Patience Not A Virtue When Revenues Sink

Michael Hedges November 7, 2013 Follow on Twitter

It’s the season for change agents. Helicoptered in from the home office, turn-around specialists are single-minded and short on patience. They prefer core businesses, preferably with fewer employees. Competitors, though, are happy to see them.

Since the board of Central European Media Enterprises (CME) replaced its CEO with co-CEO’s the company has been shaken by dramatic drops in share prices and more executive exits. Tremors have been felt in each of the company’s markets and have reached into competitors.  The company is seen as a bellwether for private sector broadcasting in central and Eastern Europe.

After a series of quarterly profit warnings CME reported yet more bad news (October 30) sending the share price down more than 50% on both the New York and Prague exchanges. Q3 operating income fell to negative US$45 million from negative US$18.4 million for the same quarter 2012. Net revenues were down 3% year on year.

“This level of performance (is) unacceptable,” said new co-CEOs Christoph Mainusch and Michael Del Nin. CME’s debt at the end of Q3 was US$946 million and held US$122.9 million in cash. In September, rating agency Moody’s Investor Service cut the company’s bond rating to Caa1, deep in speculative territory.

Mr. Mainusch and Mr. Del Nin were appointed in September to replace CEO Adrian Sarbu, who resigned in August. Both had been associated with Time Warner, CME’s major shareholder. CME CFO David Sach and EVP strategic planning Anthony Chhoy resigned in October. Jan Andrusko, chief executive of CME’s Czech television operation TV Nova, also departed in October.

Mr. Sarbu became CME president in January 2009 and CEO six months later. He’d been a company director since 1995 when CME acquired a shareholding in Romanian broadcaster Pro TV, which Mr. Sarbu founded. From then it was up and up and up and, finally, out. On the departure of CEO Michael Garin, who negotiated the Time Warner investment, Mr. Sarbu moved quickly to relocate company headquarters from London to Prague. When the Czech and Slovak television operations felt revenue pressure, largely from MTG’s Prima TV, he raised ad rates. Media buyers reacted badly. Mr. Sarbu’s exit includes an option to reacquire the Romanian TV, radio and production houses should CME move in that direction.

“Our leading audience shares give us a strong advantage over our competition, and we intend to capitalize on this by concentrating our efforts on improving the monetization of our audiences,” said Mr. Mainusch in a statement on the Q3 report release. “Improving the performance of our Czech operations is the top priority. We believe that rebuilding our relationships with agencies and clients while protecting price increases achieved during the year is an essential step to improving our competitive position in that market.”

Mr. Sarbu and Mr. Andrusko enthusiastically raised ad rates, 40% initially, and cut media buyer’s discounts in the Czech Republic, a murky decision with dozens of new digital channels available. Competitors Modern Times Group (MTG), owner of the Prima channel franchise, and TV Barrandov, owned by publisher Empresa Media, were beneficiaries. An interesting aside in a small-world way: Vladimir Zelezny was named TV Barrandov CEO in late October. Mr. Zelezny founded TV Nova 20 years ago with investment from CME, which was unable to convert the investment to a shareholding due to media ownership rules. CME then dragged the Czech government through every possible court, eventually winning US$270 million from the Czech government, US$23 million from Mr. Zelezny and return of the TV license. While owning TV Nova, Mr. Zelezny entertained Czech audiences with naked TV weather girls.

In addition to the Czech TV Nova channels, seven in all, and the Romanian Pro TV and Pro FM franchises, CME operates TV and radio stations in Bulgaria and TV channels in Croatia, Slovakia and Slovenia. In each market the company operates scores of web portals. “By the end of this year we aim to have about 1,000 fewer employees than we had at the beginning of 2013,” said Mr. Del Nin in the investors conference call. The company headcount is currently about 4,500. “We believe the company is better served by sharper management focus on its core business,” he explained.

See also in ftm Knowledge

Media Business Models Emerging

After a rough transition media business models are emerging. Challenges remain. There are Web models, mobile models, free models, pay models and a few newer models. It makes for exciting times. This ftm Knowledge file examines emerging business models and the speed-of-light changes. 137 pages PDF (January 2013)

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