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EXPECT A FLOOD OF MERGERS IN 2004

Jan 5, 2004  •  Post A Comment

Media companies are bracing for better days and bigger deals in 2004. But how they respond to the abounding risk and opportunity will shape their fortunes more than any other factor in the next year.
If stated intentions and a flurry of activity in the waning days of 2003 are any indication, some of the biggest turnaround and growth players of that year are poised to engage in some compelling transactions this year to protect and advance their competitive edge.
The bottom line on deals is that another wave of consolidation transactions making the big even bigger is a no-brainer, given the broad availability of funding, pent-up demand, massive corporate deleveraging, record free cash flow generation and choice potential acquisitions. Media and entertainment deals next year could easily double the more than $36 billion in 460-plus industry transactions announced in 2003, according to Thomson Financial’s preliminary tally.
As demonstrated by the botched AOL Time Warner merger-in which $200 billion in market value and the “AOL” name were shed within three years-a deal is less important than what the parties involved make of it.
Much of the deal-making over the next 18 months is predictable.
The improving markets and economy, and settlement of the Securities and Exchange Commission and other lingering accounting probes, pave the way for Time Warner Cable’s public spinoff. The creation of new cable stock will provide currency for acquiring the bankrupt Adelphia Communications and Cablevision Systems (which the controlling Dolan family has said for a decade is for sale at the right price), giving Time Warner the only other subscriber base to rival Comcast Corp. Even the financially and competitively robust Cox Communications and Paul Allen’s gradually recovering Charter Communications are considered prime cable merger and acquisition targets.
But that’s just the first step in what many on Wall Street expect will be a two-step transformation of Time Warner, whose stellar film studio, television production and syndication, cable network and publishing businesses (after the spinoff, sale or further minimization of AOL) would be prime merger assets for Comcast or the proposed NBC Universal.
Despite The Walt Disney Co.’s overall improving financial outlook and stock price, unsettled ABC TV and theme park business, succession issues and disgruntled shareholders will likely force the company into the hands of a merger partner or acquirer such as Comcast or Pixar Animation Studios.
Time Warner, NBC Universal, Viacom and Sony Corp. of America are among the potential suitors for Metro-Goldwyn-Mayer, whose prize independent film and TV libraries have been on the sales block for years and are perceived to be overpriced.
Consolidation of cable networks will continue. Time Warner will buy the 50 percent stake in Court TV it doesn’t already own from partner Liberty Media Corp. Time Warner or Comcast could snatch Discovery Communications from Liberty or, in fact, seek to acquire all of John Malone’s portfolio company, which also includes QVC and Starz Encore! The E.W. Scripps-owned niche cable networks also could garner a hefty marketplace sum.
And let’s not forget the broadcast groups-from Tribune to Hearst-Argyle, from Gannett to Sinclair-that hoped to expand off of deregulation that never happened. The impetus for doing deals will be healthy 2004 cash-flow multiples artificially boosted by national election and Olympic Games advertising.
But no deal will be a more potent change agent in the new year than News Corp.’s takeover of Hughes Electronics’ DirecTV. The ability of News Corp. and its Fox Entertainment Group subsidiary to use the dominant domestic satellite player to fortify the power of their Fox news, sports and entertainment cable networks, Fox broadcast network and stations, 20th Century Fox film studio and program production and syndication pipeline will give new meaning to the term “leveraged negotiations.”
More than any other companies, News Corp. and Fox demonstrate that understanding and embracing how the landscape is changing is the key to success.
But it is the big issues and changes in technology, competition and economics, and the media companies’ response to them, that will define and advance the media and entertainment industries in 2004.
Among the major trends and issues that will be opportunity and risk catalysts in the new year:
Opportunities
* Redefining the media and entertainment value propositions: News Corp.’s blow-away success with BSkyB in the United Kingdom set the precedent for what it will do with its 35 percent controlling interest in Hughes Electronics’ DirecTV. News Corp. Chairman Rupert Murdoch has promised minimum-price or free digital-video-recorder-equipped set-top boxes for satellite subscribers and myriad new interactive services linked to its popular Fox news, sports and entertainment cable networks supported by expert marketing.
While that fuels the competition with cable providers, it also sets a new service and pricing standard for in-home entertainment and raises the bar for every distribution and content player. If you’re still waiting for the television landscape to change, you’re too late. Half of all multichannel video subscribers take digital cable or DBS service, mostly for the selection of channels. More than one-fourth of digital cable subscribers pay more than $100 monthly for additional high-speed data services, soon to be matched by voice-over-Internet protocol telephony. The golden bundle is designed to minimize subscriber turnover.
* Mining digital interactive technology: Cable operators say half of their subscriber base will be paying extra for digital services within 12 to 24 months. Multiple revenue streams will provide a more efficient way to amortize content costs. They also provide a catalyst for new services, not the least of which are server-, storage- and access-related. Disney should be applauded for embracing new technology in innovative ways-from streaming movies to self-destructing discs-that extend the revenue-generating life of its content.
NBC is promising to mine Universal’s libraries for content for subscription on-demand services. HBO and ESPN have begun mining their prime content and brands in creative interactive ways. But the industry has only begun to explore the possibilities. Companies that fail to adapt to new technology are doomed to be overcome by threats such as copyright theft and piracy. Broadband technology can provide a sure and affordable way to avoid the music industry’s disaster, if content producers and distributors want it badly enough.
* The reinvention of advertising/understanding digital’s answer to the 30-second spot: With a record $16 billion of commerce transacted online in 2003, or nearly double that in 2002, consumers clearly are feeling more comfortable with online sales-the ultimate goal of any advertiser.
Broadcast television’s 30-second tease was just a warm-up to the more enticing individualized education and transaction to which the Internet and interactive television are perfectly suited. While the wild upfront spending in 2003 represents a $2 billion spending shift from irrationally priced spot and scatter markets, the new approach to advertising promises to create new revenue streams that will not only generate but also consummate sales. So-called product placement is a big red herring going nowhere. The only real control advertisers can have is to become program producers-just like in the good old days.
* Monetizing content in new ways: The $12 billion DVD film market in 2003, which was double the box office sales, underscores the strength of the in-home market and the creation of a new outlet for amortizing original content costs.
The same eventually will hold true for television programs. Cable and broadcast digital platforms will provide for some recycling and repackaging of product and more ways to amortize original costs. Television’s gradual migration to a pay-for-play model will prove more lucrative and reliable than conventional advertising. But the ultimate
challenge for targeted content providers is to avoid being minimized by being restricted to a la carte and tiered offerings.
* Drilling down into core assets and leveraging what you do best: There has been no dot-com resurgence, only companies and executives accepting the Internet as a way to extend their core franchises to a mass market that has fully embraced an online existence for communications, entertainment and commerce. Barry Diller, InterActive Corp. chairman and former Vivendi Universal Entertainment chairman, understood that before any of his peers.
Risks
* Doing nothing: Broadcasters generally have this risk cornered. Try as they might, few have attempted to develop digital businesses, though they all have been mandated to pay for the creation and maintenance of a digital platform they do virtually nothing with. Content producers and distributors who fail to forge new interactive, global, multimedia outlets for their properties are missing the boat. That includes finding new ways to use the Internet as a platform. Broadcasters need only observe how the telephone companies are reviving their fortunes. A growing number of Wall Street analysts are making the case that doing nothing in response to the rapid adoption of DVR technology will jeopardize the estimated $60 billion spent annually on all forms of conventional advertising. Others argue that 1 million personal video recording devices today morphing into 20 million in four years isn’t enough to solicit change. Who wants to take a chance?
* Economic cycles, prime-time ratings and other things out of our control: Best efforts and intentions are often defied by whims of nature that cannot be contained or anticipated. The faltering ratings at Fox, NBC and even ABC are no fluke. This season’s bigger-than-average decline in young males is not entirely a Nielsen sampling error. The signs say broadcast television and even cable television are no longer big deals. Reaching critical mass is an aggregate act that requires media companies applying the reach of their broadcast and cable networks. It is that limited reach and payback that will keep program costs and license fees in check.
* Not divesting slow, no-growth businesses; not mining human resources: The long list of asset sales Time Warner engaged in this year is proof that there is plenty of winnowing and paring to be had at the largest media conglomerates. Viacom is likely to shed Blockbuster, yet both Viacom and Time Warner are in the market to buy. But instead of buying broadly, media players now are buying deep-acquiring more TV stations, cable systems and cable networks where they already have some.
The bigger problem is one of overlooked human resources. Inordinate focus on power-hungry chief executives struggling to keep their jobs is preventing media companies from focusing on the individual talent at every personnel level who make companies great.
* Failing to think outside the box: The broadcast and cable executive who thinks he or she can coast through the anticipated financial downturn of an off-year such as 2005 on the artificial revenue boost created by the national elections and Olympic Games in 2004 is still living in the Dark Ages. These are no longer rational cycles on which you can run a business. It’s a financial disaster waiting to happen and already is creating problems for smaller broadcasters.
* New Year’s resolution: There are always better, more innovative ways to do things-find them.