Media Needs New Metrics, Sounder Valuations For Growth
Changing metrics, plummeting earnings and stock prices, and dramatically altered business models are challenging historical valuations and measurements. Not knowing what assets or legacy economics are worth will deter mergers and acquisitions even after funding and credit begin to flow again.
Time Warner's $25 billion fourth-quarter impairment charge to write down the value of AOL, cable and other assets is a troublesome reminder of that confusion. Time Warner will continue writing down AOL until it sells all or part of the unit, although its value is becoming more difficult to discern. Other media-related companies will do the same. Just this week, Intel said it will take a $950 million non-cash impairment charge related to its $3.2 billion investment in wireless broadband provider Clearwire.
Many other trouble signs exist.
The complications posed by different valuations assigned in Activision's acquisition of Vivendi Games, the likelihood that cheap public companies will be forced to go private (where stock price is equal to the cash value of shares), a dysfunctional private-equity business model, the inability of major newspaper groups to deleverage and pay down debt. In addition, companies like Cablevision Systems are taking measures to address liquidity concerns. All media players have been hurt by the collapse of automotives, real estate, financial services and other major advertising categories.
With healthy cash reserves and free cash flow, accounting adjustments for missed value or growth assumptions may have less serious implications for conglomerates than for smaller media-related companies, whose debt covenants hinge on stipulated equity ratios. Companies that have miscalculated prior acquisition values could suffer a high cost of borrowing capital. It is unclear how much more market value media assets will lose as a result of permanent digital impact.
For instance, TV broadcasters and newspapers usurped by the Internet and in need of consolidation are certain victims of a downward valuation shift with classifieds forfeited to the Craigslist and the rest of the Web. As traditional media sectors struggle to reinvent themselves, the old metrics will no longer apply, and the new metrics will take time to develop in a hotly competitive market. At some point, the unit price of conventional print and TV advertising exposure becomes less meaningful and less valuable as interactive connections and commerce with target consumers. To secure local digital ties, a coalition of more than 60 major TV broadcasters plan to collectively simulcast their local news, sports and other ad-supported content to mobile devices later this year.
TV networks are also suffering a crisis of value and function as they move more of their content and advertising online. This column has long advocated that changing economics have put the broadcast networks on course to become glorified cable networks or content aggregators. Clearly, TV networks and stations can use the Internet bypass to separately do their own bidding; advertisers can use all digital interactivity to constructive a new collective mass audience. When that happens, retransmission and upfront buying become obsolete.
The changing valuation of content and distribution will become more acute with the eventual ubiquitous interface that will simplify consumers' choice, access and movement of content and communications across all platforms and devices. Last week's Consumer Electronics Show was a reminder of the disparate vertical developments in digital interactive integration that still lack centralization for consumers' one-stop universal use.
Some conventional media valuations, such as an average seven-times earnings for broadcast properties, are not likely to be restored in a structurally changed broadband world. The uncertainty of valuations and measurable metrics, as well as the availability and cost of funding, will continue to stall deals (think AOL, Yahoo and Digg).
The decided shift to digital deals--both in numbers and value--was underscored by Jordan, Edmiston Group. Three-quarters of 2008 media-related deals (representing 90% of the transaction value) were concentrated in the growth categories of marketing and interactive services, online media and technology and data information services, which range from 13.5-times to 21.3-times earnings multiples.
Traditional media sectors average 8-times to 8.5-times earnings multiples. However, the overall value of media, information and marketing M&A fell 68% in 2008 to $33.3 billion (on a 13% decline in the overall number of deals), according to the investment bank. Even the valuations of startups fell 24% late last year, according to Angelsoft.
Although 2009 is likely to see necessary, strategic M&A (possibly such as WPP acquiring Nielsen Media or further consolidation of newspapers and TV stations), there will be huge consternation over how to value assets and project cash flow.
What may hasten the digital value changeover is an estimated $30 billion in tax incentives and the issuance of bonds supporting companies and individuals fully embracing broadband being considered by the incoming Obama administration. That would hasten the evolution of digital business models, structures and new economics, and satisfy industry executives who are impatient for a digital road map. MediaVest Executive Vice President and Managing Director Brian Terkelsen may have said it best at CES: "If we don't challenge the industry to do things differently, we're screwed."