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It's Not a Klimt‚ but the Eastern European TV Venture Is Sweet
October 16, 2006, By GERALDINE FABRIKANT
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When Ronald S. Lauder, the art collector and cosmetics heir, bought Gustav Klimt’s portrait of Adele Bloch-Bauer for $135 million last June, the acquisition made headlines around the world.
But just two months later, Mr. Lauder made an even bigger deal: he quietly sold half his stake in Central European Media Enterprises, known as CME, for $190 million.
The company, which has bought up television stations throughout Eastern Europe, has fed a rising appetite for state-free television in the former Soviet bloc countries with a diet of American programming and locally produced news. The sale put a value on Mr. Lauder’s holding in CME, which he founded, of $380 million, a remarkable gain on the $40 million investment he made 12 years earlier. For Mr. Lauder, who has made a number of missteps in his public life, his success in Eastern Europe was a welcome victory.
“I knew the people and the places,” Mr. Lauder recalled recently. “Wherever I had traveled, people said they wanted TV. It had all been state-owned. They said they wanted news that was not just propaganda.”
That desire for independent television has helped shift the nexus of growth for media companies. As stocks in American companies have risen, CME shares have soared. Since Jan. 2, 2003, CME shares have risen 1,078 percent to close Friday at $69.28 a share, up from $5.88. In contrast, Time Warner has risen 43 percent in that time, while theNews Corporation is up 80 percent and The Walt Disney Company is up 80 percent. Those companies continue to confront the slowing growth of the American economy and the complexities of managing diversified conglomerates.
CME, with a market capitalization of $2.8 billion, has TV stations in several markets where political turmoil has diminished and advertiser spending has increased. The company points out that in Western Europe, advertiser spending is $73.72 per capita, but is only $27.50 per capita in Eastern Europe in general, and even less for CME’s stations. That, says CME’s chief executive, Michael N. Garin, leaves a lot of opportunity.
To some American investors, the performance of CME is reminiscent of the United States years ago, when viewership and ad spending clocked steady gains.
“This is where the U.S. was in the 1950’s,” said David J. Londoner, whose former firm, Schroder Wertheim, took CME public in the mid-1990’s.
Given the run-up in the company’s stock in recent years, some CME skeptics, including Dennis H. Leibowitz, who heads Act II Partners, a media hedge fund, say they believe CME stock is fully priced. But Mark A. Riely, whose hedge fund Media Group Investors owns about 800,000 shares, is staying in, believing there is still a lot of opportunity to increase ad revenue.
CME’s success is something of an anomaly for Mr. Lauder. Although he is regarded as one of this country’s savviest art collectors — he was chairman of the Museum of Modern Art for a decade until 2005 and in 2001 he opened his Neue Galerie in New York — not all of his other ventures in business and politics have worked out so well.
Indeed, one of the stated reasons for taking the Estée Lauder Companies public in 1995 was Mr. Lauder’s need to pay off $200 million he owed banks and the company.
In the intervening decade, he has continued to cash out of Estée Lauder stock, selling millions of shares. And even today nearly all his remaining 13.54 million shares, valued at about $550 million, are pledged either to family trusts or a consortium of banks, according to the most recent company filings. In 2001, hisRSL Communications, an international telecommunications company, went bankrupt in the technology bubble.
It wasn’t just in business that he took his lumps. His ambassadorship to Austria generated some criticism for, among other things, employing a bodyguard at his mother’s insistence. He was trounced when he ran for mayor of New York City in 1989, a race that cost him $14 million.
Mr. Lauder’s fortunes have seemingly reversed, however. The Neue Galerie, where his Klimt now hangs, has received rave reviews. And after some rocky years, CME has paid off handsomely.
Mr. Lauder began acquiring television licenses in Eastern Europe in the early 1990’s after the Berlin Wall fell. The company now owns stations in Slovakia, Romania, Ukraine and Slovenia, all of them profitable. Its most important station, TV Nova in the Czech Republic, dominates its market. For the first six months of this year, the station accounted for 34 percent of CME’s $276.3 million in net revenues and 44 percent of its $96.1 million in cash flow from television stations. And TV Nova’s cash flow for the first six months of this year increased 49.4 percent.
But the Eastern European market is not without significant risks. CME spent $20 million two years ago to buy Nova TV in Croatia and invested an additional $60 million to upgrade the station. But it is expected to lose $17 million this year. Mr. Garin cited both political and economic problems in Croatia, where there are currently four networks.
“Two are owned by the state and two are commercial,” said Mr. Garin, who joined the company in 2004. “Croatia is the only country in Europe where stations get three sources of revenue: license fees, advertising revenue and a direct subsidy from the Parliament. The state-owned stations can afford to buy programming, such as movie packages, that private companies cannot buy.”
But he added that when Croatia joined the European Union in several years, it would no longer be allowed to subsidize television stations, and that would level the playing field. But that is some time off, and meanwhile the station continues to lose money. Over all, however, cash flow for CME’s six television stations together continues to rise.
Several analysts and investors, including David B. Kestenbaum, of Morgan Joseph, said they looked to the organic growth of the stations to measure the company’s health, rather than at net income, which has been volatile, partly because of currency fluctuations.
Nowhere has the company’s survival been more severely tested than in the Czech Republic. The station there had its debut in 1994 with some Western-style programming, including “Baywatch.” But in 1999, CME’s partner in TV Nova, Vladimir Zelezny, turned off the signal and, with the station’s staff, began broadcasting from another location.
The company’s stock dropped so precipitously that Frederic T. Klinkhammer, then the company’s chief executive, did a reverse split to try to prevent delisting. He failed, and for two years the stock was delisted from Nasdaq. It took Mr. Klinkhammer four years of fighting, but in 2002 CME won $29 million from Mr. Zelezny in a ruling by the International Court of Arbitration.
Then in May 2003, the Czech Republic was forced to pay the company $355 million for failing to protect the majority owners of TV Nova. The ruling was made by a Swedish appellate court that upheld an earlier ruling in the company’s favor by an international arbitration panel.
By the time the settlement was announced on May 14, 2003, CME’s stock had already climbed 50 percent, and it has mostly continued upward since. The stock rose even though the company ultimately chose to buy back TV Nova from the investment group PPF and a private investor for a total of $910 million.
The Czech fiasco was the company’s worst moment. But Mr. Lauder and his company have generated their share of other criticism over the years. In Czechoslovakia, for example, the company was accused of going downmarket.
“To win the license, they presented a program that was to be accessible and enlightened, but the moment they got the station they went downmarket,” said Jan Culik, professor of Czech studies at the University of Glasgow. “In a democracy you are expected to honor that commitment.”
Instead, he said, the station carried game shows, American soap operas, news heavy on crime and a weather forecast in which the forecaster “would appear naked before the camera and get dressed according to what weather was to follow the next day,” he said.
Last week Mr. Lauder said “the station’s news was balanced,” and he could not comment on its quality, because “I don’t speak the language.”
Mr. Zelezny was not the only partner of Mr. Lauder whose character has raised questions. In Ukraine, Mr. Lauder struck a partnership with Vadim Rabinovitch. Though Mr. Rabinovitch was a self-made mogul who had the political connections and television experience Mr. Lauder needed, he had also served 10 years in prison for theft. Mr. Lauder has said he was not aware of that when he entered the deal.
A rival broadcaster, Perekhid Media Enterprises, alleged in a $750 million lawsuit in New York State Supreme Court that Mr. Lauder’s company had used bribes to land its broadcast license — an allegation that Mr. Lauder’s company denied. That case was ultimately dismissed.
For the most part, the political atmosphere in the countries CME operates has calmed down. Mr. Lauder, however, is likely to face new competition, as sophisticated competitors look to get a piece of the still-growing television market. CME now has to compete with RTL, owned by Bertelsmann, and the Modern Times Group, a Swedish broadcaster, as well as Rupert Murdoch’s News Corporation, which owns five stations in Eastern Europe and Turkey.
And there is still no certainty that such young governments can promise stability.
Mr. Lauder says he has no plans to sell his remaining shares. And in an investment world where CME’s American counterparts are contemplating stodgy growth, the company’s investors seem willing to stay tuned.
Chris Hondros/Getty Images
Ronald S. Lauder showed off the $135 million portrait by Gustav Klimt he bought this summer.
For additional information, please contact:
Romana Tomasova
Director of Corporate Communications
Central European Media Enterprises
+44 (0)20 7430 5357
romana.tomasova@cme-net.com
