The media mergers and acquisitions sure to be spawned by imminent ownership deregulation has even heavily in debt players sprinting toward a new finish line.
Last week’s liberating U.S. Court of Appeals ruling that lifts restrictions against same-market TV, cable and newspaper ownership-and the anticipated raising or elimination of TV station caps-will set into motion the rollup of small and middle-size broadcasters and cable operators who concede that scale is the only path to achieving market share and profits.
“It’s all up for grabs,” said veteran analyst Tom Wolzien of Sanford Bernstein. “Companies will grab for the assets they have been prohibited from owning that will complete their vertical integration. But they also themselves could become an acquisition target.”
One of the first places deals will surface is among TV station groups, where transactions will have “varying credit implications across the industry,” Standard & Poor’s said last week.
“Even equity-financed acquisitions of now heavily leveraged station groups could present problems for companies with borderline ratings, depending on the magnitude of acquired debt,” S&P said.
The broadcast network companies especially will be big winners, since such deregulation can grow their advertising-based revenues and reach while opening the door to new secondary revenue sources. Having been allowed to produce and syndicate better than half their scheduled programs, these companies now can broaden their owned distribution platform to include more TV stations and even cable systems.
But it is certain that traditional media concerns with grandfathered newspaper and television interests in the same markets will be seeking ways to expand their footprint by merging with other such companies, which include Gannett Broadcasting, Belo, Hearst-Argyle Television, Tribune Broadcasting, E.W. Scripps and New York Times Co.
Bishop Cheen, an analyst at Wachovia Securities, said he “remains bullish on targets with big platforms, big stations or defined exit strategies” such as Paxson Communications, Young Broadcasting, Sinclair Broadcast Group, Granite Broadcasting, Allbritton Communications and Emmis Communications. He said the primary acquirers include GE, Viacom, Fox, Cox Broadcasting, Tribune, The Walt Disney Co., Clear Channel Communications, Univision, Hearst-Argyle, Belo and Media General.
Companies such as Sinclair, which owns a record 60 stations, Young and others long ago hired investment bankers to advise them on the sale of assets. Many of these groups have been waiting for deregulation to be approved for their stock prices to go up and for their cash flow and revenues to maximize their sales multiples and prices.
Some small to mid-size broadcasters-including Acme Communications, Benedek Broadcasting, Allbritton, Granite, Grey Communications, LIN Television, Young and Sinclair-could be saved from defaulting on bank loans or from having to sell assets.
Concerns about the concentration of power also have been raised by the ruling. “Scale of what is now allowed is staggering. General Electric could buy AOL Time Warner, or Viacom and Comcast/ AT&T could merge,” Mr. Wolzien said. “This essentially removes the barrier between distributors and content providers, between the biggest of the big players.”
In fact, bulking up on all kinds of distribution especially is what even the biggest (and for sure the smaller) media companies must do to secure and maintain a competitive edge in content and service distribution, advertising and marketing.
Now companies such as Liberty Media Corp., AOL Time Warner, Comcast/AT&T and Charter Communications will be free to own and program TV stations if they want. Cox, a cable operator and newspaper owner that has owned television stations under grandfathered rule protections, is free to bulk up by acquiring another cable operator or the likes of a Tribune or a Gannett.
Since last week’s ruling there has been a wave of speculation about even the biggest media concerns getting bigger. The biggest and perhaps even first beneficiaries of broad deregulation will include AOL Time Warner, Viacom, Disney, General Electric’s NBC, News Corp., Vivendi Universal, major cable operators such as Comcast/AT&T and Cox and John Malone’s Liberty Media.
Some even suggested that a well-funded company such as Microsoft Corp., which is on the prowl for ensured entry into the broadband marketplace, could go on a buying binge for cable systems and TV stations.
If News Corp. remains shut out of the domestic satellite game, it could resort to acquiring a major cable operator such as Charter, Cablevision Systems or Adelphia Communications. Such major cable operators also, in turn, could acquire major TV station groups, even if they have outlets in their major markets.
The court ruling essentially has put in play Disney, which has been the subject of considerable speculation in recent months. Although Comcast/AT&T is considered the most logical of well-funded interested buyers, officials there said they will concentrate on closing their merger and properly completing the integration of their assets before engaging in another big deal.
Other potential Disney suitors include General Electric, Vivendi Universal and Viacom. However, GE and Viacom would be testing rules prohibiting dual ownership of major broadcast networks, and Vivendi would be testing rules prohibiting foreign ownership of U.S. media properties.
But so far, new GE Chairman Jeff Immelt said he considers NBC a growth vehicle and will continue on a buying binge that so far has included the Telemundo network and Granite Broadcasting’s KNTV in San Jose, Calif. NBC also is in line to acquire Paxson Communications.
The anticipated elimination of ownership restrictions will essentially hand a blank check to John Malone and his Liberty Media, which would welcome the opportunity to take major stakes in even more U.S.-based media companies as a respite from its 18-month struggle to dominate the German cable industry. Liberty’s long-standing participation in cable distribution and content has kept it from playing a more prominent role among television broadcast concerns.
Suddenly, not just AOL Time Warner but nearly any major media player-from NBC to Tribune to another major cable operator-could step up to buy the perennially for sale New York-based Cablevision Systems.
However, even AOL Time Warner, whose one-time $250 billion market cap has been more than halved by the fall of its stock price to $24 a share, now is bumping up against the limits of its most comfortable debt-to-earnings ratio and is preoccupied by many of its own internal management and growth issues, according to Lehman Brothers analyst Holly Becker.
Still, AOL Time Warner is likely to tap its targeted $5 billion in annual free cash flow to buy large-market WB-affiliated television stations it does not own, which could support its syndication and network program production business and extend its cross-media advertising sales and promotion muscle.
If so, it will find itself running up against the aggressive likes of Viacom, which has made no secret of its interest in acquiring the Univision network and other major station groups.
If the Federal Communication Commission lifts or modifies foreign ownership rules, France’s Vivendi Universal Entertainment, now headed by USA Networks Chairman Barry Diller, could get in the game, bidding for Disney, NBC, Charter, Cox, Adelphia or any of the major TV station groups.
Although the elimination of rules could “jump start” the upward trading of media stocks, the “biggest limit will be the unknown impact of antitrust laws,” Mr. Wolzien said.