What value is Vladimir Zelezny providing to TV Nova?Vladimir Zelezny provided complementary capabilities and resources to TV Nova, which complemented CEM’s resources and skills. In this case, Zelezny’s complementary capabilities were related to his access to knowledge about the local TV market having been a producer, journalist, and former Czech government press official. In addition, Zelezny also possessed significant knowledge about the Czech regulatory system having worked as a spokesman for the former Czech Prime Minister and having significant influence on the Czech media council which was mandated to regulated broadcasting and media activities. As a recognized player in the Czech media industry, Zelezny used his marketing and financial resources to provide TV Nova with advantages in the Czech media industry. Furthermore, Zelezny also provided value to TV Nova through unique competencies that CMA could not easily substitute. In this case, Zelezny as a local partner had excellent working relationships with the Czech government, which was essential to gaining a foothold in a state where the markets were still largely government controlled.

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These unique capabilities related to having a close relationship with influential government officials and agencies could not be independently replicated or developed by CME. Therefore, TV Nova was reliant on Zelezny’s strong Czech identity and close links to power to gain market share in the media industry. Thirdly, given the legal environment in the Czech Republic, Zelezny’s value also extended to enabling TV Nova to operate in the country. In this case, foreign investors like CME were required to partner with a local investor in order to operate TV services in the country. Under Czech law, CME could only acquire a minority holding of the company’s shares in licensing, which was achieved by Zelezny becoming a majority shareholder in CET 21. This, in turn, allowed for the formation of CNTS owned by Zelezny and CME with Zelezny being made CNTS general director.

What value is CME providing to TV Nova?
On the other hand, CME’s value to TV Nova was mainly linked to its provision of financing and new programming. As one of the first private TV station in the region, TV Nova had access to significant resources from CME that allowed TV Nova to undertake an expensive and glitzy marketing campaign. As part of this campaign, TV Nova was eager to advertise the broadcasting of American TV serials and films provided by CME, which easily attracted viewers in the country away from Czech public TV. The latter, mandated to ensure that at least 38% of its programming was local, could not compete against TV Nova’s access to the more appealing foreign broadcasting provided by CME. Moreover, CME’s involvement allowed TV Nova to purchase rights to various American films and series from Twentieth Century Fox and Walt Disney, which were not available to TV Nova’ competitors in the Czech Republic.

Furthermore, CME also provided TV Nova with economies of scale, which was important given the high fixed costs of setting up a national broadcaster with new programming. CME allowed TV Nova to achieve critical mass in the TV industry by pooling its foreign-based broadcasting resources with local resources. In turn, TV Nova could provide its audiences with a mix of locally-produced shows and American shows aimed at capturing different market segments and achieving mass-market audience status. CME’s clout following tentative attempts by Time Warner to buy out the company also ensured that TV Nova’s association with CME afforded them opportunities to attract necessary credibility and financing with 3rd parties, thus attracting local talent to the company. Finally, CME also provided the financial resources required by TV Nova to buy a new headquarters in Prague and new, advanced TV equipment along with new talent to work the equipment. CME’s financial clout also enabled TV Nova to attract the best talent in the country and sometimes from the region, allowing TV Nova to differentiate its TV offering from state-owned public TV.

As CME, would you purchase the shares from Zelezny?
CME should purchase Zelezny’s 5.8% share in CNTS because they already have an agreement with Zelezny for him not to jeopardize any cooperation between CNTS and CET 21 in running TV Nova. Since Zelezny has already breached this agreement by forming another cooperation agreement between CET 21 and CNTS by allowing a competitor, AQS, to buy new programs for TV Nova. This action by Zelezny can be considered a default due to a material breach of the initial joint venture agreement between CET 21 and CNTS, as well as change of programming control by bringing in AQS and attempting to transfer CNTS’ interest to AQS which was also controlled by Zelezny. In this case where there is a seeming lack of particular contractual remedies in the absence of government support, CME should terminate the joint venture and seek damages using a ‘put and call’ mechanism. This mechanism would allow CME to acquire Zelezny’s shares at a fair value.

CME as the majority shareholder in CNTS should be keen to agree an unfettered purchase of Zelezny’s shares, specifically since this is within their control and discretion. CNTS could then choose to realize the full value of CNTS through later sale to a 3rd party, in this case with an eye on a possible merger with SBS. Purchasing Zelezny’s shares will reduce his opportunity to interfere with realization of the merger process, particularly given Zelezny’s significant influence in the Czech government. Therefore, CME should consider taking up the share sale offer by Zelezny, or at least ensure that Zelezny does not sell his shares in CNTS to a possible competitor who may scuttle the merger talks with SBS. Given that TV Nova is jewel in CME’s crown, and that SBS wishes to merge with CME with an eye on TV Nova, CME should consider buying up the shares from Zelezny in order not to jeopardize the merger.

How would you value Zelezny’s shares?
The valuation of Zelezny’s shares can be determined using the value attached to CNTS during CME’s negotiations with Zelezny. In this case, the price paid by CME to purchase Nova Consulting in August of 1997, which was fully owned by Zelezny, was $28,537,500 with Zelezny’s sole asset being his 5.8% ownership stake in CNTS. This price was pegged on the understanding that Zelezny would receive a sum of money corresponding to 5.8% of CNTS’ aggregate value from CME, as well as that the other buyers would also be willing to purchase the shares for a similar amount if CME declined to do so. The two parties, as part of their arm’s length discussions, agreed that the aggregate value amounted to approximately $500 million, roughly ten times the value of CNTS’ 1997 EBITDA. Factoring in the multiple to CME’s EBITDA value in 1998, the total valuation would come to $542 million.

The value of Zelezny’s shares could also be determined through the value ascribed by SBS to CNTS as willing purchaser of Zelezny’s shares in case CME opted out of the purchase agreement. CME and SBS negotiated a potential merger but did not close the contract after SBS decided to terminate their contract with CME and pay penalties for this termination after the Czech Media Council violated CME’s rights, allowing CET 21 to severe all dealings with CNTS in 1999. While these negotiations were only related to SBS’ willingness to buy out the entire CME organization, the former also performed a rigorous and extensive assesment of CNTS’ value because CNTS was CME’s most important component. Moreover, SBS also revalued CNTS as it became increasingly possible that CME would not deliver CNTS as part of the deal to give SBS exclusive operations over TV Nova. According to SBS, the value attached to CNTS for a willing arm’s-length purchaser was approximately $600 million if the government could assure CNTS of an exclusive and legally protected economic position.