Cable Mergers Arouse Speculation on Who’s Next

Jul 14, 2003  •  Post A Comment

With Liberty Media’s buying all of QVC, Viacom’s taking 100 percent of Comedy Central’s and MGM’s selling back to Cablevision its stake in the Rainbow channels, the question in this game of cable channel ownership consolidation is “Who’s next?”
Could it be Game Show Network, which is owned 50/50 by Sony Pictures Entertainment and Liberty? Starting next February, both companies have the right to make changes in their stakes in the channel, with each company’s possessing the first right of refusal to buy out the other, according to Securities and Exchange Commission filings.
Maybe it’ll be Court TV. Its 50/50 owners, Liberty and AOL Time Warner, have the right to buy each other out after Jan. 7, 2006, according to SEC filings.
Or perhaps the next network to go the single ownership route will be E! Entertainment Networks. There is an arrangement, which under certain circumstances would allow minority holder The Walt Disney Co. to exercise a trigger to sell its stake in the channel to controlling shareholder Comcast. Yes, the Robertses just sold QVC to Liberty, but the nation’s largest cable operator might still have an appetite for a traditional ad-supported cable network, in addition to its ownership of The Golf Channel and Outdoor Life.
Beyond the much-publicized sale of Vivendi Universal Entertainment, which controls cable channels USA, Sci Fi and Trio and whose owners include Vivendi Universal, Liberty Media and Barry Diller’s InterActiveCorp, Wall Street analysts and industry observers are unsure which channel could be next. Indeed, the transactions that have taken place in recent months weren’t widely expected before their announcements.
However, given the interest in VUE, and the QVC deal, Liberty clearly is on the prowl for more properties.
In July, Comcast sold its 57 percent stake in QVC to John Malone’s Liberty Media for $7.9 billion. That deal clearly reflected Mr. Malone’s desire to turn Liberty into an operator of media properties.
While motivating factors behind the QVC, Rainbow and Comedy Central sales were different, a point that was clearly not lost on the executives running these media companies is investor preference for plain-vanilla ownership structures over the more complex ones now in place at many channels, analysts said.
“Many of these partnerships made sense at the time [they were made as a way] to help disperse the risk of launching a new channel,” said David Joyce, a cable analyst at Guzman & Co. in Miami. “But Wall Street likes pure-play stories and can give higher multiples on less complexity.”
Added Ted Henderson, a cable analyst at Stifel Nicolaus in Denver: “No one wants to read a 2-inch-thick 10-K,” referring to the SEC document that a public company files every year that includes details on the properties that a company either owned or had a stake in.
Indeed, it appears Wall Street responded well to deals involving Comedy Central, the Rainbow properties and QVC. AOL Time Warner shares advance 26 percent between late April and early July, while Viacom shares rose 2 percent. MGM shares have inched up 1 percent since late June, while Cablevision shares rose 10 percent. Liberty, which announced the QVC deal July 3, saw its stock rise 6 percent, while Comcast shares rose 5 percent.
However, it remains to be seen whether rises in stock prices or investors’ cries for simpler structures will be enough to motivate more media companies to tackle the task of dismantling partnerships – particularly if there is no pressing need to do so.
Discovery Communications, whose ownership is divided among Liberty Media, Cox Communications, Advance/Newhouse Communications and Discovery Chairman John Hendricks, has no plans to change its ownership structure, said David Levy, a company spokesman.
“Our shareholders have been the same since the mid-’80s, and Discovery has no plans to be sold or to go public,” Mr. Levy said.
But Mr. Malone, whose Liberty owns 49 percent of Discovery, can be mighty persuasive when he wants to be, and Liberty might think it would get much more credit on the Street-read higher stock value-if it owned Discovery by itself.
Indeed, while industry experts agree that most media companies are at least examining their ownership stakes in cable channels to see if opportunities to simplify exist, they warn that thinking about unwinding these partnerships and actually following through can be two very different things.
Possible Wrinkles
Among the potential wrinkles, experts warn, some partners simply may not be interested in selling what have been profitable investments. In the case of others, an acquirer might be looking at a hefty price tag to buy out a partner, particularly if there are tax implications to a sale. “It’s not as simple as, `Let’s straighten up the furniture,”’ Mr. Henderson said.
That is the case even where there are potential conflicts. For instance, NBC has a 25 percent stake in A&E, yet now owns Bravo, a direct competitor. NBC Chairman Bob Wright said there are no plans for NBC to sell its stake in A&E.
Among the networks that industry experts say would be the most obvious candidates for an unwinding are ESPN, 80 percent of which is owned by the Walt Disney Co. and 20 percent held by the Hearst Co.
“ESPN is such a huge locomotive for Disney that if they could buy it, I think they would,” said one veteran television executive.
A cable veteran agreed. “If Disney continues to languish, Michael [Eisner, Disney’s chairman] is going to have to do something,” he said.
However, convincing Hearst to sell its stake might be tough, a person familiar with both companies said. For one thing, Hearst has been with ESPN since its early days and is likely quite happy with the cash generated by its stake. Another issue could be Hearst’s tax implications associated with being a longtime stakeholder in an entity that has grown enormously in value over the years, noted Guzman’s Mr. Joyce.
A Hearst spokesman declined to comment. A Disney spokeswoman did not return calls seeking comment. A Liberty spokesman could not be reached for comment.