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March 21, 2006

Central European Media Enterprises Announces Equity Offering

Last week, Central European Media Enterprises (CETV) announced an equity offering. The company appears to be raising cash for future investments as the SEC filing document indicates the proceeds of the offering will go in the bank. I doubt it will stay there for long but assuming the interest earned will 4%, I see the deal as about 5 cents additive to EPS and 10 cents additive to free cash flow per share assuming the money stays in the bank. CETV should earn around $2.25 in 2005 and almost $3.00 in 2007.

I exchanged several emails with the CFO about the ultimate use of the money. He indicated that there are several small projects on the horizon in the internet and TV production/distribution areas that could consume some cash. Additionally, the company wants to build some reserves to increase its stake in its operating companies if the opportunity arises. As a reminder, CETV has spent about $50 million already this year to increase its stakes in Romania and Slovakia. Importantly, in Slovakia, CETV was able to obtain control of its broadcasting license....

I strongly suspect that this cash is being raised in order to fund an increase in CETV's economic ownership in Ukraine which will also allow the company to gain control of its broadcasting license. Presently, CETV owns a 60% economic interest in its operations in Ukraine and only has a minority stake in the company that controls the license. Recently, the Ukrainian Parliament passed a law allowing foreign ownership of broadcast licenses and the President is expected to sign the bill this month. On the latest conference call and in other recent management presentations, CETV has hinted that they have a deal to increase ownership in Ukraine. I believe the market would view this very positively because absolute control lowers the risk profile and because Ukraine is one of the company's fastest growing and largest long-term opportunities.

CETV shares initially fell about $1 following announcement of the deal but have since recovered and touched a new 52 week high today. The company will sell 2.53 million shares if the green shoe is exercised raising $166 million. The deal represents almost three weeks of average daily volume so temporarily I think the stock will be capped as the supply-demand balance is upset. However, given my strong confidence in the company's 2006 and 2007 outlook coming off the excellent 4Q05 results and extremely constructive commentary on the latest conference call, I think the shares will resume their upward trend once the deal gets done. I've paid as high as $65 for the shares and would use any additional deal related weakness to add further. I stand by my outlook for a mid $70s target based on 2006 estimates and an upper $80s target on 2007. Assuming I am right about gaining further ownership in Ukraine, I'd view those targets as at least $5 too low.

Posted by Steve Birenberg at March 21, 2006 11:31 AM in CETV