Central European Media Enterprises (CME) is to sell its loss-making Ukrainian TV operations Studio 1+1 Group to Harley Trading Limited (HTL), a company owned by Igor Kolomoisky, for $300m in cash. The group consists of national free-to-air channel Studio 1+1 and Kino, a network of regional free-to-air channels. An estimated $19m will be added to the purchase price to fund cash expenses of Studio 1+1 Group for the interim period until the closing of the transaction. HTL is expected to make an initial payment of $30m on 1 February 2010. CME projects the transaction be completed in the second half of April 2010.
Studio 1+1 Group is the third biggest broadcaster in Ukraine after Inter Group and a set of channels owned by business oligarch Viktor Pinchuk. The national Studio 1+1 channel had an audience share of approximately 10 per cent in 2009.
Sale marks execution of put-option with Igor Kolomoisky, who in July 2009 had agreed to merge his Ukrainian channel TET TV with Studio 1+1 and provide a $100m cash injection in exchange for a 49 per cent stake in CME's Ukrainian business. In the context of this deal he also granted CME a put option to sell him its remaining 51 per cent stake within a year of completion of the transaction.
Following a double-digit dive of advertising revenues across all of CME's operating countries in 2009, the broadcaster embarked on a rigid cost-cutting strategy and repeatedly pronounced the intent to contemplate the put option. Despite heavy investments, Ukraine had remained a loss-making business for CME and the particularly severe advertising crisis in Ukraine exacerbated this, dragging down the company's overall performance. CME's Ukrainian group revenues were $14.3m in 9M 2009, down 81 per cent from $75.4m over the same period 2008. EBITDA margin was already negative in 9M 2008 with -16 per cent, but fell to -277 per cent in 9M 2009.
Letting go of Ukraine represents a difficult trade-off for CME. Despite the fact that the Ukrainian TV advertising market fell in excess of 60 per cent in H1 2009, it also is the first advertising market in Central and Eastern Europe (CEE) to rebound. Already Q4 2009 showed market recovery and Screen Digest expects the Ukrainian TV advertising market to grow by 17 per cent in 2010. Mid- and long-term, the Ukrainian TV market bears tremendous potential. Boasting a population of 45 million, it is the second biggest country in Central and Eastern Europe ahead of Poland (38 million). At the same time, it is also one of the most underdeveloped TV advertising markets yet with TV ad spend per capita at EUR 8 in 2008, compared to EUR 29 in Poland EUR 62 in the Big Five Western European markets.
However, following an expansion and investment strategy, CME is exposed to liquidity and covenant issues with a net debt/EBITDA ratio of 14x. Whilst the threat to beach covenant has been severely reduced following Time Warner's investment of $242m in Q1 2009, net debt/EBITDA ratio can be significantly improved by parting with Ukraine. CME's stated core aims for 2010 include maintaining liquidity and increasing free cash-flow. However, in order to become profitable, Ukrainian operations would require further significant investment. In the light of sluggish recovery in CME's core advertising markets in 2010 (Screen Digest forecasts only single-digit growth), such required investments may stand at odds with liquidity targets. Furthermore, despite its attractiveness, risks remain attached to operating ad-funded, free-to-air television in Ukraine as the political climate remains unstable.
In the light of these issues, in the current situation it seems sensible for CME to refocus on core markets to stabilise the group at the expense of a high-growth, but unstable and capital-demanding new market.