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The buck both stops and starts with CFOs

Apr 9, 2001  •  Post A Comment

DIANE MERMIGAS
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It takes a special breed of executive to get excited over things like creating a new business model, making corporate debt longer term and cheaper, pitching a company’s improved balance sheet to Wall Street investors and using accounting changes and tax incentives to do deals.
That best describes the new wave of chief financial officers who are not just tracking but reshaping the financial fortunes of media companies such as AOL Time Warner, The Walt Disney Co., Viacom and Comcast Corp.
“When you think about how complicated and global this business has gotten, the CFO must assure a company the financial flexibility and balance sheet strength needed to seize opportunities and grow,” said AOL Time Warner CFO J. Michael Kelly.
Mr. Kelly and other media industry CFOs say they view themselves as members of a senior executive team that collectively determines a company’s financial fate. Most admit being personally shaped by–as well as personally shaping–the evolving role of CFOs as financial strategists rather than simply as a bookkeepers.
Comcast: Ready, willing and able to grow in a down market
John Alchin has been co-CFO and treasurer of Comcast for 11 years, during which time he has helped to create a $6 billion-plus deal-making reserve, reduced debt to a mere $10 billion and tripled the size of the company.
Positioning a media giant to seize opportunity even in a dismal market, restructuring the balance sheet to respond to changing market conditions and opportunities, and making current operations more cost-efficient are all in a day’s work, Mr. Alchin said.
Late last year, Credit Suisse First Boston offered to acquire $1 billion of Comcast’s 20-year zero coupon debentures. Comcast used the proceeds to pay off some of its other existing debt, netted $1.15 billion it wouldn’t otherwise have had and saved $50 million annually on interest payments. Four weeks later, Comcast raised $1.5 billion in the bond market to repay short-term, high-priced bank debt.
“Invariably, the market comes up with surprises, and this was one of those positive surprises,” said Mr. Alchin, who shares the CFO title with Larry Smith, who oversees Comcast’s investments.
Additionally, Comcast is in the process of cashing in on some of its off-balance-sheet investments, swapping AT&T stock for 700,000 new AT&T Broadband cable subscribers. After investing what analysts estimate will be about $250 million to upgrade the AT&T systems, the new subscribers should be generating the average $260 in cash flow per annum like other Comcast subscribers, up dramatically from the $160 per annum those subscribers now yield for AT&T.
Analysts say it may just be a dry run for acquiring all of AT&T Broadband down the road–a highly speculated prospect that Mr. Alchin and other Comcast executives refuse to discuss.
“We’re certainly interested in having more than 8.5 million subscribers. We’re in the fortunate position of having reduced our cost of and extending the maturity of our capital, and still having lots of balance sheet liquidity we haven’t touched,” Mr. Alchin said.
It was Mr. Alchin and other top Comcast executives who in 1999 turned the company’s thwarted bid for MediaOne Group into a $1.5 billion consolation fee. That was about the same time he led Comcast to exercise its option to fully acquire QVC, which in five years has tripled its cash flow and mushroomed into a home-shopping powerhouse.
AOL Time Warner: Bringing giants together in a new world
Meanwhile, Mr. Kelly has faced the unprecedented task of having to create and sell to Wall Street a hybrid business model that integrates the financial and valuation dynamics of AOL and Time Warner. He said the first nine months were a tough sell because investors and investment banking firms had to reassess the way they were viewing next-generation media alliances.
“It has been an interesting challenge to sell the model for a 21st-century communications, media and entertainment company. We’ve really done something unique here merging the online world and the offline world and taking it to a new position,” said Mr. Kelly, who joined AOL as CFO three years ago.
“There is a broad diversity of investors and analysts who follow our company. So, the challenge has been explaining to the media analysts what the online world and AOL are all about, and explaining to the high-tech analysts and investors what traditional media is all about, and how combing the two accelerates growth in absolute terms,” Mr. Kelly said.
Much of his time continues to be spent integrating the companies’ operations and checking expenses and cash flow so that AOL Time Warner can meet its ambitious first-year targets of $11 billion in earnings on $40 billion in revenues. Within weeks of completing its merger, the company announced the elimination of 2,400 jobs and nearly $700 million in cost savings, which Mr. Kelly also oversees.
At the same time, he is positioning AOL Time Warner for its next big deal.
“This is a company that over the next three to four years will have $50 billion of financial capacity, from a combination of free cash flow, new cash generation and our ability to increase our leverage based on the strong financial ratios we are hitting overall. We have $14 billion in financial capacity this year,” he said. “It’s my responsibility to make sure we have the financial funds available for the strategic initiatives we want to do.”
Disney: In shaky times, focus increasingly turns to cash flow
Even amid its recent unprecedented announcement of 4,000 layoffs, Disney CFO Thomas Staggs has one eye on the company’s continued growth by expanding existing businesses, acquiring new ones and launching new services.
“You spend so much of your day thinking about strategic positioning and strategically how we are leveraging our businesses,” Mr. Staggs said. “I do not think the current economic situation will be paralyzing. We’ve been really focused on driving cash from our businesses. We’re maximizing free cash flow, because in the event we have a further downturn in the economy, we need as strong a balance sheet and as strong a cash flow as possible to take advantage of what surely will be buying opportunities.”
Managing corporate finances isn’t just about holding the line on costs.
“We need to make sure we’re investing in the kinds of strategic initiatives and transformational opportunities that will generate additional revenues in the future from things like music subscriptions or multiple ISPs,” Mr. Staggs said.
While the routine tracking and reporting of a company’s financial performance is no longer the sole focus for a CFO, the credibility of that process and the statistics it yields were never more important or more closely scrutinized. In the past questions raised at media companies such as AOL and Disney about accounting practices were later dismissed or resolved.
But the media business and company finances have since morphed into more complex and far-reaching entities, carrying with them far more swift and sure risks and rewards.
Mr. Staggs, who has played a key role as an adviser to Mr. Eisner, found himself creatively aggregating and publicly spinning off Disney’s Internet assets only to privately rein them back into the corporation a year later amid the sudden dot-com collapse.
“You constantly have to re-examine the environment in which you are operating and do everything you can to make sure your business units and financial structures are right for the situation–no matter how quickly or dramatically it changes,” Mr. Staggs said.
Disney’s GO tracking stock, launched late in 1999, stopped trading in March. In the end, the 18-month Internet odyssey cost Disney more than $500 million in one-time charges, although it gave the company “traction in a number of Internet areas we otherwise would not have had,” Mr. Staggs said.
Such creative financing–done and almost as quickly undone–is not nearly as troublesome as the current market ambiguity plaguing media companies of all sizes. All the CFOs interviewed con
cede it is troublesome not knowing where the bottom is to the free fall in the stock market and advertising market, making it more difficult to sell a media company’s future fortunes to investors and analysts.
With runaway inflation, higher interest rates and lower core ad revenues all possibilities, it can be risky piling on the debt. Most CFOs have moved swiftly in recent months to favorably refinance or repay debt. It’s simply tough to assure growth in this uncertain environment, they say.
For instance, during the past five years, Comcast invested more than $3 billion in its system upgrades, during which time the company’s equity market capitalization tripled to about $45 billion. But in time of economic, stock market and advertising instability, there is no telling when or what the return on investment will be. That can make selling a company’s financial prospects and strategic visions to Wall Street analysts and investors all the more challenging.
“What we’re up against is largely driven by the economy, and none of us are alone,” Mr. Staggs said. “We continue to focus on the long-term and what we think are our unbelievably strong assets. We may be facing single-digit growth this year. But in the long run, it will come down to who delivers growth in profits and in cash flow and increased return on capital investments.”
All the CFOs interviewed conceded that advertiser spending softened faster than anyone expected and that no one is sure just how long the lull will last. They also are grappling with other unknowns that can prove particularly troublesome in a soft economy.
For instance, AOL Time Warner has yet to demonstrate it can initiate fast enough its multimedia cross-selling strategy to meet its ambitious financial targets. It has yet to pull off its unparalleled role as a host and as a supplier in a multiple ISP digital cable situation.
At Disney, the company must demonstrate it can stay afloat financially in tough economic times by skillfully balancing its advertising-dependent and economically sensitive core businesses with its more financially self-sufficient operations.
Comcast, along with other cable multiple system operators, is demonstrating that it can roll out and build potentially lucrative new services at a time when consumers aren’t inclined to part with their discretionary income.
Leading cable operators such as Comcast haven’t tested during an economic downturn how resilient the top end of their new digital product lines are with consumers who have discretionary income.
Another more recent challenge is trying to accurately forecast the revenues–and even profits–associated with new interactive businesses, products and services being rolled out. Even as Disney is breaking even on its enhanced-TV-related products, it has been conservative about detailing its investments.
Video on demand, interactive games and streaming video offer similar financial planning and forecasting challenges, the CFOs say. The international and interactive markets–thought to be fertile ground for short-term gains–are now being considered in a much more long-term light.
The good news, many CFOs say, is that with most cable and broadcast digital conversion costs behind them, more minimal investments are on the line, since most companies are betting on new markets and revenues with content they already own, they say.
When the economy and markets improve, and the new businesses take hold, “the upside will be tremendous,” Mr. Staggs said.
With business unit managers fixed on hitting daily financial targets, the CFOs say they must keep one eye on the horizon, even in tough economic times. Today’s CFOs have a broad mandate to focus on strategic issues while managing the daily financial picture. They must think creatively about how to use assets and stock, in better times as deal currency, or to access funds at minimal cost and risk.
“It’s all about leveraging off what you already have,” Mr. Alchin said.
For instance, Comcast stands ready to deal with $1.25 billion in Sprint PCS stock it has as an off-balance sheet investment that grew out of a strategic joint venture it entered into in 1993 with Cox Communications and what was then John Malone’s TCI.
However, “CFOs know they always have to think about the implications of what they’re putting into place and what limits they may impose down the road,” Mr. Kelly said. For instance, AOL has inherited a complicated Time Warner entertainment joint venture involving AT&T Corp. as a 25 percent partner. It is struggling to restructure TWE, which was considered a financial engineering fete at the time it was announced.
On the other hand, Comcast designed Microsoft’s equity ownership stake in the company to yield $1 billion with virtually no strings attached.
Viacom: How to put together a media powerhouse
Fred Reynolds has not only survived but has designed the morphing of the media-related companies he has been with, from Westinghouse Electric to CBS Corp. to Viacom.
Viacom Executive Vice President and CFO Reynolds lobbied in 1994 for an overleveraged Westinghouse to salvage its Group W Broadcasting unit of five TV stations, 17 radio stations and a minor league production company, representing 5 percent of the company’s overall revenues. After selling the other 95 percent of its nonmedia businesses, which ranged from nuclear and fuel to real estate and appliances, Mr. Reynolds made a pitch to buy CBS from Laurence Tisch for $5 billion in cash in 1995 and later acquired Infinity Broadcasting and King World Productions.
Westinghouse acquired CBS with a highly restricted $7.5 billion junk bond offering, most of which it paid off in less than two weeks after it closed on the deal through the sale of some of Westinghouse’s nonmedia businesses. “I paid about $100 million in fees to bankers for money I never borrowed. But at the time we bought CBS, 90 days earlier, we didn’t have the sales in place,” Mr. Reynolds said.
Mr. Reynolds’ impetus for acquiring CBS was $5 billion in tax credits left over from Westinghouse that were used to shield its growing high-margin broadcast base from taxes. The last of those tax credits will be used this year. Last year, CBS folded itself into Viacom in a tax-free stock merger.
While the CFO job appears to be a giant chess game that could be as much fun as it is challenging, there are few qualified candidates to assume the post at sprawling entertainment and media companies.
Just last month, Viacom hired Richard Bressler, former CFO at Time Warner, to assume the CFO role at Viacom while Mr. Reynolds becomes the operating head of the company’s TV stations to spend more of his time with his family on the West Coast.
“I would say 30 percent to 40 percent of the CFO role is truly being focused on the balance sheet and being attentive to the financial side of the business: making sure the controls are right, getting the cash in, making sure receivables are being collected … a good system, tax and treasury function. The rest of the job is how to make existing businesses better and where you want to grow,” Mr. Reynolds said. “That’s the best part of the job.”
Now it will be Mr. Bressler’s turn. But he comes well-equipped to knock heads with Viacom’s Mel Karmazin and company Chairman Sumner Redstone, having accompanied former Time Warner Chairman Gerald Levin into its union with AOL.
“Once you have the strong balance sheet, the brands, the financial resources, the visionary management, the momentum in place, there’s nothing you can’t do,” Mr. Bressler said. “Who else can go to work every day and say that?”