kolomoisky claimed entitlement to 70% of Studio 1+1. Rodnyansky and CME – directly and indirectly claim 60% of Studio 1+1, CME holding 60% of Innova/Intermedia, owning 30% of Studio 1+1. Mr. Kolomoisky won the first round.

“Today’s outcome is very disappointing, which is why we will appeal this decision,” said CME CEO Michael Garin in the August 16 press release.  “We have a longstanding binding agreement with our partners that we are entitled to a 60% interest in Studio 1+1 and they are entitled to a 40% interest. Alexander Rodnyansky is effectively a custodian of our interest until a previously agreed restructuring of the ownership of Studio 1+1 to reflect these ownership interests has been completed.  Igor Kolomoisky has acknowledged this right in the course of the proceedings in Kiev. The 40% interest in Studio 1+1 is not the property of CME and we cannot compel the sale or transfer of it. Any transfer, however, can only be by legal means.   Accordingly, we do not believe that any person can have a legitimate claim to a 70% interest in Studio 1+1.   We are confident the government is committed to ensuring the interests of foreign investors in the Ukraine are protected.”

The company also noted – thus assuring investors – that the court’s decision is not enforceable pending appeal.

Kolomoisky is the lead partner in Privatbank Group, a well-known Ukrainian industrial investor and one of the major commercial banks. He is believed to have been a significant supporter of Viktor Yuschenko’s presidential compaign and, later, a supporter of Prime Minister Yuliya Tymoshenko, now out of office but not out of the spotlight. A year ago, in an interview with Zerkalo Nedeli, he denied that Studio 1+1 would be “given it” to Tymoshenko but said he’d pay $100 million for 40%.

Rodnyansky has held the balance of shares in Studio 1+1 under an agreement with CME that allows the company to operate the television channel and remain below the Ukrainian 30% ownership limit. After a famous meeting with Rupert Murdoch Ukrainian President Yuschenko agreed to change – if not completely forego – the foreign ownership limits. But times have changed – as they often do in the former Soviet Union’s orbit: Yuschenko’s rival in the inspired but incomplete Orange Revolution – Viktor Yanukovych – is now Prime Minister. CME was granted an early license extension to operate Studio 1+1 beyond 2006.

Studio 1+1 journalists – also famously – went on strike during the 2004 election, refusing to broadcast government ordered news coverage.

Rodnyansky is a founder of Studio 1+1 – when it was known as Channel 1+1 – and was for a time its general manager. More recently he has been CEO of CTC Media in Russia, successor to the StoryFirst broadcast operations. CTC Media is primarily owned by Modern Times Group and Alfa Group.

Foreign media companies effectively blocked by cartels and governments from Western Europe raced to enter Eastern Europe, the former Soviet States and Russia itself began in the late 1980’s before the Soviet Union ceased to exist. When Mikhail Sergeyevich announced glasnost the door opened for more, even if it was the back door. Licenses were traded for fast airplanes and every deal needed a politically wired fixer. The indelible truth about politically wired fixers is that they tend not to be permanently politically wired.

CME had the same sort of problem in the Czech Republic over TV Nova, losing the license once, winning $300 million from the Czech Republic in an International Court of Human Rights decision then winning back the station license.

Financial analysts rightly agree that CME will ultimately prevail in the Ukraine for reasons similar to the Czech problem. JP Morgan analysts, quoted by Reuters, said in a memo to clients that “the impact should be manageable.” Czech analysts Patria Finance said “we keep our buy recommendation unchanged.”

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