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Media values black and blue all over

Jul 15, 2002  •  Post A Comment

However unsettling the times and circumstances, media companies are being forced to re-examine the way they do business and to make changes that ultimately will be for the better.
But the bruising and battering isn’t over by a long shot.
That’s because the scrutiny and blows are coming from nearly every direction and are transforming forces that are out of their control.
First, there’s the stock market. Last week’s five-year lows set by the Dow and NASDAQ kept media stocks and valuations near historical bottoms. A company such as MGM, at just under $3 billion, would be an attractive acquisition target right about now if it weren’t for the fact that most prospective buyers such as The Walt Disney Co. (which inquired about the studio earlier this year) are strapped with heavy debt, liquidity issues and tempered growth.
Disney’s own stock-normally an important deal currency-is trading at about $18 a share. That translates into about a $38 billion market capitalization, which is only a fraction of the $54 billion price tag many analysts attach to just the company’s consolidated operations.
With the stock market likely to remain skittish well into 2003, reflecting the uncertain growth and investment turmoil that are eating away at asset values, clearly media companies’ valuations and their ability to do deals will remain suppressed at least through year-end. The exceptions-and they will occur-will be wherever buyers with plenty of cash and available financing are willing to pay premiums for scarce operations such as Discovery Communications, Vivendi Universal Entertainment and even Yahoo!
Second, investors, Washington lawmakers and President Bush are uniformly demanding stricter government regulation of public companies.
Some of the other critical regulatory changes ahead for public media companies-whether it’s the way they report and account for their financial numbers or how they select and compensate directors and top executives-will become apparent in the next round of quarterly earnings reports during the next month.
Being more accountable
On a more voluntary basis, media companies that especially have relied on earnings before interest, taxes, depreciation and amortization as a measuring stick of their success are being forced to find ways to be more accountable and informative. It won’t be such a bad thing if cable companies with hefty capital expenditures or broadcast companies with extensive acquisition costs begin emphasizing more tangible free cash flow and earnings per share and less EBITDA to provide a more accurate growth picture. Many media companies already have.
“The vast majority of American businessmen are straight and their accounts are honest,” said Kevin Carton, global leader of PricewaterhouseCooper’s entertainment and media practice. “But the implications of recent events are causing every company to rethink how they present themselves, and out of that will come some constructive, additional disclosures and improved information.
“Beginning with their second-quarter earnings calls, companies are going to have to stand up and say these numbers are real, these numbers are right, and let’s get on and talk about business issues. They are going to have to be clearer about who they are, what they are and how they got there.”
Even with much stricter reporting guidelines and chief executives of $1 billion or bigger companies having to personally vouch for their audited numbers or face hefty fines and jail terms, there is an aspect to financial reporting that will be subjective in the selection and positioning of numbers. Conglomerates simply have too many moving parts to report on everything.
That puts the onus on everyone on the “corporate reporting supply chain” to report with painstaking integrity and accountability in a process that PricewaterhouseCoopers tackles head-on in the new book “Building Public Trust: The Future of Corporate Reporting.”
Still, there is no getting over the fact that WorldCom executives managed to find a way within the existing rules to stash nearly $4 billion in corporate expenses on its balance sheet, which has spooked investors about the veracity of financial statistics reported by big companies that have lots of acquisitions, investments and capital spending under their belts.
Even as companies such as AOL Time Warner, Disney, and Vivendi Universal struggle with internal division and try to realize merger synergies and make their companies work, they must do it in an environment of intense scrutiny and accusations from Washington and even from some key constituents, which can include investors, advertisers, consumers, vendors and lenders.
“If companies allow this paranoia of financial noise to continue unabated, this could be a huge distraction” that will eventually take a toll on the bottom line, Mr. Carton said.
At a time when companies should be focused on developing incremental revenue streams from new technology such as broadband and developing international expansion strategies to execute when things improve abroad, they are forced to spend time on damage control instead, he said.
One top media executive last week described it this way to me: “It’s just like a paralysis has taken hold. You report your best numbers; you tell them the advertising market is starting to come back; you work hard at pushing new digital technology and growing the bottom line and you run up against a wall of questions and concerns.”
The pressure is particularly acute for companies with cable interests, whose stock prices have declined more than 50 percent this year, making them the hardest hit. “As earnings results show accelerating growth and build momentum throughout he year, we suspect the stocks will follow,” said Fred Moran of Jefferies & Co.
Many media companies for which improving revenue and subscriber growth is not enough will also have to spend time finding ways to convince Wall Street that their balance sheets and strategies are simply above reproach.
Fishing for irregularities
For instance, investors “fishing” for accounting irregularities have raised what Merrill Lynch analyst Jessica Reif Cohen said are unwarranted questions about the way AOL Time Warner accounts for cable subscriber acquisition costs and accounts for AOL online subscribers.
Not only are the company’s accounting practices in line with general industry standards, but they are also consistent with its historically accepted practices.
“We believe both of these accounting practices are overblown,” she said.
Still, the company has gone into damage control modes that will encompass a series of positive moves in the coming months, including an investor meeting to review the gains made in reversing the online services’ fortunes. Last week AOL Time Warner heralded a new $10 billion credit facility to back up its commercial paper as if its AOL online unit had signed a long-awaited Internet service provider agreement with a major cable operator.
The support from 12 leading banks, which was oversubscribed by $2 billion, was a vote of confidence for a lumbering giant wrestling with internal divisions, a practice strategy and $28 billion in debt pitted against cautious operating projections. Dissolution of the troubled Time Warner Entertainment partnership and the possible public spinoff of Time Warner Cable may help, but it won’t solve AOL Time Warner’s bigger problems.
Searching for good news
In recent weeks other media companies also have been looking for some good news to boost investor confidence and their sagging stock prices. For instance, Microsoft founder Paul Allen announced that he bought 5 million more shares of Charter Communications, whose stock price has plummeted more than 70 percent this year on financial concerns.
Likewise, Viacom may be pushing all the good news it can muster, with its stock having taken a blow last week, falling in two days on several cautious analyst reports and renewed concerns about the pace of an ad recovery. Viacom’s stock is one of the few media issues that had remained above the fray, trading at
a 14 percent premium.
Despite his long-term buy rating on Viacom, JPMorgan analyst Spencer Wang cautioned clients that Viacom’s comparatively hefty valuation does not reflect what he expects will be “a slow ad recovery and decelerating growth for most mature media businesses” during the next five years.
But if AOL Time Warner was any indication last week, good news doesn’t last long these days or have nearly the impact it once did. The company’s stock price barely spiked the day of the refinancing announcement.
“It used to be you would come up with strategies for entire quarters or years,” one media CEO said. “Now even the best of us are just trying to figure out how to make it through each day.”