Top media execs are poised to deal

Dec 16, 2002  •  Post A Comment

Richard Parsons, AOL Time Warner’s thoughtful and focused CEO, could have been speaking for the entire media industry when he said of his own challenged company, “Hang on, hang in and stay tuned.”
His comments came amid two major Wall Street media conferences last week, which offered a mixed, somewhat turbulent view of where the industry is headed and how it will deal with the transforming issues reshaping it.
Mr. Parsons reminded us that so much of media today-and not just his company-is “a work in progress,” requiring time, enterprise, resources and opportunity.
But in 2002, it became clear few media companies have it all, and that most are either wrestling with internal change or responding to external change that will dictate new ways of doing business.
The underlying messages of weeklong media conferences hosted by UBS Warburg and Credit Suisse First Boston were take nothing for granted and brace for more change.
2003 promises to be a time of renewed horizontal consolidation, accelerated asset swapping and heavy-duty restructuring, according to many of the top executives whose companies made presentations to investors.
One sure catalyst highlighted in nearly every major company presentation is the financial pressure mounting at so many media firms: pressure to reduce debt, to spend plentiful free cash flow, to generate new revenue streams from existing operations, to streamline costs, to prudently invest in the future. Whether or not the financial markets and the economy are ready, media firms will and should make some significantly strategic moves next year in three primary areas.
Media acquisitions announced in the first 11 months of this year-totaling a mere $50 billion, according to Thomson Financial, which is less than the $54 billion closing price of Comcast-AT&T-are a meager warm-up to 2003.
Financial pressures
Whether spurred by long-promised deregulation or a pent-up bid for scale, top media executives are being blunt about their eagerness to do deals.
“We’re at the table; we’re in the hunt,” said Viacom Chief Operating Officer Mel Karmazin. At both conferences, Mr. Karmazin openly referred to his company’s interest in buying the Sci-Fi Channel or USA Networks from Vivendi Universal, American Movie Classics from Cablevision Systems, and more television stations. Viacom’s net $2 billion in free cash flow and low debt gives it the power to acquire entire companies.
Robert Bennett, president of Liberty Media Corp., told attendees at the UBS media conference that Liberty is prepared to make a run at Hughes Electronics’ DirecTV and at the Vivendi Universal Entertainment assets with or without a partner such as News Corp., in which it is a 20 percent equity owner. A combined News Corp.-Liberty-Microsoft bid for DirecTV is imminent in light of EchoStar Communications and Hughes Electronics’ canceling their merger, rejected by regulators.
Its total equity value of $40 billion and fluid, high-powered public and private holdings afford Liberty the firepower to be a deal catalyst next year.
An intensified investigation by French authorities and a tax dispute with Barry Diller’s USA Interactive threaten to force a sale of VUE assets sooner rather than later. Universal Studios, the other hotly sought-after asset, could land with News Corp., Viacom, The Walt Disney Co. or Metro-Goldwyn-Mayer.
MGM, which is itself an acquisition target, also is eyeing opportunities to expand. MGM Chairman Alex Yemenidjian told UBS Warburg attendees that Cablevision’s AMC, in which MGM owns a 20 percent stake, would be a “perfect fit.” “Next year will be really big for mergers,” said Mr. Yemenidjian, whose company would be a match for the likes of NBC, Viacom or Fox.
Cable giants Comcast, AOL Time Warner and Cox also expressed interest in acquiring cable networks or more cable systems. While steering clear of any more “transforming deals,” Mr. Parsons said Time Warner Cable will use its new public currency to acquire partial or whole stakes in other cable operations when it is spun off early next year.
The other prominent group of presenters last week was the larger television station and newspaper media companies whose balance sheets, while in some cases heavily leveraged, are strong and ready for expansion. Cross-ownership and other deregulation promised next spring will unleash Tribune, Gannett, Hearst-Argyle, Belo and others who will seek scale through rigorous mergers and acquisitions, possibly even with each other.
Advertising questioned
Despite all the good news in broadcasting, no one appears convinced that the advertising recovery is solid.
Even major advertising forecasters were at odds. John Perriss, chief executive of Zenith Optimedia Group, told UBS attendees he sees only “signs of recovery,” forecasting a 4 percent rise in all of television spending in 2003. Sharing the same dais at the UBS gathering, Universal McCann’s Bob Coen said advertiser spending in 2003 should be up 4.5 percent for the broadcast networks, 7.5 percent for national cable, 2 percent for spot TV and 2.5 percent at TV stations-in high contrast to most other flat to negative forecasts.
Merrill Lynch analyst Lauren Rich Fine’s advertising estimates are somewhere in between, calling for TV stations to sustain a 6 percent dive next year to flat ad growth compared with a 6 percent increase for broadcast networks and also for cable.
Fitch Ratings in a report last week pointed out that an “elusive advertising recovery” remains hinged on improvement in corporate profits and general economic stability. It should be treated like the stronger-than-expected broadcast upfront, which “should not be viewed as a conclusive turning point for advertising.”
If a 5.7 percent increase in national ad spending in consumer media forecast by Mr. Coen holds for next year, then businesses will be able to maintain their status quo, given that inflation remains in check and interest rates remain low.
But status quo isn’t good enough anymore. Media businesses that want to remain competitive must begin to heavily reinvest in their future. Major players appear unabashed in their commitment to gobble up businesses with established dual revenue streams as a defense against not only advertising spending cycles but also sea changes in conventional content viewing and ad spending.
Technology challenges
The increased adoption of technology that gives consumers control of television content was clearly top of mind with many savvy media and advertising executives. Addressing a UBS lunchtime crowd, Mr. Parsons talked about the need for “harnessing the beast” as the best defense against such technological change.
While the projected adoption rates for personal video recorders, video-on-demand and the like can be disputed, the trends are clear.
Viacom’s Mr. Karmazin offered a pragmatic approach to increasing ad zapping and fractionalized ad spending, in suggesting CBS could always be turned into a pay TV network. “Then we will have to make our money some other way,” he said.
The Deals page is edited by Diane Mermigas, who can be reached by phone at 708-352-5849, by fax at 708-352-0515 or by e-mail at dmermigas@crain.com.