Playing the media game
By : Anna Kocinska
The early 1990s were tough times for business leaders in Poland. Back then, international financiers were still unsure about the business acumen of Polish entrepreneurs. But times change and today venture capital companies are eagerly eyeing Poland's expanding markets. For many local entrepreneurs, a lot of hard-won experience was first gained by playing the media game.
In 1996, Advent International, a private equity investment firm with E3.5 billion of funds worldwide, led a $65 million investment in @Entertainment, a multichannel pay-TV provider and later a digital broadcaster. In 1999, @Entertainment was acquired by Amsterdam-based United Pan-Europe Communications (UPC) in a deal worth more than $1 billion.
"It's our best investment so far," said Marcin Duszynski, general director of Advent International's operations in Poland. "And it was one of our first investments in Poland."
@Entertainment was a start-up, which also introduced new television technology to Poland. "We started with the (digital) platform only two years after the first international companies did," said Andrzej Muras, first president and founder of Polska Telewizja Kablowa (PTK), a private cable TV network. "There was little experience in the West and we had no experience here."
The success story of @Entertainment started in 1989 when David Chase, an American entrepreneur with Polish roots, came to Poland and invested in PTK. Since that time, PTK has grown from 45,000 to 300,000 subscribers in April 1996 and 950,000 in 1999. "At that time (until late 1996), @Entertainment was actually Chase Entertainment and it was 100% owned by David," Muras said. "I remember when they (Advent) came to David and said they were interested in investing in the media."
According to Muras, it was Advent that provided the stimulus that made Chase decide to get involved in setting up a digital platform. In December 1996, Robert Fowler, a former director at D.T. Chase Enterprises, was appointed chairman of the management board at @Entertainment, which owned PTK and later on Wizja TV, Poland's first digital platform. Fowler became the driving force behind the digital project.
With a market capitalization of $475 million, the company announced that it would invest $350 million in the new project during the first year. In 1997, @Entertainment, again assisted by Advent International, floated 9.5 million shares in its initial public offering in the U.S. to raise $199.5 million for further growth. In 1998, the company launched a digital-direct-to-home (D-DTH) platform of 14 channels of Polish-language programming. In June 1999, David Chase, who had a 56% stake in @Entertainment, and Robert Fowler, who had the option to buy 1.286 million shares of stock at $3.707 per share under an employment contract, closed the biggest deal of their lives. UPC offered to pay $19 a share for all of @Entertainment.
"People from Advent were convinced (in 1996) that it would be a successful investment," Muras said. "It was also a question of some kind of intuition, which is characteristic of great businessmen. Chase definitely had such intuition."
Before Chase, Muras was financed with a $13.5 million from the U.S.-government related Overseas Marketing Corporation. "I remember how difficult it was. PTK was a small company with a small number of subscribers," he said. "It was hard to convince all those people it's worth investing in the company. Today, getting funds is much easier." Today entrepreneurs such as Muras would probably more likely look to venture capitalists for finance.
Funding for entrepreneurs
Innova Capital, an independent private equity firm based in Warsaw, is one of the leading investors in Central Europe. It manages two funds: Poland Partners L.P. and Innova 98 L.P., but it is planning to raise another fund within the next nine months. "It could be anything from $150 million to $250 million," said Robert L.Conn, managing partner and co-founder of Innova Capital. The company employs 30 people. "And we will probably add another eight in Poland and internationally," Conn said. Innova is also opening an office in Budapest.
Conn arrived in Poland in 1990, and established a small investment advisory firm called CAL (Company Assistance Limited) with Steven Buckley, his current partner at Innova Capital. CAL did a number of restructuring projects with state-owned companies, worked on four privatization projects and sold nine companies, Conn said.
"During that process it became very apparent that Poland's success wasn't based on privatization, it was based on the private sector and the entrepreneurialism of Polish culture," he said. "It was then that we decided that what this country needs is money, equity, not bank debt, and some smart money with some Western business skills." Conn and Buckley started looking for partners to put together a venture capital fund. Their first $63 million fund, Poland Partners, was raised in April 1994. "We were the first fund that had only private money," Conn said.
According to Conn, Poland has a dynamic investment environment. "It's exploding at the moment," he said. "Why? Polish culture is extremely entrepreneurial."
In 1996, Innova, together with Advent, invested $4 million in @Entertainment, which delivered a 42% return on their investment. "Our target is generally at least 40% per annum," Conn said. "We also invested around $5 million in Town & City, (an outdoor advertising company), which was very close to a start-up. After, we sold it to News Corporation, it delivered 82% rate of return."
The rise of high-tech media
But times of spectacular start-ups in the traditional media industry are fading. According to Conn, the explosion in technology media, along with mobile telephony and broadband communications, has created a new dimension to his business.
"In most traditional (media) industries, the deals are now at a later stage. In technology-related areas we are still doing start-ups (broadband, web sites development, e-commerce)," Conn said. "However, most of our investments outside technology are consolidations, spin-offs or management buy-ins."
Last year, Innova completed 20 transactions, and five deals are currently being closed. "Three of them are in infrastructure to support the growth of the web, one is in financial services and the fifth one is mobile-phone related," Conn said.
When Innova gets involved with start-ups it looks for opportunities where there is very limited or no competition. "That's why we wouldn't invest in print in Poland as it's already consolidated with all of the large German groups here," Conn said. "In general, industries are getting to a stage when the big boys are coming in and we need to get in two to three years earlier than that."
Mergers and acquisitions
According to Heather Potters, managing partner at Baring Communications Equity Emerging Europe (BCEE), there are significantly fewer start-up projects compared to opportunities for mergers and acquisitions and consolidation in Poland's media market.
"Poland has reached a medium level of maturity where there are probably primarily opportunities related to mergers and the fortification of existing media companies," Potters said.
BCEE, a $74.25 million private equity fund, whose investors include Chase Manhattan Bank, EBRD, ING Barings, Toronto Dominion, and several other private and institutional investors, has been operating for almost three years now. The preferred investment size is $1 million to $5 million. However, smaller or larger investments are considered on a case-by-case basis.
"Many of our current investors are interested in raising another fund for Central Europe," Potters said. This year, BCEE has invested $17.35 million, but it may invest another $10 million-$15 million by the end of 2000 in Eastern and Central Europe. "And we will be investing more money next year," she said.
Currently, BCEE is working on a merger of Machina, a pop culture magazine published by Machina Press, with four other titles. "That should happen within the next couple of weeks," Potters said.
While Advent's Duszynski sees some investment opportunities in print, such as a Warsaw daily, he is generally skeptical about investing in print. "It's like outdoor advertising where most players are taken over by strategic investors who don't want to share anything," he said. "The daily press has been taken by the Germans."
And venture capitalists and strategic investors don't generally mix in the same type of business. According to Innova's Conn, strategic investors have a different approach to their investments. "Although we often take a majority stake in businesses, we are partnering and backing the existing management, we are not managing a management," he said. "A strategic investor runs the business, whereas we try to ensure that the business is run well."
Advent, which last year purchased a minority stake in Radio Zet, one of Poland's leading commercial radio stations, recently acquired a 29% stake in the Warsaw-based Radio Kolor the only Warsaw-based radio station independent from media groups. "We assume that Radio Kolor will grow," Duszynski said. "It's a good platform to build on." Radio Kolor, which was established in 1992, is aimed at 25-45 years olds. In June 2000, Kolor had a weekly reach of 9.3% of radio audiences, compared to Radio Eska's 11.4% and TOKFM's 4%, according to estimates by market research company SMG/KRC.
A 51% stake of Radio Kolor belongs to Pawel Obrebski and another 20% to Kolor's former president, Alina Strzesniewska. "Advent is not a strategic investor so it's not going to manage the company, but we will create other media ventures together," Obrebski said. He said he had sold part of his stake in Radio Kolor to invest in other local radio stations. "I hope we will invest (with Advent)," Obrebski said. "I will invest no later than at the end of this year and I am talking tens of millions of dollars."
Looking around the region
Meanwhile, according to Duszynski, Advent still has some $80 million to spend in the region (Poland, Czech Republic, Hungary). "According to our estimates, we can still invest some $20 million-$30 million in the media this year," he said. In Advent's investment portfolio, media accounts for 40% and IT technology for another 40%. "Projects such as broadband, cable and satellite TV, could take as much as $5 million-$19 million each."
While the Polish market matures, the work of venture capitalists is getting increasingly more difficult. In the past, Innova did a lot of start-ups because it wanted to back the right management and the right business model. "In Poland Partners we found that there were very few companies that we felt had quality management," Innova's Conn said. "That's why we invested in start-ups and not in existing Polish companies, so in Beverly Hills Video and not in an existing chain of small rentals."
But Poland has evolved a great deal since then. These days the companies Innova invests in have Polish management, whereas six years ago they didn't, Conn said. "The management capability is here now," he said. According to Radio Kolor's Obrebski, until now everybody in Poland has been doing work without proper analysis. Times have changed. "I do believe in market research. It doesn't matter what type of music I like, it's what our target group likes," he said.
Conn, who for the past 10 years has been making sure that the talent and knowledge is in the management, has no doubts that the Polish market has come a long way. "I don't think we would have started up a venture capital fund in Britain," he said. "I don't think we could have got to where we are if we were in a mature market."
