Media Poised for Turnaround

Mar 28, 2005  •  Post A Comment

Has the dark cloud looming over big media finally lifted?

After years of buffeted stock prices and failed attempts to placate restive investors, large media companies appear to be poised to regain their luster as the sector glimpses light at the end of what has been a long, dark tunnel.

Much of the credit goes to a series of events that have taken place since March 13. They include the announcement by John Malone’s Liberty Media that it will spin off its stake in Discovery Communications into a separately traded company; the confirmation from Viacom that it is exploring splitting its broadcast and cable assets into two publicly traded companies; the selection of Robert Iger as successor to outgoing Walt Disney Co. CEO Michael Eisner; the completion of an effort by Rupert Murdoch’s News Corp. to bring separately traded Fox Entertainment Group back into the News Corp. fold; and the settlement between Time Warner and the Securities and Exchange Commission over allegations of accounting fraud at Time Warner’s America Online unit.

At a minimum, each event signals that what was once business as usual at big media companies may no longer be the case. Indeed, analysts said the announcements by Liberty and Viacom have led executives at other large entertainment conglomerates to begin evaluating the long-term prospects of businesses within their own stables.

Who can blame them? Large media company stocks have struggled for years as investors have grown tired of trying to decipher what critics have called convoluted asset mixes, in which high-growth businesses are obfuscated by businesses that either have slower growth or are in decline. These days, the idea of combining disparate assets is falling out favor as investors reward simplicity.

“This trend may have been encouraged by the past year’s stock price performance of pure-play entities,” Merrill Lynch media analyst Jessica Reif Cohen noted in a recent report. She pointed out that animation companies Pixar and DreamWorks have seen their stock prices advance at rates three to four times better than those of traditional media giants.

“We believe most of the large media companies will reconsider their asset mix to better appeal to large pools of investors,” she added.

Yet even if the top media companies are confronting the same kinds of questions, analysts and other experts say each will respond in its own way, in large part because each company faces its own unique set of challenges-and opportunities.

The following is a look at what observers and analysts believe might be these companies’ next moves in light of recent developments.

Time Warner

Financials (for the 12 months ended Dec. 31, 2004)

Revenue: $42.1 billion versus $38.1 billion in 2003

Net income (loss): $3.4 billion versus $2.6 billion in 2003

Big event: The company on March 21 reached a settlement with the Securities and Exchange Commission over claims the company’s America Online unit inflated revenue and subscriber numbers between 2000 and 2002. Time Warner agreed to pay the SEC $300 million.

With the AOL accounting scandal officially behind it (Time Warner reached a similar settlement with the Department of Justice in December, agreeing to pay a $60 million fine and establishing a $150 million fund to compensate affected shareholders), analysts widely believe Time Warner is free to revisit the possibility of spinning off either its Time Warner Cable unit or perhaps even AOL.

Time Warner first floated the idea of spinning off Time Warner Cable a few years ago, and was set to launch an initial public offering of the multiple system operator in 2003, but was forced to table the idea due to the SEC and Justice Department probes into AOL’s accounting. However, in recent months the TWC IPO concept has gained strength as the accounting probe drew to a close and as Time Warner joined forces with Comcast Corp. to offer around $17.6 billion for bankrupt cable operator Adelphia Communications.

These days, analysts believe Time Warner will spin off Time Warner Cable and combine it with Adelphia. From there, Comcast and Time Warner will negotiate a deal in which Comcast gets around 2 million basic cable subscribers in exchange for Comcast’s 21 percent stake in Time Warner Cable, inherited when Comcast acquired AT&T Broadband in 2002, and maybe $1 billion cash. At present the Time Warner-Comcast bid is being evaluated by Adelphia.

The scenario of spinning off AOL is less certain. With the AOL accounting scandal now history, Time Warner is free to explore selling the business, which has struggled as subscribers abandon its bread-and-butter dial-up service for broadband services offered by cable and telephone companies. However, Time Warner might wait a little bit longer for a more robust AOL recovery before considering a sale of the business, said Harold Vogel, CEO of Vogel Capital Management.

News Corp.

Financials (for the 12 months ended June 30, 2004)

Revenue: $24.5 billion versus $20.1 billion the previous year

Net income (loss): $1.6 billion versus $1.2 billion the previous year

Big event: The company on March 21 completed its exchange offer to buy the 18 percent stake in separately traded Fox Entertainment Group that it didn’t already own.

Though many observers consider News Corp. one of the strongest-performing media companies around, there has been some concern over Liberty Media’s recent stock purchases, which have given Liberty the second-highest voting control behind Mr. Murdoch and his family. With the Fox Entertainment issue resolved, there is a general sense News Corp. is now able to turn its attention to reducing Liberty’s stake.

How that might happen, however, is anyone’s guess. Both Mr. Malone and Mr. Murdoch have reputations as tough negotiators, and it is unclear how this potential tussle might play out. That said, because the two men are keen on executing deals that are tax-efficient, a handful of possible scenarios are emerging.

Merrill Lynch’s Ms. Reif Cohen noted that News Corp. is sitting on a huge hoard of cash that could be used to buy back at least a portion of Liberty’s stake in News Corp. Another option she believes possible is News Corp. selling off some of its television stations, particularly UPN affiliates and those Fox stations located in markets without football teams.


Financials (for the 12 months ended Dec. 31, 2004)

Revenue: $22.5 billion versus $26.6 billion in 2003

Net income (loss): ($17.5 billion) versus $1.4 billion in 2003

Big event: The company on March 16 confirmed rumors that it is exploring splitting its cable and movie operations from its television broadcast and radio businesses to create two publicly traded companies.

Having had more than a week to digest news of what Viacom is mulling over, Wall Street is growing more convinced that the Sumner Redstone-controlled media company will follow through with its breakup plan when it reaches a decision sometime in the second quarter. But that doesn’t mean breaking up will be easy to do.

A number of seasoned media executives examining a Viacom breakup more closely are beginning to question how the company is proposing to divvy up its assets, with a number of observers pointing out that if the company splits CBS from the cable networks, weaker channels such as Spike TV face a riskier future.

“Spike survives only on ‘CSI’ reruns, but that opportunity goes out the door” if there’s no link between Spike and CBS, said one media executive. “‘CSI’ could end up anyplace.”

More long term, a split-up of Viacom might not have any effect on the affected businesses’ growth prospects, Mr. Vogel noted.

“The growth will be whatever it is,” he said. “The basic assets and valuations [separated] will not be that much greater than where they are right now. They still live or die by what happens on t
he advertising side.”

Liberty Media Corp.

Financials (for the 12 months ended Dec. 31, 2004)

Revenue: $7.7 billion versus $4 billion in 2003

Net income (loss): $46 million versus ($1.2 billion) in 2003

Big event: a The company on March 15 announced plans to combine its 50 percent stake in Discovery Communications with its 100 percent interest in programming services company Ascent Media to create a new publicly traded company, Discovery Holdings.

With Liberty’s stock price still failing to garner much respect from investors, a growing number of analysts and observers believe that the Discovery spinoff might be a precursor to the eventual breakup of the entire company.

Liberty more than a year ago reorganized itself by creating three distinct operating units-one for interactive companies, another for its programming assets, including Discovery and Starz Encore Group, and a third for emerging businesses-and then set about becoming more of an operating company than merely a holder of stakes in other companies. The idea was to juice the stock, which had been penalized by investors who were unsure of what kind of company Liberty was.

“Liberty has been frustrated at the lack of market understanding” of its assets, said independent media analyst David Joyce, who also noted that Mr. Malone has publicly been more excited about the opportunities for growth internationally, where the cable business is far less mature than it is in the United States.

The Walt Disney Co.

Financials (for the 12 months ended Sept. 30, 2004)

Revenue: $30.8 billion versus $26.1 billion the previous year

Net income (loss): $2.3 billion versus $1.3 billion the previous year

Big event: The board of directors on March 13 named President and Chief Operating Officer Robert Iger as CEO effective Oct. 1, succeeding the embattled Michael Eisner, who will step down Sept. 30.

Analysts and observers believe that installing Mr. Iger as CEO will go a long way toward settling the unrest that has plagued Disney for the past 18 months-and could even brighten the company’s overall outlook.

Mr. Iger, who was largely unknown until only recently, has won praise from analysts as he raised his profile during recent months-ostensibly preparing for the day he might be tapped to run the company-and cast himself as the even-tempered alternative to the mercurial Mr. Eisner.

The strategy might work. Analysts believe Mr. Iger could be a key factor in repairing Disney’s damaged relationship with animation powerhouse Pixar Animation, and in re-establishing ties with the creative community, which became alienated from Disney under Mr. Eisner’s leadership.

However, it is unlikely that Disney will follow Viacom or Liberty’s lead in splitting off assets in order to stoke its stock price. Aside from Disney’s assets being seen as largely stable, Credit Suisse First Boston media analyst William Drewry pointed out that Mr. Iger might be keen on letting the dust settle following his arrival, rather than kicking up more dust by selling off assets.