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A business Groomed for Success
July 19, 2005, Financial Times' Business life
Reproduced from July 19 2005 Financial Times' Business life
By TIM BURT
(c) 2005 The Financial Times Limited. All rights reserved
Ronald Lauder wants to make something clear. Central European Media Enterprises is not for sale.
The son and heir of Estee Lauder, founder of the world's largest privately-owned cosmetics company, does not want to cede control of a television business that broadcasts to more than 90m people in eastern Europe.
Several international media groups have cast envious eyes at Central European Media Enterprises (CME), where Mr Lauder and his family owns 20 per cent of the equity and 71 per cent of the voting power.
News Corp, led by Rupert Murdoch, last year considered a transaction that would have left the US media giant holding a substantial stake in Mr Lauder's company. But the two sides failed to agree terms, according to people familiar with the putative deal.
Mr Lauder, who is also chairman of Estee Lauder International and Clinique Laboratories, now scorns the idea of a tie-up. In comments that might irritate potential suitors, he says: "The only reason to buy CME is because their own market is not growing. Why would shareholders want to be boarded by a company trying to get out of the mud?"
The CME chairman is a member of an exclusive club of truly wealthy US entrepreneurs who have used the family fortune to build a new business, hoping to prove their industry flair. Others include Edgar Bronfman Jnr, who is now running Warner Music after losing part of his family wealth following a painful tie-up with Vivendi Universal of France, and Bennett Dorrance, heir to the Campbell Soup fortune, who runs one of the largest property developers in the western US.
Mr Lauder's company, which is controlled through a Bermuda-based parent group and holding companies in the Dutch Antilles, has attracted attention because its business defies the sluggish growth and volatile advertising of network television in the US and western Europe.
The business - albeit small in global media terms - boasts underlying profit margins of 30 per cent on sales that rose by 46 per cent last year to Dollars 182m (Pounds 104m). It has emerged as the largest commercial broadcaster in the Czech Republic and has nine television channels in five other central and east European countries.
In a rare interview, given at his London offices, Mr Lauder, 61, admits the 10-year development of CME has cost him up to Dollars 100m of his personal fortune. The entrepreneur fully expects a payback. But the former US ambassador to Austria, treasurer of the World Jewish Congress and one-time US deputy assistant secretary of defence is prepared to wait. For CME has been a long time in gestation.
"It's something very personal," he says. "As a teenager, when most people were going to vacation in the Hamptons or wherever, I was in eastern Europe. My grandparents came from Budapest and Slovakia, and I was in Hungary when the Berlin Wall came down. I realised that it was a once-in-a-lifetime opportunity to change things."
Mr Lauder, a relative outsider in the media industry, set about acquiring control of or signing partnerships with commercial TV companies in former Soviet satellite states. Several other media groups followed suit. SBS, News Corp and RTL, the television arm of Germany's Bertelsmann group, have all expanded into the region.
This month, RTL moved into Russia by agreeing to acquire a 30 per cent stake in REN TV, the television and production company. Gerhard Zeiler, RTL chief executive, said the deal underlined its determination to expand in eastern Europe, describing Russia as one of the fastest growing advertising markets.
The industrial logic is clear. Average spending on television advertising in western Europe is flat, at best. In the past three years, spending has increased by more than 60 per cent in the six markets where CME operates. Economic growth in those countries is higher than in the US and the European Union. Terrestrial networks in eastern Europe face less competition from pay-TV rivals and, unlike more developed markets, audiences and advertising are not yet migrating to online media.
CME is planning to launch three new channels in the Czech Republic after buying TV Nova, the country's dominant station, for almost Dollars 900m earlier this year.
"If you're going to be in Europe, the east is a very attractive place to be," according to one executive. "It is like the western market in the 1970s with only a handful of commercial TV groups carving up a big advertising market."
Mr Lauder, however, appears to regard CME as much more than a business. Most industry leaders avoid political controversy or grand geo-political statements like the plague. But but not the scion of the Estee Lauder empire.
Mr Lauder, a former Republican contender for mayor of New York, says: "CME stations all talk about democracy. We give a positive view of America and appeal to the new capitalist-oriented generation now growing in eastern Europe."
CME, nevertheless, has suffered the body blows associated with the rapid emergence of free market economies in former Soviet-controlled states, often led by local oligarchs. Its strategy was threatened when Vladimir Zelezny, a Czech entrepreneur and CME's one-time partner, seized control of TV Nova and cut CME out of the partnership.
"He wanted all the profits and made the decision to try to get everything, encouraged by the government," says Mr Lauder, who launched a multi-million-dollar lawsuit to regain control of the business.
Almost three years ago, CME was awarded Dollars 358.6m in compensation after an international tribunal upheld a ruling that the government had failed to protect the company against Mr Zelezny's illegal seizure.
The settlement encouraged CME to continue its eastward expansion. But the partnership strategy is risky, as it admitted in a share prospectus linked to TV Nova. In it, the company said it did not have management control of its affiliates in the Slovak Republic or Ukraine and could not "affirmatively direct the operations". The prospectus also revealed errors in the group's calculation of earnings per share over the past three years, indicating a "material weakness" in financial controls.
Controls have been tightened and accounting procedures reviewed following the arrival last year of Michael Garin as chief executive. Mr Garin, a founder of Lorimar Telepictures, the company behind the hit television show Dallas, has devolved management control to the stations and invested in local production.
Mr Lauder, who handles negotiations with governments, says the company is looking at more channels following the TV Nova purchase. He hints that Poland and Russia could be future growth areas, and says CME is well placed to capture those opportunities.
"You can't run a business of this kind sitting in New York or Germany," he says. "To global players, eastern Europe is just a dot on the map. But we only play in this region and we get the rewards."
For additional information, please contact:
Romana Wyllie
Vice President of Corporate Communications
Central European Media Enterprises
Krizeneckeho nam. 1078/5
152 00 Praha 5
Czech Republic
+420 242 465 525
romana.wyllie@cme-net.com
