Nicholas Birch & Robert Anderson -

Backed by its new private equity investor, the regional TV broadcaster Central European Media Enterprises (CME) has plans to continue its eastward expansion, with Turkey a particular target. Media ownership rules, however, remain a problem.

Interviewed last month by the business daily Referans, the vice-president of the consultancy Booz Allen Hamilton, Adam Bird, described Turkey as "a media company's dream." News Corporation and CanWest Global Communications, both of which have recently bought into the Turkish media market, certainly agree and now, it seems, so does Central European Media Enterprises (CME).

In an interview with bne , Michael Garin, CME's chief executive, described Turkey as being a "very interesting market," where it would be happy to follow in the footsteps of News Corp, which earlier this year paid €78m for TGRT, a national television station owned by the conglomerate Ilhas Yahin Holdings.

"We would feel more comfortable as the number two foreign TV company, rather than number one," Garin said.

You only need to look at the demographics to see why Garin, Bird et al are so bullish on Turkey: a market of 72m people, of whom 65% are younger than 35 years of age. Yet it isn't just simple head-counting that is attracting these foreign media firms. Heavily affected when many of the banks that it had relied on for funds collapsed in the 2001 financial crisis, the media sector has finally recovered and is now on the way up. The advertising market boomed by 30% last year and – with predictions of 20%-plus growth over the next two years – shows few signs of slowing down.

More ads, more TV

Now worth $1.7bn, the advertising market is expected to be worth $3bn by 2010, according to a report released last month by Dogan Yayin Holding (DYH), Turkey's largest media company. Many analysts think that's on the conservative side. Revenues, they argue, are not just being fuelled by economic growth, but also by Turkey's increasingly competitive consumer markets.

"We have a newly-privatised Turk Telekom, Vodafone newly arrived on the mobile phone market, and an increasingly competitive banking sector", says Toygun Onaran, vice-president of Garanti Investment. "All that is a boon for advertising."

The EU accession process also looks set to have a role to play, with Turkey required over the next few years to lift current limitations on advertising by pharmaceutical companies.

Above all, analysts say, the advertising boom has a lot to do with how far Turkey is behind its neighbours. "Turkey today is where the Eastern European countries were at the start of their EU accession process", says Elif Tore Doleniye, an analyst with Yapi Kredi Investment.

She points to statistics for ad spending as a percentage of gross domestic product (GDP). Turkey was roughly level with other Eastern European countries at the beginning of the 1990s; today, along with Romania, it trails far behind with 0.45% of GDP compared with 1.32% in Poland, 1.46% in the Czech Republic and 2.29% in Hungary.

For Muhittin Kuley, vice-president of Fortis Securities, an even more striking symbol of the length of the road to be travelled is the "laughably low cost of advertising spots on prime-time TV." In 2003, according to DYH's September 2006 Investor Presentation, a 30-second spot cost Turkish advertisers only $1,750. In Mexico, by contrast, the same spot would cost $7,820.

Yet while the potential for expansion is huge, it is not spread evenly among the different sectors of the media.

For years, Turkey's print media has been something of a duopoly, with DYH and what is now Merkez Yayin Holding sharing around 60% of circulation and 85% of advertising revenue between them. The real fight for dominance here has now moved to the rapidly expanding magazine market.

The broadcast media, meanwhile, is not only growing faster, it is also wider open. In TV, four main players scooped up 56.3% of audience share in the first half of 2006, with the remaining 43.7% shared among a host of smaller stations.

News Corp made full use of the fragmented market when it bought a majority stake in TGRT this July. A broadcaster owned by the scion of one of Turkey's most influential religious sects, TRGT's nationalist-Islamist programming ensured it a 5% audience share in the first quarter of 2006. News Corp has said it plans to emphasise the company's entertainment side.

However, there's one thing that the all-powerful media baron Rupert Murdoch has been unable to budge: the country's restrictive media ownership regulations, including the law limiting foreign shares in media companies to 25%.

Keeping it in the family

On the face of it, the existence of such a law would rule out for the foreseeable future any move by CME into Turkey. CEO Garin stressed during the interview that his firm is not interested in minority stakes, which have caused the firm problems elsewhere.

One of those places where it is encountering such difficulties is Ukraine. On August 16, CME found itself on the wrong side of a Kiev court judgement that ruled Ukrainian businessman Igor Kolomoisky, owner of the conglomerate Privat, is entitled to a 70% stake in Studio 1+1, CME’s Ukrainian operation in which the Nasdaq-listed firm claims it has a longstanding, binding agreement that entitles it to a 60% stake.

The problem stems from the same kind of media ownership laws in Ukraine that are found in Turkey, which until March of this year barred a foreigner from owning more than 30% of a Ukrainian TV license-holding company. To get around this problem, CME held 30% outright, while the other 70% - some 30% of which CME claims as its own - was held in trust by Ukrainian partner and Studio 1+1 honorary president Alexander Rodnyansky. It is this 70% stake that is in dispute, though CME claims that after the current restructuring which all parties have agreed to, CME will be entitled to its total 60% interest while the other partners can squabble over the other 40% interest.

In public at least, CME appears unfazed. "Frankly this is a dispute between Alexander Rodnyansky and Igor Kolomoisky so does not apply directly to us. Kolomoisky has publicly stated that even if he wins this case, he doesn’t dispute that we are majority owners of Studio 1+1," says Romana Tomasova, director of corporate communications at CME.

Fortunately for CME and its shareholders, the court judgement is not enforceable until the appeal against the judgement has been heard, though Tomasova was unable to give a date of when that hearing will be held. The appeal court decision can then be taken to the Supreme Court, meaning a final decision may take up to two years.

Even so, the whole affair may not get that far. On August 22, the Ukrainian news agency UNIAN carried a report in which Kolomoisky said he was ready for an "amicable settlement" in the dispute with Rodnyansky.

Few analysts doubt that CME will ultimately prevail in the Ukraine. "Theoretically, Kolomoisky can ultimately win, yet he needs a favourable ruling by the Appeal Court," says Andriy Dmytrenko, chief strategist at Kiev-based brokerage Dragon Capital. "Although we lack all the information, we think winning of the case will be rather challenging for him."

Dmytrenko says that while Kolomoisky will probably lose this court battle, "he could come up with another court action on a similar but not same issue, which would re-launch the court saga."

Such a scenario, say analysts, would smack of the growing problem in Ukraine of corporate raiding, whereby ostensibly legal entities exploit loopholes in Ukraine's legislation and court system as well as corrupt judges in order to bind up multinationals in costly cases to force a settlement, or in some cases even employ dodgy court orders so the target company is in the raiders’ hands for long enough to siphon off the assets.

These foreign ownership restriction laws in Ukraine were scrapped earlier this year. Even though the same laws have been under fire for some time in Turkey and, in an effort to encourage competition in media ownership, the government tried last year to change them, they remain on the statute books after Ahmet Necdet Sezer, the country's increasingly protectionist-minded president, vetoed an amendment.

"The law causes real problems and there's no doubt it will eventually be changed," says Fortis's Kuley. However, with both presidential and parliamentary elections due next year, and the religious-minded government looking increasingly paralysed by pressure from the secular establishment, Kuley doubts "the government has any immediate plans to tackle it."

Just as CME did in Ukraine, News Corp and Canada's CanWest found ways around Turkey's media ownership laws. In News Corp's case, it got round the rule by teaming up the Turkish-born music entrepreneur Ahmet Ertegun to buy TGRT. CanWest also joined up with a Turkish partner to buy four Turkish radio stations between September 2005 and February 2006. Though it will not initially have any equity interest in the stations, CanWest reserves the option to acquire up to a 75% interest in all of them, subject to a change in the law – whenever that might be.

With various ways around the restrictive media laws and no end in sight to their repeal, should the right assets come available, CME might be tempted to swallow its distaste for minority shareholdings.

What might be on offer? As well as harbouring plans to dispense with Milliyet, a centrist and relatively high quality newspaper with a circulation of around 300,000, Dogan Yayin Holdings is also rumoured to be keen to see the back of one of its three TV channels, CNN-Turk, a news channel that it set up in 1998.

According to sources, there was a big reshuffle at CNN-Turk recently, with several of the company's executive directors resigning. Tensions seem to have been caused by the channel no longer getting the prime-time interviews that it used to.

CME on spending spree

CME certainly has the necessary funds on hand if something interests it. In August, it announced that the major private equity firm Apax Partners had agreed to pay $190m to Ronald Lauder – CME's company’s founder and one of the heirs to the Estee Lauder cosmetics fortune – to take a 7.8% economic shareholding with 32% voting rights.

Garin says Apax is an ideal partner for CME because it could analyse, identify, negotiate and finance any potential acquisition. "Now we can compete very aggressively and very confidently with every company – whether RTL or News Corp – as we have the credibility to finance and complete any deal in this region," says Garin.

If Turkey's media ownership laws preclude a deal, CME says it's still interested in expanding in Ukraine – its current troubles notwithstanding. "We continue to try to aggressively expand our footprint in Ukraine – this is our number one priority," Garin says.

Dmytrenko of the brokerage Dragon Capital agrees that Ukraine is an attractive market, not just for TV companies, despite the damaging loopholes in the current local court system, which allows this corporate raiding to continue.

"This market with 47m people is very interesting for any company as the advertising market grows very fast each year and Ukraine's economy is growing faster than the neighboring markets," says Dmytrenko.

In Ukraine, CME spokeswoman Tomasova explains that the firm is following the same strategy it employed successfully in Romania, which is to launch as many as three channels because the addition of two channels on top of the first one can be achieved relatively cheaply by leveraging the library of programmes.

Garin says he expects most growth to come from CME’s stations in Romania and Ukraine - where revenues are increasing at a rate of 30%-40% a year - and from the Czech channel TV Nova, which already represents 36% of the group’s revenue and 47% of ebitda (earnings before interest, tax, depreciation and amortization). In the more mature Czech media market Garin said revenue growth would come from increased advertising rates and more efficient programming.

"Before they didn’t have proper analysis – they’d run programmes and lose money and not even know it," Garin said. In the future, TV Nova would ensure it ran appropriate programmes for the time period, thereby improving ratings and profitability.

Yet if it decides against expanding into Turkey, CME will find fierce competition for the few remaining independent stations in Eastern Europe and that the owners of these stations are typically keen to cling on to them.

"Everyone feels they are the Silvio Berlusconi or Rupert Murdoch of their country," Garin said. "It’s very hard to give it up."

At a time when western media companies are redefining themselves as value stocks, Garin says CME remains very much a growth stock. "We are not resting on this increasing growth story," Garin insists. "We want to build on this in a very prudent way."

Send comments to: Nicholas Birch and Robert Anderson