Art of the media deal

May 20, 2002  •  Post A Comment

Allen & Co. partner Nancy Peretsman’s deal-making advice has led to some of the biggest media transactions of the past decade. The deals she has consulted on include Westinghouse’s $5.4 billion purchase of CBS, the $2.5 billion sale of King World Productions to CBS, Comcast Corp.’s $60 billion acquisition of MediaOne, the sale of BET to Viacom for nearly $2 billion and the recent $12 billion sale of USA Network’s cable and programming assets to Vivendi Universal.
Though these arrangements have panned out over time, other deals negotiated by some of her Wall Street counterparts have not been as successful. The continuing struggles of AOL Time Warner and Vivendi Universal have raised serious questions about whether bigger is always better and whether the investment bankers involved fully considered all the risks.
Even with a few new transactions in the works, Ms. Peretsman concedes that the ground rules for smart deals are changing as quickly as the media landscape. The start of another upfront advertising season phases her less than dramatic recent changes in ad spending trends that will impact the future value of companies.
“Providers of goods and services eventually will spend far less than they do today on advertising and promotion. The media-and even broadcasters-will be less dependent on advertising. It’s happening already,” Ms. Peretsman said during a recent break in the action at Allen & Co.’s Manhattan headquarters.
“In the interactive, connected world that is emerging, we will have on-demand collection systems. The Internet will allow us to do something that this whole business was predicated on not being able to do: cater to and give control to the individual. It will change everything,” she said.
The outspoken Ms. Peretsman, who possesses the same visionary qualities as the media powers she represents, says she is betting on a handful of enterprising and even controversial assumptions about how media will change over the next five to 10 years. She expects that e-commerce will emerge as an important revenue supplement to conventional advertising and that interactive on-demand consumer television selection will rival the practice of static scheduled programming. She also believes that traditional syndication will decline as cable’s digital fortunes continue to rise; and a new market metrics that rewards audience segmentation will become a parallel force to mass market reach.
Media power brokers sit up and take notice of her prognostications since Ms. Peretsman was an early predictor of the competitive importance of cable and the Internet, both of which shaped her deals in the 1980s and 1990s. Today the major change force is interactivity, and one of the formidable questions is what constitutes a mass market? Media fundamentals will be reshaped by the emergence of a consumer-controlled, fully connected on-demand market in which full-blown mega-mergers may not always be the best option.
For instance, Ms. Peretsman is loath to believe that a newly combined AT&T-Comcast will hotly pursue the Walt Disney Co. in a year or two, as has been widely speculated.
“I don’t actually think that happens. It is not all that logical, because Comcast could use relatively little of Disney’s programming. Even ESPN is an enemy of the distribution business right now. What will make ESPN a good business in the future is exactly what AT&T-Comcast doesn’t want,” she said. “But this is an amazing time because there are so many things you can do that aren’t `bet your company,’ that represent evolving business models,” she said.
“What [USA Interactive Chairman] Barry Diller is doing-spinning off the interactive assets of USA from the entertainment pieces being merged into Vivendi Universal Entertainment-is probably the purest play out there. He probably has the strongest intellectual construct on it of any of his peers. He gets it,” she said.
Historically, Ms. Peretsman’s role has been somewhat formulaic. It has been a matter of “taking assets and thinking about what is their best home and who will pay the most for them and to whom they are the most valuable,” said the 47-year-old investment banker.
Her intuitive approach to deal-making wins Ms. Peretsman regular meetings with media company heads to discuss ideas or present proposals on behalf of clients, and that has defined her career from the start.
She worked at Addison-Wesley, the college textbook publisher, before coming into her own in the 1980s as a media investment banker at Salomon Brothers.
She first met her boss, the legendary Herb Allen, in 1976 as an undergraduate student at Princeton University, when she provided baby-sitting and house-sitting services for him at his home in the Hamptons. The Worcester, Mass., native kept a detailed log of the cash she was given and how it was spent to run the household that summer. Her attention to detail won her an internship at Allen & Co.’s risk arbitrage unit while she was a graduate student at Yale University business school.
Her first entertainment stint was writing a fairness opinion for Mr. Allen when he was head of Columbia Pictures and faced a takeover challenge by Kirk Kerkorian. She joined Allen & Co. in 1995 and has counted Tribune Co., Time Warner, and Adelphia Communications among her other clients.
She has helped throw her deal-making expertise behind the formation of regional sports networks, the firm’s involvement in still-viable Internet enterprises such as Priceline.com and the development of new cable content concerns such as Oxygen. And she is certain to be instrumental in helping Mr. Diller invest his $5 billion-plus cash hoard to acquire additional new media and interactive real estate.
It hasn’t always been easy to get the biggest media companies and powerbrokers to take risks in new areas. “I think there are a bunch of very interesting businesses out there that are worth getting into early so that you can understand them and make mistakes. Sometimes you have to try things in order to learn,” she said.
Viacom President Mel Karmazin has been a direct beneficiary of Ms. Peretsmann’s efforts. Even though he’s never hired her as an investment banker, he meets with her regularly. Mr. Karmazin said the BET and King World sales to CBS occurred, despite serious stumbling blocks, because of Ms. Peretsman’s keen negotiating skills.
“Obviously, she wanted to get the most money for her clients in those deals-who were [Liberty Media Chairman] John Malone and [BET Chief Executive] Bob Johnson and [King World President] Roger King. But she wanted to make sure the assets lived in a strategic place that would work in the future,” Mr. Karmazin said. “She’s terrific at finding solutions for what some people might perceive as potential deal-breakers, which we had in both deals. But she made it work.”
But these are testing times, even for the most well-regarded bankers.
Ms. Peretsman said the biggest hindrance to deals now is that “buyers’ and sellers’ stock price multiples are out of line. The seller want a premium that buyers don’t want to pay.” The sale of many $500 million to $1 billion-size media companies are waiting in the wings, most of them controlled by original investors who are not anxious to sell out at too low a premium. In the meantime, broadcast and cable assets will continue to be swapped and consolidated, and pieces of companies-such as NBC, Time Warner Cable and Vivendi Universal Entertainment-could be spun off to create new shareholder value and deal currency. Changes in the corporate tax rate and further deregulation will be deal-making catalysts-if mounting corporate debt doesn’t get in the way.
Allen & Co., best known for high-powered wheeling and dealing and its annual exclusive Sunny Valley, Idaho, retreat for media mavens, has been a beneficiary of the intense scrutiny of investment banks in light of disclosure scandals because it is an independent boutique that does not do research and only brokers deals with principals.
“The thing I’m the most proud of is my deals usually work, and I think it’s because we tell the truth. When someone has s
howed up with what we think is not a very good idea, we’ll say we don’t think it makes sense. That’s intellectual integrity. We have to live with the real afterward. Our reputation is on the line,” Ms. Peretsman said.
“When the AOL Time Warner deal was announced, I remember Mel [Karmazin] saying that he was up at night trying to figure out what it meant. He’s smart enough to intrinsically know that the traditional model, long-term, is an unstable model. The foundation of traditional advertising is not going to be sufficient. That’s why he was so anxious to have a traditional business like his CBS married to Viacom. It made a whole lot of sense.”
“The question is, where do you go from here? In my view, the big guys have a very interesting advantage and challenge,” she said.
“Advertisers still want to know how to get a mass market. How does Viacom, AOL Time Warner or any of the other media giants offer major advertisers such as Proctor & Gamble the demographics they are looking for across their company’s stable of media assets? How do they burn off the programming they don’t use on a broadcast network on cable? How do they create a surrogate for a mass market?” she said.
The paradigm shift already is under way with subtle but discernable marketplace changes.
“We’re really in this funny place in terms of the acceleration of technology and where it will take us. Even the early forms of video-on-demand challenge the practice of broadcast networks determining a static schedule. In the new world, that’s not going to matter because I will have TiVo-like functionality built into my television set and my set-top box, and I’m going to be able to watch what I want, when I want to watch it. It’s happening now,” she said.
Indeed, future media deals will be guided by the emergence of a segmentation that is “truly powerful,” that couldn’t exist without the availability of digital tiers and multiple integrated media platforms, “and that will have dramatic implications for advertisers,” she said.
The paradigm shift also will have a profound impact on content producers and distributors.
“Syndication will simply disappear. It just won’t matter,” Ms. Peretsman said. “In the not-so-distant future, if you produce a show there won’t be the need for a middleman, because consumers will select what they want, when they want. Suddenly, the cost of producing a show doesn’t extend to exorbitant distribution costs,” she said. “As a result, more of the economics accrue to the creator of the content.”
Until now, the system has pretty much been built on third-party hopes and prayers that syndication and selling offshore will help cover their deficit.
“The awkward thing today is that they are doing business by the old means while the new means are starting to develop,” she said. “If I am an ABC affiliate today, I’m buying `Oprah’ because I want a strong lead-in to my next show. In the new world, that’s not going to matter, because consumers will have access to the technology that allows them to watch what they want, when they want. So the real estate value of things will change.
“In the new model, a series such as `Friends’ may actually be more valuable to them, because on a TiVo or video-on-demand system, consumers might be willing to pay extra for it if they weren’t home to see the original broadcast,” she said. “What will that mean for advertisers? Will that extended reach be worth a premium? The existing model does not differentiate, but that could be the basis for a whole new revenue stream.”
That is the kind of complex forward-thinking Ms. Peretsman must build into media deals for which she advocates. It’s all about how they play five years from now, when all the rules are likely to have changed.#