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A Flurry of Media Deals Ahead

Oct 20, 2003  •  Post A Comment

More targeted, defensive media deals lie ahead in the next two years, driven by companies’ unprecedented free cash flow and high debt, new interactive revenue opportunities and changes in advertiser spending and other core financial metrics.
And let’s not forget perhaps the most potent motivator: fear.
Some players fear they won’t have enough important marbles to play with, or that leveraging their billion-dollar assets will depend on someone else exercising his or her clout. It’s fear of slow or no growth in mature media businesses.
The proposed NBC Universal merger is just a warm-up. Experts say it is conceivable that eventually Comcast Corp. could buy a streamlined Time Warner or Walt Disney Co., that Viacom could buy EchoStar Communications or that Disney could buy Pixar Animation Studios under new business mandates that include scale, ensured access to content and distribution, dual revenue streams and interactive enterprise. That is why cherry-picking media rivals will become a sport.
Beneath the big splashy plays at the top will be a massive reshuffling of media and entertainment assets, including predictable continued clustering of TV stations and cable systems and less unpredictable moves such as leaps into international markets and back into the Internet space.
While most media players want to be part of the action, they also want to avoid the pitfalls that led to the lightning-fast undoing of the merger of AOL and Time Warner, which has seen $200 billion of its value evaporate in two years.
The new deal paradigm is being set by Comcast Corp., which has integrated and upgraded AT&T systems, reduced acquisition debt by one-third and scoped out its expansion options in less than one year. Next year it will likely use this firepower, $2 billion in free cash flow and $10 billion in nonstrategic off-balance-sheet assets to make big content plays.
What NBC Universal provides, in the meantime, is a blueprint for prudent, creative financing that has the General Electric subsidiary walking away with cable networks and a studio for about one-third of their assigned $14 billion value (to be paid mostly in GE stock), which is about what Vivendi paid Barry Diller for the USA and Sci Fi cable assets two years ago. Twenty-percent minority partner Vivendi has no option but to cooperate and cash out on cue in a few years.
Among the most potent catalysts at work in this and future deals is the reinvention of programming economics. One method to achieve this is to force ESPN to retreat from 20 percent fee hikes and settle for mere 3 percent to 5 percent increases instead of being dropped or bounced to a paid tier. Widely adopting paid on-demand models supplemented by advertising is another method for an industry that soon will be remote-controlled by personal video recorders, digital video recorders and video-on-demand. Or, like NBC, buy program suppliers out and do as it pleases with their content.
incestuous squeeze
Such fundamental change is jarring for single-revenue-source media players whose advertising lifelines are already under siege. It is an especially critical challenge for grass-roots broadcasters who, in their ongoing break from the broadcast network fold, must quickly learn how to leverage their digital platforms and their retransmission rights if they want to thrive in an increasingly fragmented world in which local advertising dollars are siphoned by cable systems that support the cable networks owned by the corporate parents of their affiliated broadcasting networks. It’s a deadly, incestuous squeeze.
The AOL Time Warner and Vivendi Universal debacles demonstrated that simply slapping together media assets isn’t enough. Even in the case of NBC, where it’s always been a given that the capable GE-bred executives in charge will continue to oversee the expanded merged company, there is a question of needing a few more capable hands. To the point: What outside executives of stature will assist NBC Program President Jeff Zucker to reinvent NBC’s dominant prime-time schedule, integrate and monetize the Vivendi Universal Entertainment assets, create and execute new on-demand services and nurture creativity over the next nine months? Who else comes over from Universal with Ron Meyers?
Where executive leaders have prevailed at so many media conglomerates, true leadership has too often been in short supply. And that is what makes some potential transactions ripe for picking.
Some finance experts are convinced Disney will attempt to acquire or more closely align with Pixar as a long-term resolution to renegotiating their current partnership. Forfeiting the favorable economics of the final two animated films in that pact, as rumored, would be only a stop-gap measure. And wouldn’t it be just like the savvy Pixar CEO Steve Jobs to view a carefully crafted Disney deal as a reverse takeover that would lead to a peace-with-honor exit for Disney chairman and chief executive Michael Eisner? Many institutional investors wildly support what Mr. Jobs is doing with Apple Computer and consider him a perfect match for Disney.
Short of such a match, Disney could be promoted to bulk up on TV stations and cable networks to ramp up its free cash flow in a sustainable manner, since many of the welcome gains ahead in 2004 are a function of onetime box office hits and accounting credits.
Another prospect would be a friendly Comcast-Disney stock deal that could leave Disney’s affable president Bob Iger presiding over its media networks, studios and theme parks, while a uniquely qualified Steve Burke, Comcast’s cable president, integrates, reshapes and oversee the Disney assets he once helped to manage. Comcast sees in Disney what it opted not to bid on in VUE-a content treasure trove to create channels, on-demand services and subscription products at low cost and risk. Independent MGM’s 4,000-title library eventually will have the same acquisition attraction for Comcast, NBC Universal, Viacom or even John Malone’s Liberty Media Corp., if it doesn’t first merge with another smaller Hollywood player such as DreamWorks or Sony, experts say.
But ultimately, a gradually dismantled Time Warner may be more tempting. Eliminating “AOL” from the corporate moniker last week is a precursor to a spinoff or a sale of the AOL online unit next year (Barry Diller is said to be interested), Wall Street sources say.
With the $2 billion-plus Warner Music unit finally being sold, the planned public spinoff of Time Warner Cable will occur next year, when government accounting probes of AOL have concluded and if the liability payout on pending shareholder lawsuits isn’t financially debilitating.
potential acquisitions
Within a year’s time, TWC stock could be used to acquire Cablevision Systems, Charter Communications and even bankrupt Adelphia Communications-all potential acquisitions for Comcast, which ultimately may swap its 21 percent stake in TWC for select cable systems that fill out its footprint. All that done, Comcast or Viacom (which has its own $3 billion in free cash flow and debt-free balance sheet) could acquire Time Warner’s cable and broadcast and print and studio operations, industry experts say. It’s all 18 months to 24 months away and very doable, Wall Street experts say.
Another likely deal scenario being talked up in financial circles has a media giant such as Viacom, NBC Universal or Disney making a play for Charlie Ergen’s EchoStar in several years’ time, when the $20 billion satellite player is ready to sell at a premium after topping out its free cash flow, new subscriber and new services growth.
By that time Rupert Murdoch’s News Corp. and Fox Entertainment Group will have mastered the unprecedented art of leveraging its 34 percent ownership control of dominant DirecTV, its leading broadcast and cable networks, TV stations, syndication and production studio.
In anticipation of an improving but not less volatile economy, Wall Street deal-makers say they are bracing for a new round of strategic matches with higher return on investment and lower risk to up the ante for all vertically integr
ated media giants. They seek a better defense against an increasingly uncertain offense, knowing the biggest risk of all: clinging to old conventions and doing nothing.