Media Valuations Are Tricky Propositions
The primary threats to seemingly impenetrable big media are an uncertain economy that weakens advertiser and consumer spending, as well as cyclical shifts (from presidential elections to the rotation of box office and prime-time TV hits). Eventually, company stocks and valuations will emerge whole again, and fundamental metrics will prevail. That appears to be the thinking of many industry analysts, including those at UBS, who issued a report this week on "qualifying entertainment company values in a period of earnings uncertainty."
If the 1990-91 recession is any indication, large-cap entertainment stocks that have declined 15% from their peaks in May 2007 could appreciate nearly 100% over 15 months once the current recession ends. During the past year, media stocks have declined nearly twice as much as the S&P 500, although Walt Disney, Viacom, News Corp. and Time Warner are expected to deliver higher cash-flow growth than the overall market, UBS analysts say.
Many analysts have been lowering their earnings forecasts and ratings. UBS' current entertainment company valuations imply longer-term growth rates of just below 3%. Few analysts have factored in, much less attempted to estimate, the more notable financial impact expected from ongoing shifts in digital interactivity, international expansion and changes to business models. The status quo cannot be a default option just because the profound changes underway cannot yet be quantified.
For broadcasters, this means years of cumulative ratings decline colliding with next year's mandated digital conversion and a flood of competitors playing by new mobile interactive rules. For cable, it is trading basic subscriber video losses to telcos for higher-margin voice customers, while underlying business shifts to interactivity outside the home. Internet players are consolidating for scale in forging the next generations of socialization, search, collaborative content and transactional advertising. Shifts in advertising, economics and technology dramatically impact all.
That has left Wall Street investors, analysts and industry executives grappling for ways to define media valuations. In some cases, opportunistic mergers and acquisitions are pushing the envelope. While Yahoo argues for a $40-a-share buyout, Microsoft holds fast to its $31-a-share takeover offer. The $45 billion bid is the premium no one wants to meet at a time of fluctuating fundamentals. Time Warner and Barry Diller's Internet portfolio, InterActiveCorp., are betting their individual assets can command more in the market than their companies as a whole.
Others, like Cablevision, have tried to set a buyout price that shareholders have rejected. Cablevision's controlling Dolan family says it has no new plans to take the company private, in light of speculation that Time Warner could make a run for its choice East Coast systems. Last year, fund managers said Cablevision in the best of times could be worth many times the $36.26 a share the Dolans offered to take the company private.
General Electric denies perennial speculation that it will spin off or sell NBC Universal. But JP Morgan analyst C. Stephen Tusa says it would "unlock significant value." Without drilling down into all the interactive digital nitty gritty, NBCU is worth $45 billion--or $10 billion to $15 billion more than GE's lagging stock price would imply, he says.
In all but a few dramatic cases of aggressive deal-making by buyers with deep pockets, media companies will increasingly find their strategic planning disrupted by an inability to know whether the new value they are attempting to create can exceed the old. At this juncture, there are few if any sure-fire options for recalibrating media asset values. That requires new standardized metrics for re-pricing content, advertising opportunities and consumer reach. That critical process has barely begun. In the interim, traditional media and Internet companies are opting for a quick fix with headcount reductions, rather than making bold and meaningful structural change in their legacy businesses.
Many analysts are estimating virtually flat growth based on what they know and can quantify, conceding that media risk-rewards cannot be fashioned on obscure digital gains. "The digital opportunity appears either too small or too distant to matter at present," laments Bernstein analyst Michael Nathanson.
UBS analysts Michael Morris and Matthieu Coppet concede that diverse factors such as how content creates long-term value and the new ways it will be monetized must be used to determine worth. For now, historical perspective is everyone's increasingly irrelevant fallback position.
JP Morgan analysts recently offered an interesting alternative: valuing Internet companies based on revenue-per-employee productivity. Based on 2007 revenues, Google generates $736,303 per each of its nearly 16,000 employees--double the revenue generated for each of Yahoo's 14,000 employees (before the recent staff cuts). That's a daring metric that would work no matter what the business model or platform.
And it likely would scare the pants off most media executives.