Central European Media Enterprises Ltd.

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Central European Media Enterprises Ltd.

PO Box HM66, Clarendon House
2, Church Street
Hamilton
Bermuda
HMCX
Telephone: (441) 296-1431
Web site: http://www.cetv-net.com

Public Company
Incorporated: 1994
Employees: 1,850
Sales: $92.6 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: CETV
NAIC: 515120 Television Broadcasting

Central European Media Enterprises Ltd. (CME) was founded with the goal of bringing independent broadcast television to Eastern European countries eager for an alternative to state-run media. Company founder Ronald Lauder, heir to the Estée Lauder cosmetics fortune, also believed that CME would profit from growth in the developing economies of former Communist nations after the fall of the Iron Curtain. The company pairs its financial power and technological expertise with local entrepreneurs who hold broadcasting licenses in various Eastern European countries and operates television stations with programming calculated to appeal to popular tastes. Eastern Europe has been a difficult operating environment for CME, however, and the company has had to pull the plug on several of its ventures. The most notable dispute occurred when its partner in the Czech Republic, where CME established the enormously popular Nova TV, took his broadcast license away from the company. After traveling a very rough path, CME has emerged with six leading television stations in Slovakia, Slovenia, Romania, and the Ukraine. The company places importance on tailoring programming to local tastes, and its schedules are a mix of locally produced programs, Hollywood films, and top series from the United States.

Early Success in the Czech Republic: 1991–94

Ronald Lauder, founder of CME, left an executive position at the Estée Lauder cosmetics company in 1983 and took a foreign affairs position at the Pentagon. Later he was appointed ambassador to Austria, which gave him the chance to develop personal contacts and practical experience in Europe. The post also augmented his appreciation for his Eastern European heritage: his parents had come to the United States from Nazicontrolled Hungary in the 1930s. After the fall of the Iron Curtain in the early 1990s, Lauder's professional experience and personal heritage led him to pursue business opportunities in the countries newly liberated from Communist control. He teamed up with Mark Palmer, a former ambassador to Hungary, and founded Central European Development Corporation in 1991. The two focused on television broadcasting as an area with particular potential for growth. They believed that consumer spending was likely to continue growing in Eastern European countries and would soon generate a boom in the demand for television advertising space. Over the next few years, they explored the possibilities for partnerships in Eastern Europe and began amassing technical and programming capabilities.

Lauder and Palmer's first successes came in the Czech Republic. There they partnered with several Czech cultural figures and intellectuals, who formed the company CET 21. In 1993 CET 21 beat more than a dozen competitors to win a broadcasting license in the Czech Republic. According to Czech regulations, the license could not be owned by foreigners, so it remained in the hands of the Czech-controlled CET 21. CME provided financial backing, programming, and technology through its Czech subsidiary Ceska Nezavisla Televizni Spolecnost (CNTS), and CET 21 granted CNTS the exclusive right to use the license. The new station was launched in February 1994 under the name TV Nova.

Aside from its Czech operations, CME had acquired a broadcast license for Berlin in 1993. The company bought stakes in regional stations in Berlin and in the southern German city of Nuremberg in 1994. That June Central European Media Enterprises was incorporated in Bermuda to operate Nova and the other stations. John Severino was CEO. The company went public on NASDAQ and raised $62 million. Secondary offerings over the next year brought in more capital for acquisitions. CME's prospectus acknowledged the risky nature of its operations and forecast losses for the first few years as the company focused on growth. Investors were encouraged to rely on the directors' expertise in Eastern Europe and on the potential for huge growth in advertising revenue.

The Czech station TV Nova turned out to be more successful than anyone had anticipated. It debuted in November 1994 with the film Sophie's Choice. After a year it had captured 68 percent of the Czech television audience and had already recouped its start-up investment. The station's success was due in large part to Vladimir Zelezny, a former journalist and television broadcaster who had been repressed under the Communists. Now in his 50s, he turned away from a more intellectual background producing documentaries and began producing lighter fare—soap operas and quiz shows—at Nova. Zelezny's low-brow style ran counter to the initial goal of the station. CME had partnered originally with a group of intellectuals with visions of language classes and international news programs. Zelezny first joined the company as a translator and lobbyist. His energy impressed the leadership of CME, who soon promoted him to station manager and allowed him to renovate the station's programming mix.

With relatively staid state-run television as the only competitor, Zelezny won viewers rapidly with a mix of popular U.S. series and sometimes racy Czech-produced shows. Although it aired sitcoms such as Beverly Hills 90210 and M.A.S.H., TV Nova retained a distinctively Czech flavor. The most popular show was a striptease version of the daily weather forecast, in which a naked male or female model dressed according to the next day's weather. The news program was also popular, because instead of showing dry meetings between heads of state, it aired graphic footage of car wrecks and murders. Critics referred to the programming as "tabloid television" and bemoaned the cultural degeneration of the nation. Zelezny told the Wall Street Journal in 1997, "The intellectuals believed Czechs were special, more sophisticated. We proved they were wrong. We showed that Czechs are like all other Europeans, whose first interest is soccer, with erotica a close second."

Launching Stations Throughout Eastern Europe: 1995–97

CEO Severino was replaced by Leonard Fertig, a former ABC executive and cable TV entrepreneur, in 1995. Fertig presided over several station launches across Eastern Europe. In late 1995 CME partnered with license holder Media Pro in Romania to form PRO TV. Adrian Sarbu was station director. A year later PRO TV reached 55 percent of Romania's population of 23 million and had captured 40 percent of television advertising revenues. Its programming combined U.S. films and series with locally produced shows such as a weekly quiz show, Watch and Win. Also in late 1995, POP TV was launched in Slovenia with local partners MMTV and Tele 59. The premiere movie, Die Hard, drew three quarters of the small country's population. After a year it had captured nearly half of the television advertising market and reached 80 percent of the population. A third station debut occurred in August 1996 in Slovakia, where CME established Markiza TV. By the end of the year the station had about 47 percent of the television advertising market.

CME had record revenues of $136 million in 1996, but its net loss, at $30 million, was also higher than ever. The company had yet to turn a profit. Still, its subsidiary stations seemed to be prospering and the company was doing well at delivering the programming that audiences wanted. Nova continued to be the star station, contributing 80 percent of revenue in 1996 and posting an operating income of $45 million. CME upped its stake in Nova from 66 percent to 88 percent that summer and moved to 99 percent in 1997. The German stations were the weakest part of the company's domain. CME had entered a joint venture with Time Warner to launch its Berlin and Brandenburg stations under the Puls brand name, but the German sector continued to be a cash drain.

CME also began moving into the Ukraine in 1996. The company already had the rights to sell advertising on the stateowned channel UT-2. That year CME managed to win a broadcasting license even though the Ukrainian Parliament had imposed a moratorium on new licenses. In initial meetings between CME executives and Oleksandr Volkov, a senior adviser to the president of the Ukraine, Volkov said the company had no chance of getting a license. Later, however, he suggested that CME team up with two wealthy and influential Ukrainians, Vadim Rabinovich and Boris Fuchsmann, who owned the broadcasting company Studio 1 + 1. CME acquired a share in Studio 1 + 1, managed to secure a license, and began broadcasting its usual mix of U.S. series such as ER and Friends and locally produced shows in January 1997. One popular program was an interview show called Bez Tabu (No Taboos). Viewers could call and ask questions about the allegedly sordid or violent lives of guests hidden behind a curtain. In 2001 the U.S. federal government began investigating CME for possibly bribing Ukrainian officials to obtain a license. Rabinovich and Fuchsmann also were accused of having ties to organized crime in Russia. CME issued a statement saying it was confident the investigations would clear Lauder of any wrongdoing.

With a profitable and popular television station in the Czech Republic as well as several successful stations in smaller East European markets, the future looked bright for CME through 1997. The company continued to expand its reach in the region that year: in October TVN Network was launched in Poland and TV-3 in Hungary. In Romania, where PRO TV had already cornered 60 percent of television advertising revenue, CME launched a second station in February 1998. Known as Acasa, the station was intended to appeal to female viewers and stave off the threat of rival stations that were appearing in the country.

Company Perspectives:

Central European Media Enterprises operates the leading group of TV networks and stations across Central and Eastern Europe. Today, CME and its partners operate six stations in four countries, and are market leaders in every one of them, with news and information programming at the heart of each operation.

Lost Stations and Legal Battles: 1998–2001

Early in 1998 Leonard Fertig resigned as CEO and was replaced by Michel Delloye. At this point, CME was the largest private broadcaster in Central and Eastern Europe. But its fortunes took a turn for the worse that year, heralding a difficult period that nearly wiped out the company over the next few years. First of all, CME closed down its German stations at the end of 1997, including interests in local stations in Berlin, Brandenburg, Leipzig, and Dresden. Next, both the Polish and the Hungarian stations ran into trouble. In Poland, CME underestimated the competition from existing stations and got mired in disputes with its local partner over the style of programming. TVN Network never caught on among Polish viewers, and CME was forced to refund money to advertisers who had been counting on a certain minimum audience. In late 1998, CME reluctantly left Poland, one of the biggest Eastern European markets, when it sold the station to its local partner and wrote off a loss of $44 million.

In Hungary, CME invested millions in developing an attractive programming schedule, only to have the broadcast license it expected to receive granted to a rival company. As a result, CME was able to air its program only over cable to limited audiences in Budapest. The station was finally abandoned two years later. By the end of 1998, numerous write-offs, as well as a drop in advertising revenues due to the August fiscal crisis in Russia, left CME with its biggest net loss ever of $125.3 million. From a high of $30, its share price plummeted to less than $5 late in the year. Ronald Lauder injected millions of dollars to keep the company going, buying stock at several times the trading price.

Despite these setbacks, CME's remaining stations were performing well for the time being. In 1999, CEO Fred Klinkhammer, who had replaced Delloye in March, began exploring a possible merger with SBS Broadcasting, a Luxembourg-based media company with stations in Scandinavia, Belgium, and The Netherlands. Klinkhammer described the merger as an ideal meeting of opposites: SBS was cautious yet reliable, while CME was a bold pioneer still smarting from recent failures. But before the deal could be clinched, it was blown apart by the sudden loss of TV Nova, CME's star broadcaster in the Czech Republic.

The conflict began when Klinkhammer accused station director Vladimir Zelezny of misappropriating funds through such activities as giving free advertising time to favored clients and guaranteeing his own company's debts with CME money. In April 1999 Klinkhammer fired Zelezny as CEO of CNTS, the CME subsidiary that operated Nova. Zelezny retaliated by refusing to let CNTS use the broadcasting license that he still controlled through CET 21. Zelezny set up broadcasting from his own makeshift offices, leaving CME with no outlet for its signal. CME had to shut down operations at CNTS and sought help from the international judicial system. Nova was by far CME's largest revenue generator, and its loss caused SBS to call off the proposed merger. CME's share price fell to less than $1 in the wake of these troubles and remained at abysmal levels through 2001. The company was delisted from the NASDAQ for about two years.

Emerging from Near Collapse: 2001–04

Observers were ready to pronounce CME dead, but the company continued its relatively successful operations at stations in Slovenia, Slovakia, Romania, and the Ukraine. But, with the exception of the Ukraine, these were small nations that could not generate enough advertising revenue to make up for the loss of TV Nova. Net revenue fell to $76.8 million in 2000 from a high of $182.4 million in 1998. Nevertheless, CME managed to acquire another station in October 2000 when it purchased Slovenia's Kanal A, a leading television broadcaster that had been in operation since 1991. The acquisition brought in about another 10 percent nationwide audience share in addition to the approximately 30 percent share CME already had in Slovenia through POP TV.

In 2001 international courts issued rulings on the TV Nova case. In February of that year an international arbitration tribunal in Paris ordered Zelezny to pay $27 million to CME. Zelezny handed over the sum the following year. Meanwhile, Lauder moved ahead with suits against the Czech government for allegedly encouraging Zelezny to deny CME its license. Early in 2001 two separate courts in London and Amsterdam ruled that Lauder could not claim compensation for his failed investment. Lauder filed a third suit via a Dutch subsidiary of CME and in September an international court in Stockholm found in Lauder's favor, ruling that the Czech government must pay Lauder the fair market value of TV Nova. The court determined that the Czech government had failed to protect Lauder's investment and that the Czech broadcasting council had actively conspired with Zelezny to push CME out. The amount of the settlement was to be determined later.

Net revenues rose to $92.6 million in 2002, and CME reported its first operating income, of $13.4 million, in four years. The company still had an overall net loss due to interest costs, but all four territories had posted profits. Studio 1 + 1 in the Ukraine was most impressive, with a 37 percent increase in revenues due to rapid development in the advertising market.

Key Dates:

1991:: Ronald Lauder and Mark Palmer launch a precursor to Central European Media Enterprises (CME).
1994:: Nova TV, operated by CME, begins broadcasting in the Czech Republic.
1995–97:: CME launches stations in Slovenia, Romania, Slovakia, and the Ukraine.
1998:: Failed stations in Poland and Hungary contribute to a record net loss.
1999:: CME loses control of TV Nova, its most profitable station.
2003:: CME wins a $355 million settlement related to the loss of TV Nova.

In 2003 CME put most of the problems related to TV Nova behind itself. In May the Stockholm panel ruled that the Czech Republic owed CME $355 million. The sum was staggering for a country that already had a nearly $5 billion deficit. Czech Prime Minister Vladimir Spidla lamented the size of the award and blamed the Czech broadcasting council for promoting Zelezny's efforts to oust CME. CME, for its part, planned to use the sum to retire much of the debt it had accumulated over years of net losses. The company also planned to seek an acquisition, perhaps to reenter the market in Poland or Hungary. In August Lauder filed a new claim against the company that was now running TV Nova. He asked for $275 million, but said he would hand over all but $72 million to the Czech treasury to shift some responsibility off the Czech taxpayer. Zelezny had been forced out of TV Nova earlier in the year and the station was now majority owned by the Czech financial concern PPF Group. CME sold CNTS, the subsidiary that once operated TV Nova, to the PPF Group in October for $53.2 million. In 2004 the company was left with six stations that were profitable market leaders, albeit in small markets: PRO TV and Acasa in Romania, Markiza TV in Slovakia, POP TV and Kanal A in Slovenia, and Studio 1 + 1 in the Ukraine.

Principal Subsidiaries

CME Development Corporation (Delaware); MKTV Rt (Hungary); Innova Film GmbH (Germany; 60%); Enterprise "Inter-Media" (Ukraine; 60%); Studio 1 + 1 (Ukraine; 18%); Kanal A (Slovenia; 97%); Pop TV (Slovenia; 97%); Media Pro S.R.L. (Romania; 44%); Pro TV S.R.L. (Romania; 49%); Media Vision (Romania; 70%); Media Pro International S.A. (Romania; 66%); Slovenska Televizna Spolocnost (Slovak Republic; 49%); Markiza s.r.o. (Slovak Republic; 8.5%).