CME bouncing back

By Chris Forrester

Anyone who bought stock in the US company Central European Media Enterprises (CME) at under $1 (E1.12) a share just a few weeks ago would have seen a near 10-fold return in the price over the past 45 days. Those holding onto shares purchased at the peak of the market back in 1997, however, would still find themselves hugely out of pocket.

The recent boost in CME’s value is entirely down to the company winning a long-running arbitration claim against the Czech Republic and Vladimir Zelezny, the operator of CME’s former flagship station TV Nova. On September 14 Bermuda-based CME secured an International Arbitration Tribunal decision against the Czech Republic over CME’s investments in CNTS (TV Nova). Commenting on the development, Fred T. Klinkhammer, the company’s president and CEO, said: “the ruling by an independent international tribunal clearly establishes that the Czech Republic committed multiple breaches of the (Treaty). We will now pursue the award to which we have been found entitled on behalf of our shareholders. CME will prove that these damages exceed $500 million, plus interest”.

While the arbitrators “final and binding” ruling was clear enough and listed five breaches of the treaty – as well as awarded legal costs to CME – it seems the Fat Lady, in the shape of the Czech government, is not yet prepared to sing. Indeed, on October 17 the Czech deputy finance minister Ladislav Zelinka said the Czech government will question the arbitration verdict and is preparing a lawsuit. As a result, CME’s stock price fell back a couple of dollars.

Yet this is by no means the first setback in what has been a boxing match of near-epic proportions over the last couple of years. Indeed, CME has lost previous skirmishes in Amsterdam last February when it attempted an arbitration claim for $470 million and in London on September 6 which found that neither the Czech government nor Vladimir Zelezny caused any harm to the US company. Zelezny commented at the time that “it turned out that Ronald Lauder (CME’s principal) was simply an unsuccessful businessman and that the only person he could blame for his failure was himself”.

Talking exclusively to Interspace, Klinkhammer said the body blows have been “almost fatal” to CME and 18 months ago the company was being wholly written off. “Since then we have cut our corporate costs by 50 per cent, reduced our other expenses by 38 per cent and taken four previously unprofitable operations and converted them into profitable EBITDA stations. We have also paid out millions in terms of legal costs. We won one claim against Zelezny earlier this year and got a $28 million award”.

Meanwhile CME’s television stations in Romania, Slovenia, Slovakia and Ukraine continue to do reasonably well, although not as well as TV Nova, which was pulling in revenues of almost $100 million as recently as 1997. Klinkhammer admits that Romania remains CME’s toughest market, “but it is, like all our markets generating positive EBITDA”. Pro TV remains CME’s primary channel and retains the leading spot in prime time, while Acasa, a channel distributed by satellite and aimed at a largely female audience, is also very successful. CME also has plans to launch a sports channel in the country.

Klinkhammer adds that “Slovenia (Pop TV) is the most EU-focused country within our portfolio. Its is also the smallest of our stations. We also bought the SBS station (Kanal A) last year after it had lost a lot of money. We are up against well-funded ad-supported state channels (operated by RTV Slo). Our local management is running expenditure at about 60 per cent of their 1998 budget, with great revenues, solid growth and investing in local content”.

Klinkhammer says CME’s experience in Slovenia will be the springboard for new operations in Croatia and hopefully Serbia. “Kiev’s Studio 1+1 back in 1998 was making money, but then the rouble’s value slumped. We have clawed our way back, putting in another $10 million and the station is making money. Kiev is a boomtown again and the market is going crazy. The station is Number 1, with sales up 50 per cent, year on year”.

He adds: “in Slovakia, TV Markiza is the dominant player taking 87 per cent of available advertising. It is a modest market, and again is making progress towards EU entry. It is a delightful operation”.

Klinkhammer is nothing if not tenacious, and says he is quietly confident of winning the Czech battle. “Interest, even at 6 per cent, is running at $30 million a year, taking our claim to near $600 million”. He expects the second round hearing to be over by March or April next year, and seems prepared to sequestrate Czech Republic assets wherever they can be found. “But as we have told CME shareholders, while this is good news, it would have been better news had we not had to embark on these actions.”

“But once the cash is in our hands it will be quite a pleasant task to find proper places to invest it. We took our pain in 1999, the RTLs and SBSs are taking the pain now. I would think that just as we were bruised and beaten in ’99, there may now be an opportunity for us to acquire a property or two from them and help them solve their problems, or even something grander than that. We would like to be in Moscow, and it has always been Ron Lauder’s dream to operate in that city. It’s tough today, but with President Putin talking of joining NATO – and who would have forecast that a year or two ago – we think we are in a good, cash-rich position, to move forward”.