Media giants cautious but keep eyes on deal-making

Apr 30, 2001  •  Post A Comment

Although several major media players who reported better-than-expected quarterly earnings last week hedged their forecasts for future advertiser spending, they all professed to be prospective deal-makers.
Viacom President and Chief Operating Officer Mel Karmazin, Walt Disney Co. Chairman and CEO Michael Eisner and USA Networks Chairman and CEO Barry Diller each told investors during their earnings calls that they plan to be opportunistic buyers of other struggling media companies and they would continue to do what they had to do to meet their targeted financial projections for the year.
All the companies warned of slower growth in the current second quarter of the year.
Vivendi Universal, 40 percent owner of USA Networks, has said it wants its alliance with Yahoo! to reach beyond its recently announced music-downloading joint venture. General Electric’s NBC also is considered another choice media partner or acquisition target.
“We’re talking to Vivendi about lots of joint ventures in Europe and things we could do jointly in the United States. Acquisitions would involve them playing a direct role with us,” Mr. Diller said.
“Whether the opportunities come or not-and at what scale-I don’t know. But we’re certainly prepared. We’re in such solid shape in our core businesses, we’re in interesting shape in our emerging businesses, and we have such a strong balance sheet,” he added.
Mr. Diller said USA could spend $1 billion-plus on acquisitions in 2001, having recently acquired cable program services, including Trio and Crime Channel, and some online and interactivity-related concerns.
Vivendi has said it expects to gain a foothold in domestic television with its own product through USA Networks, though Mr. Diller indicated last week that Vivendi could choose to blaze its own separate program trails in the United States. Mr. Diller said he welcomes Vivendi’s plans to increase its USA stake, “if growth can be assured,” and he is allowed to maintain veto and voting control of the company.
Though Viacom also is frequently mentioned as a possible Yahoo! suitor, Viacom and Disney also are potential buyers of other broadcast TV and radio station groups and cable program services. Viacom recently acquired BET for $3 billion.
“We’re in the business of generating free cash flow. We like the businesses we’re in. We feel that we are complete,” Mr. Karmazin said. “We certainly have had no discussions [about] doing a deal with somebody like Yahoo!, and we look forward to having a good working relationship … large parts of our companies could do things together.”
Mr. Karmazin acknowledged Viacom is in discussions with News Corp. about its Fox subsidiary taking an equity ownership stake in UPN, although it is unclear which of the two companies would exercise daily control. News Corp., which has said it wants to see UPN survive, recently agreed to further extend the UPN affiliation of the major market Chris-Craft stations its Fox subsidiary will soon acquire.
Sources say Viacom is not eager to sell UPN outright and would welcome a partner to help program it as an independent alternative network that could then turn profitable more quickly.
“At Disney, current sluggishness in the American economy represents an opportunity to build for the future,” Mr. Eisner said.
A strong balance sheet will allow Disney to respond to “potential acquisition opportunities,” which he described as media properties that are becoming more “fairly valued” in a depressed market.
Although depressed advertising and economics were clearly evident in its latest, better-than-expected quarterly earnings, analysts questioned how much of the additional earnings growth was attributed to cost cutting and accounting changes.
“The draconian earnings cuts have set the stage for upside surprises, with the bad news revolving around the outlook for the current June quarter,” said Christopher Dixon, analyst at UBS Warburg.
But any way you cut it, CBS is feeling no pain.
CBS, which was reaping about $3 million in revenues on Thursday nights before it began airing “Survivor,” is hotly pursuing NBC’s $22 million in ad revenues for the evening, representing nearly half of NBC’s prime-time ad take, Mr. Karmazin said. “There is significant upside to us,” he added, referring to CBS’ ability to sell to otherwise pessimistic upfront advertisers. He pointed to UPN’s surprise snaring of the hit series “Buffy the Vampire Slayer” from The WB as an example of ways Viacom can bolster UPN’s prime-time performance. “I cannot overestimate the significance of UPN picking up `Buffy,”’ he said.
“If there is to be a recession, we’re just not going to be there,” Mr. Karmazin told investors. As for the upfront market, “If advertisers want to hold back spending and wait for the scatter market, we’ll wait with them,” he said.
Viacom’s CBS will hold out for high-single-digit price increases-flying in the face of a flat-to-negative prognosis for broadcast networks in general-but will hold back as much as half of its available inventory if it means getting higher prices in scatter.
If Viacom can get the prices it seeks, CBS and UPN would sell as much as 80 percent of their inventory, and Viacom’s cable networks would sell as much as 70 percent of their inventory in the upfront, Mr. Karmazin said.
Viacom’s targeted 20 percent growth in earnings before income, taxes, depreciation and amortization to $6.2 billion this year could be off by 5 percent in the event of a strike. Disney continues to promise single-digit-percentage earnings growth in fiscal 2001. USA is holding to its targeted 18 percent earnings growth for its operating businesses.
Mr. Karmazin said CBS could take an unconventional approach to selling “Survivor” on its own in the upfront or even after the upfront is over but declined to elaborate.
Viacom said it is in negotiations with two major advertisers on pre-upfront deals that mirror the Viacom Plus multiplatform deals it has with companies such as Glaxco Wellcome, Merrill Lynch, Fidelity, Tylenol, Daytex and DaimlerChrysler.
Mr. Karmazin, Mr. Diller and their peers agreed that the advertising upfront will go on for a while once it starts and that cable and broadcast TV buys could be made simultaneously.
With a soft economy and strikes looming, executives are exercising more than a bit of caution.
“We’re not seeing signs of it getting any worse, but we don’t see signs of recovery yet. That’s why we are focused as we are in our advertiser-supported businesses,” said Disney President Bob Iger, confirming that a 4,000-employee reduction is under way.
Mr. Diller was even more emphatic. “There’s no reason to think there will be improvement. I think it’s going to be a tough climate for the foreseeable future,” he said.
Mr. Diller said he expects the cable upfront to be up modestly but USA would likely hold back more inventory than in previous upfront markets. And he doesn’t think there will be a writers strike, which if it does occur would have no material impact on his company’s operations.
Broadcast network companies could experience some economic improvement in the event of a strike because they would be spending much less on original programming, even though they generally would charge advertisers less for ad time. However, as Mr. Dixon pointed out, advertisers will need to buy many more spots than usual to ensure themselves similar audience coverage as in a regular prime-time network TV season, which also could pump up overall strike-related ad revenues.
Also, Viacom, News Corp. and Disney each own prominent cable channels that would be the beneficiaries of audience defections from the broadcast networks during a strike.
“There is a lot of posturing going on by advertisers right now. There is a chance the upfront could actually be better than last year, but it’s a little too early to tell,” Mr. Iger said.
The soft ad market was the culprit that drove a fiscal second-quarter decline of 8 percent in revenues to $2.2 billion and a decline of 9 percent in operating income to $489 mi
llion at Disney’s media networks, which include the ABC TV stations and ABC TV Network, which experienced a 15 percent decline in first-quarter revenues. Disney’s cable networks delivered a 9 percent increase in operating income to $319 million.
Viacom’s television segment (which includes the CBS TV network and TV stations and UPN) posted a 14 percent increase in earnings to $315 million on an 8 percent rise in pro forma first-quarter revenues to $2 billion. The CBS TV Network posted high-teens revenue growth buoyed by “Survivor” and the Super Bowl.
USA Networks reported a 16 percent increase in earnings to $269 million on a 17 percent increase in revenues to $1.2 billion, driven by diversified holdings that include cable networks that posted a 17 percent increase in cash flow on a 10 percent increase in revenues.
Advertising comprises about 16 percent of USA’s overall revenues; about 50 percent of Viacom’s, 30 percent of Disney’s and about 24 percent of AOL Time Warner’s.