Beauty Is in the Breakup

Mar 21, 2005  •  Post A Comment

Which will break up next? The announcements last week that John Malone’s Liberty Media is spinning off its 50 percent stake in Discovery Communications into a separate company and that Viacom is considering splitting its cable and broadcast operations into two publicly traded businesses have the investment community abuzz with predictions about which of the remaining media giants might join the trend of breaking up to unlock value.

Yet while there is celebration among many investors at the prospect of finally being able to see their media investments appreciate after years of being moribund, some analysts are questioning whether these breakup plans make much sense in the long term, and if might be simply financial maneuvers designed to give the appearance of being more meaningful than they really are.

Analysts say that while all of the major media conglomerates are fair game for similar kinds of breakups, many eyes are presently focused on Time Warner, which during the past two years has shed assets it deemed noncore and which continues to see its stock price languish amid a persistent decline in subscribers at its America Online division and the prospect of slower growth at its Time Warner Cable unit.

A lot of the speculation has centered on Time Warner Cable, which a few years ago Time Warner considered spinning off until a U.S. Department of Justice and Securities and Exchange Commission probe into the accounting practices of AOL shelved those plans. Now that the accounting investigation is nearing completion and Time Warner, along with Comcast Corp., is making a play for bankrupt cable operator Adelphia Communications, sources said Time Warner is once again revisiting the idea of a spinoff strategy for its cable division.

A Time Warner spokesman declined to comment.

Attention is also being paid to The Walt Disney Co. and Rupert Murdoch’s News Corp., though the general consensus of analysts is that neither company is likely to break itself up anytime soon.

The concept of spinning off assets is not new. For the past few years big media companies have been selling assets deemed noncore or nonstrategic. Time Warner sold its CD-manufacturing business and its music division. Viacom also has been active in this area, selling off its controlling interest in video retailer Blockbuster last year.

But last week’s announcements indicate that media companies are increasingly willing to take things further, separating out low-growth businesses from higher-growth ones and enabling investors to choose between the two-all in a bid to jump-start stock prices that have taken a beating in recent years.

On one level, Liberty’s and Viacom’s moves seem very clearly to be an acknowledgement that synergies across different assets are difficult to achieve and Wall Street is no longer interested in media giants with diversified businesses. In short: They’re a sign that media’s obsession with consolidation could be ending.

However, some observers are noting that both Liberty and Viacom are controlled by majority shareholders-Mr. Malone at Liberty and Sumner Redstone at Viacom-who for months have lamented that Wall Street hasn’t given their companies their due respect. Observers suggested that the breakups are more about enriching these moguls’ personal fortunes than giving shareholders a fair shake.

The skepticism is largely rooted in how Liberty and Viacom are thinking about these spinoffs. Analysts initially thought Liberty might spin off its operations along the lines of how it has divided its assets within the company. Liberty’s assets are divided among a networks division, which includes Discovery and Starz Encore Group; an interactive division largely made up of home-shopping giant QVC; and a third group largely comprising emerging businesses. But instead of creating a new company made up of its network assets, Liberty opted to dip into both the networks and interactive divisions to combine the Discovery stake with Liberty’s full control of Ascent Media, a post-production sound and video services company, to form Discovery Holdings Co.

“It’s not exactly what people wanted, but one could argue that it’s logical if it’s one step toward the potential liquidation of Liberty,” said independent media analyst David Joyce.

Richard Greenfield, a media analyst at Fulcrum Global Partners, said while the pairing of Discovery and Ascent might not seem logical at first blush, the move makes sense because Liberty’s chief goal in spinning off Discovery is to ensure that the transaction is tax-free-a goal Mr. Malone tries to achieve in every transaction he enters into. To achieve that, an asset that Liberty has tax-consolidated for at least five years had to be included in the new entity. And while Starz Encore Group might have qualified, Mr. Greenfield noted that valuing the storied Starz operation might have been tougher than the simpler Ascent.

A Liberty spokesman did not return a call seeking comment.

Viacom, meanwhile, is pondering whether to combine its high-growth cable operation, which includes MTV Networks, with the Paramount film studio to create a business that would be run by co-Chief Operating Officer Tom Freston. At the same time, the remaining assets, including Viacom’s television and radio operations, would be spun off into a second company to be managed by co-COO Leslie Moonves.

Analysts and observers across the board agree that such a split allows investors interested in high-growth assets to buy into the Freston-controlled entity, while shareholders interested in a company that buys back stock or pays huge dividends can buy into the Moonves-controlled company. It also addresses the issue of succession, since Mr. Freston and Mr. Moonves are both vying to succeed Mr. Redstone.

Nevertheless, some observers are questioning the logic of saddling high-flying CBS with Infinity Radio, which has lagged amid a slowdown in advertising. What’s more, these people note, the cable networks lose the benefit of having leverage over cable and satellite operators in retransmission consent discussions if CBS becomes a separate company.

“We are not convinced that combining the CBS network with the radio assets and separating it from the cable networks is the right strategic move given the similarities of the businesses and the potential synergies,” said analyst William Drewry of Credit Suisse First Boston. “It smacks more of financial engineering, and the market often discounts through those moves with media companies.”