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Bob Wright, NBC weigh M&A risks

Feb 3, 2003  •  Post A Comment

Deciding how or if NBC should pursue a Vivendi Universal Entertainment deal is a dilemma for NBC Chairman Bob Wright that exemplifies a major challenge facing most of his media peers, regardless of their size.
In these times of unprecedented change and uncertainty, media executives are weighing how far they can push for organic growth from existing assets in an unstable economy against betting big to acquire and integrate choice businesses in hopes of realizing a swift and sure return.
Whether it’s a $20 billion collection of cable networks and studios or $400 million for a cluster of TV stations, the decision to be a merger-and-acquisition player has become more complicated, risky and unavoidable. Here’s why:
Most of the former rules of play for media M&A are broken. Price multiples, strategic rationale and reliable forecasting of incremental revenues and earnings gains have been bashed by failed megadeals, a freefalling stock market and a weakening economy.
Companies aren’t predicting their financial performance much further than they can dependably see it, which is the next six months at best. Even what looks like a moderating and steady advertising marketplace to some broadcast and cable companies rests on a house of cards. If any of the looming geopolitical concerns such as war kick in, all bets are off.
The only catalyst that could potentially test current media company reticence would be any meaningful deregulation later this year. If the conglomerates that own the broadcast networks were suddenly allowed by law to scoop up their biggest TV station group affiliates or each other, deals would abound, although there likely would be a bloodbath over valuations.
So it is understandable, in this environment, that even NBC-the most financially successful broadcast network company, whose dominant viewer demographics spurred it to $1.5 billion in operating profits on $6 billion in revenues-prefers to stick to its knitting.
Mr. Wright told me last week that he is determined to keep NBC focused on improving and rebranding Telemundo, Bravo and some recently added TV stations representing nearly $4 billion in new acquisitions and a potential $400 million in collective incremental annual profits within several years.
“This year it is all about execution, so we can realize the value of what we have,” Mr. Wright said.
The intense mining and growth of existing operations under tight, smart management also is the modus operandi at other media companies, including Viacom, Fox, AOL Time Warner, Disney and Tribune.
Companies are going to extremes to shed some of the financial baggage they accumulated doing deals in the 1990s. For instance, just last week AOL Time Warner said it aims to eliminate at least $7 billion of its $27 billion debt using most of its free cash flow and selling or spinning off assets, some of which it acquired in recent mergers. Well-placed sources say that, within a year, that could include spinning off the AOL unit and selling The WB Network along with its stakes in major cable services.
Given the ugly fallout from many of the bigger recent media mergers and acquisitions and the widespread pressures for companies to deleverage their balance sheets, proceeding with caution is the right thing to do. But in the end, so might be making another large strategic deal.
Even Mr. Wright concedes other forces are at work that will radically change traditional media and likely move NBC and others toward doing some big deals down the road.
Those forces, as they are discussed by Mr. Wright and other top industry executives, include the shift in power from content providers to content distributors. They include the fragmentation of viewers, subscribers and advertisers, along with the critical revenues they generate.
Then there is the breaking point the industry has reached on programming costs-particularly sports rights-and changes in the use of programming that involve immediate repurposing and on-demand play. And finally there is the next and perhaps final wave of consolidation that could lead to an unprecedented concentration of power in every industry sector.
Each of these change agents has begun to reshape even the biggest media players and their deals.
For instance, the unprecedented leverage being used by consolidated content providers and distributors to dictate pricing and access, even at this early juncture, has cast an anxious pall over the industry.
So for NBC a major consideration has to be how a prospective merger or alliance with VUE would make it a more formidable content player, helping to make up for the distribution it doesn’t control and putting it on equal footing with Viacom, Walt Disney Co. and Fox Entertainment Group.
With the stakes so high, it is not surprising that high-level sources close to the company say NBC’s corporate parent, General Electric, might be willing to consider a limited spinoff or even an outright sale of the company at the right price and under the right circumstances, having firmly rejected both options in the past. It appears that times also are changing for a formerly invulnerable industrial giant such as GE, which is now rethinking every aspect of its far-flung portfolio. Mr. Wright, who also is a vice chairman of GE, declined comment on the speculation.
In the end, such a transforming move may be the only way for NBC to either partner with or counter a challenge by the likes of Barry Diller, VUE’s chairman and CEO, whose USA Interactive has a 5.4 percent stake in the Vivendi subsidiary, and John Malone and his Liberty Media Corp., which has stakes in Vivendi and USA. Both men have expressed interest in the VUE assets.
In any event, VUE may actually turn out to be one of those scarce valuable media companies that players such as NBC and Liberty, who are seeking scale and synergies, simply can’t resist.
To be sure, there remains plenty of deep-set skepticism on Wall Street, where investment bankers are eager to do deals and investors are flinching at the thought. Analysts are quick to point out that the only big media mergers and acquisitions that have really panned out in recent years include Viacom’s takeover of CBS, Infinity Broadcasting and King World. They represented “like” businesses that, when carefully integrated, created more value-certainly well over $100 billion in a better market, by one analyst’s count-than those same companies could have realized on their own. That’s quite the contrary to the AOL Time Warner merger, which has lost an astounding $200 billion in value in the past two years.
Little wonder then that JPMorgan is leading the charge on Wall Street, cautioning that even with the strongest balance sheets in the industry and above-average trading levels, the mergers and acquisitions Viacom and Fox (including its corporate parent, News Corp.) are poised for could quickly take a toll. Major acquisition targets include MGM, major TV station groups, Hughes Electronics’ DirecTV, stray cable channels, VUE and even NBC.
Any big deal-making early in 2003 could especially prove problematic if there is so much as a slowdown in advertising, which accounts for more than half of the domestic media market and would adversely affect revenues and cash flow.
In a painstaking analysis, JPMorgan analyst Spencer Wang makes a convincing statistical case that more times than not, media companies have overpaid for and underdelivered on their acquisitions in times that were economically better and more competitively predictable. That makes today’s merger-and-acquisition risks daunting, indeed. That no doubt has crossed Mr. Wright’s mind a few times.
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.