Central European Media's Stock Tanks Amid Ad Revenue Challenges

cme Central European Media - H 2012

UPDATED: The broadcaster, in which Time Warner owns a 49.9 percent stake, reports a "significant decline" in ad demand late in the fourth quarter.

Central European Media Enterprises, in which Time Warner owns a big stake, on Wednesday reported a narrowed third-quarter loss as expense controls offset lower revenue.

But the broadcaster warned that it has seen negative advertising trends in its markets in Central and Eastern Europe, particularly in the fourth quarter, which traditionally is its most significant for ad revenue. The news led to a sharp decline in the company's stock. As of 10:50am ET, the stock was down 13.9 percent at $5.90, near its 52-week low of $4.63.

"Since the beginning of the fourth quarter, we have experienced a significant decline in the demand for television advertising across our markets compared to our previous expectations, with a number of advertisers indicating that they no longer intend to honor previous spending commitments," CME said. "In addition, we expect increases in our net investment in programming and our investments in locally-produced programming."

As a result, the company reduced its forecast for the amount of cash it will have at the end of the year.

Time Warner owns a 49.9 percent stake in CME, which operates TV businesses in six markets, the biggest of which is the Czech Republic.

TW first acquired a stake in the company, which has struggled with debt, in 2009. It also owns preferred stock that it can convert into more regular stock, which would give it a majority stake, once a voting agreement with an affiliate of CME non-executive chairman Ronald Lauder expires next year. Lauder has the right to vote TW's stake until May 2013.

On the company's quarterly earnings conference call Wednesday, CME executives said that the company is considering a public or private equity placement to raise further cash and has been in contact with TW about that possibility. A TW spokesman wasn't immediately available for comment.  

"Trading remains tough in Central Eastern European TV advertising, but Time Warner looks to be acting as a bridge for CME to keep the group going until the economic recovery in peripheral Europe kicks in, whenever that may be," suggested Jefferies analyst Will Smith.

CME's third-quarter revenue of $140.1 million was down from $165.5 million in the same quarter a year earlier. Broadcast revenue dropped 19.7 percent, while new media revenue rose 16.5 percent.

Operating income before depreciation and amortization, declined from $8.9 million to $3.5 million. But the company's net loss improved from $82.2 million to $32.6 million.

CME is one of TW's key bets on Europe. Analysts have projected growth for Eastern Europe, but economic weakness and financial challenges in European countries have made the investment somewhat of a rough ride.

“Our third-quarter results and the prospects for the full year 2012 indicate that our markets are not recovering," CME president and CEO Adrian Sarbu said Wednesday. "In the second half of 2012 advertising spending has not matched our expectations." On a conference call with analysts, he said that multi-national corporations have driven the ad weakness, with many spending less than planned on ad hoc campaigns.

He added: "Facing new challenges, we focus on maintaining our leading positions while aggressively managing our costs and improving free cash flow generation and liquidity.”

Email: Georg.Szalai@thr.com
Twitter: @georgszalai