Merger frenzy will continue in new year

Dec 31, 2001  •  Post A Comment

When Comcast Corp. President Brian Roberts snared AT&T Broadband in a $72 billion stock and debt deal, he launched what could be a runaway train of media consolidation in 2002 despite economic hard times.
“I think we take a deep breath and see what are the right next opportunities. There is real opportunity to build,” Mr. Roberts said.
Experts say the combining of Comcast and AT&T alone could spur numerous other deals stemming from the swapping or spinning off of noncore systems.
The nearly $150 billion in media deals announced in the closing months of 2001 were just a warm-up for frenzied acquisition and alliance activity next year, despite a limping economy and an unabated ad slump, experts said.
Seven of the top 10 media deals in 2001 were announced in the second half of the year. The largest media deal-the proposed merger of AT&T and Comcast Corp.-topped the list of all U.S. merger-and-acquisition activity.
Although the flurry of year-end big-ticket deals was the product of media giants that command their own money and terms, the new year likely will see more midsize and small players seeking survival through scale by deciding whether to buy or be bought.
Industry experts say favorable changes in accounting rules, a new wave of media ownership deregulation, the relative low cost of money and the need to stay competitive are among the deal catalysts already at work.
A mergers-and-acquisition study conducted this month by PricewaterhouseCoopers concluded that transactions in 2002 will largely hinge on deregulation and economic improvement.
As a result, the deals themselves will fuel more deals. For instance, Mr. Roberts said his pursuit of AT&T became more intense in response to deals such as EchoStar Communications’ acquisition of Hughes Electronics’ DirecTV, which fortifies direct broadcast satellite’s growing competitiveness with cable, and by Walt Disney Co.’s acquisition of Fox Family Channel, which represents the growing pricing power a handful of content providers have over cable operators.
“There really is a lot of excess capacity of program spectrum, or advertising time, of everything,” said Bob Filek, a transaction service partner at PricewaterhouseCoopers. “To do deals and take that capacity out is really expensive. That’s why you are seeing a few dominant players consolidating and rolling up some of that excess capacity. They are the only ones who can afford to do it,” said Mr. Filek.
On the content side of the ledger, where it is fast becoming apparent that while content is king, ensured distribution is imperative.
Just before year-end, Vivendi Universal and its 43 percent-owned USA Networks announced the $11.7 billion merger of their transatlantic entertainment assets.
The new company, Vivendi Universal Entertainment, is expected to chase more deals, including the organic launch or acquisition of cable and broadcast networks, including, most likely, making a run at NBC.
“These deals highlight the need for more vertical integration of content production and distribution. It’s what everyone will be chasing in 2002,” said John Martin, analyst at ABN-AMRO.
“These recent big transactions will spark another round of consolidation among media and entertainment companies.”
Companies the size of AT&T Comcast Corp. and AOL Time Warner will have so much clout with advertisers, program suppliers and viewers, they will blow everyone else away, some analysts said.
Other analysts such as Legg Mason’s Blair Levin, a former chief of staff at the Federal Communications Commission, say ultimately there will be great pressure on programmers to join forces against monopolistic distributors who are the gatekeepers.
When the gatekeepers control nearly every top 20 market, they can determine which cable channels and services debut and survive-and can universally control the price of product and subscriptions.
Mr. Levin says the dominant media giants ultimately could wind up swapping distribution and content with each other to secure what they need.
Many deals next year may in fact focus on programming and the need to develop unique targeted niche services to effectively compete for viewers and advertising in an expanded digital spectrum.
ABN-AMRO’s Mr. Martin said the recent spate of big mergers can be especially damaging to content producers who will be squeezed by a handful of gatekeepers who may keep prices high and access low.
The new AT&T Comcast Corp. already says it will seek $500 million in annual program savings as a result of merged scale. EchoStar says it can achieve as much as $700 million in program cost savings and synergies through 2005, or 5 percent in annual cost reductions, as a result of its proposed acquisition of rival U.S. satellite provider DirecTV.
That is why some experts believe the new year could see yet another major broadcast network such as NBC change hands, with many fiercely independent major-market TV station group owners agreeing to sell under the pressure of soaring program costs, a prolonged advertising recession and intensified digital-related investments.
EchoStar’s surprise grab for DirecTV especially has sent even the largest, hotly competitive cable operators huddling against the cold winds of an intensified rivalry with direct broadcast satellite.
Even the losing bidders for AT&T could win. AOL Time Warner could snatch Cablevision Systems and swap specific clustered systems, while Cox Communications pursues Adelphia Communications and Paul Allen’s Charter Communications. All of the activity so far has strengthened cable stocks, which will increasingly be used as deal currency. Such consolidation could put three surviving cable operators in control of more than 90 percent of all cable subscribers.
TV station owners especially are being squeezed by economic need. Their single source of advertising revenues have proven too vulnerable in this recession. Those who remain pure broadcasters must bulk up to spread their rising costs across a larger base of stations and shared resources. But most eventually will make themselves part of a media conglomerate also involved in cable, outdoor and online media.
Dominant independent TV station groups, including Hearst-Argyle, Gannett, Belo, Scripps Howard and Post-Newsweek, all say they seek to grow through merger and acquisition. However, NBC, bankrolled by corporate parent General Electric, with new GE Chairman Jeffrey Immelt, may be the first big buyer of the new year, snatching at least another major TV station group.
NBC’s acquisition candidates include such large affiliate groups as Gannett, Post-Newsweek and Hearst-Argyle, well-placed industry sources said.
While The Walt Disney Co. also is eager to buy more stations, it may be restricted on what it can do, given the poor performance of its ABC TV Network and theme parks.
That in turn could adversely impact struggling station group owners such as Young Broadcasting that are relying on larger players such as Walt Disney and NBC to buy out their choice stations at premium prices.
Disney and NBC, along with Fox and Viacom, could be aggressive bidders for Young’s TV stations in Los Angeles and San Francisco.
But there are industry analysts who believe that even companies the size of Disney could become acquisition targets. Fred Moran of Jeffries & Co. said he wouldn’t be surprised to see AT&T Comcast make a run at Disney within a few years.
“I don’t know if bigger is better, but bigger means being able to better ensure profitability,” Mr. Moran said.
But the first burst of new-year deals likely will come from middle- and small-size station owners showing signs of buckling under the pressure of refinancing and still not being able to pay off debt fast enough with advertising revenues at record lows. Although broadcast companies are not as highly leveraged at they were in the 1991 recession, they face greater pressure to reinvest to upgrade their technical facilities and develop content for a new digital age.