Will new media consolidations have the right stuff,
or will they crash and burn? Diane Mermigas reports
Media deals in 2010 will reposition companies for the digital playing field, eliminate the weak by consolidating the strong, redefine values and lead to the formation of new business models. Quintessential dealmaker John Malone, chairman of Liberty Media, predicts "massive restructuring and consolidation in old media."
Even before post-recession pacts ramp, experts say 88 cents of every M&A dollar in 2009 has been spent on digital media and tech. Nearly two-thirds of this year's $11 billion global media deals (prior to speculation about NBC Universal-Comcast) primarily involved strategic investors and occurred in August and September. Recent acquisitions were at a 15 percent to 40 percent premium across all media, UBS reports. Traditional media companies have been trading at a 10 percent to 15 percent discount to historical pre-financial crisis valuations, according to Barclay's Capital.
While the pace of deals quicken and values are being set off their lows, the tenure of transactions is changing. Consolidation will involve mostly similar companies, conglomerates will shed non-core assets, and distressed sales by overleveraged, underperforming players will abound.
The overriding goal is to limit risk and to tap into new digital business dynamics, such as individual consumer relevance, for which new metrics and business models must be created. Deals will be different because the distribution and value of content and services are different. Bound books and print publications are adapting to e-readers; television programs are now streamed online, and telephone calls have become text messages.
Companies with cash hordes have been the first to jump into these uncertain new waters with selective strategic catches. Walt Disney bought Marvel Entertainment for $4 billion. Google has said it will acquire one strategic company in the $100 million range every month for the next year to expand particular fields. Microsoft, Apple, Time Warner and Comcast are among the other media titans with cash to burn. Yet More media players such as News Corp. and Discovery Communications tapped the robust market to raise more than $ billion in debt funding in September.
The structuring of deals to share and minimize risk and maximize rewards, as proposed by Comcast in its gradual takeover of NBCU, is more important than ever with media companies generally reticent to spend at all.
At the same time, media conglomerates are shrinking down to just a handful of core businesses to improve profitability and predictable results. Time Warner has become a pure-play content company having spun off its cable systems and nearing its spin off of AOL, ending a decade of value destruction from the failure of its storied merger. Major media conglomerates have written down $200 billion in assets since 2000 as a result of overpaying, according to the new book The Curse of the Mogul: What's Wrong with the World's Leading Media Companies.
Case in point: General Electric acquired RCA, which included NBC for $6.3 billion in 1985. It has since expanded the NBC empire to include Telemundo, Bravo, Oxygen, Financial News Network (the precursor to CNBC), The Weather Channel and Universal - with all transactions amounting to more than $33 billion, according to Dealogic. If Comcast acquires majority ownership of nbcu, the companies' combined assets would be valued at about $30 billion ($24 billion of which is NBCU), according to Bernstein Research. So much for GE's return on investment. Still, if Comcast demonstrates clear cost and synergistic revenue gains, global communications companies will be reassessing their content deal strategies, says UBS analyst Matthieu Coppet.
Traditional pure-play media companies, such as CBS, may be more vulnerable to takeover because they cannot transition their legacy operations and processes fast enough to more streamlined digital options. Likewise, pure-play cable operator Cablevision could be absorbed by Time Warner or Comcast now that it has shed its Madison Square Garden assets.
Rapidly growing private companies that want to remain independent will use the reviving ipo market to raise public currency and capital. Facebook is expected to go public and use its stock as deal currency, having recently bought Friend Feed for $50 million. Twitter may remain private, and recently raised $100 million from T. Rowe Price, Spark Capital, Insight Venture Partners and Institutional Venture Partners.
The reviving IPO market will put many new long tail Venture Capital-spawned companies in play. Smaller streaming video players, such as Veoh and Joost, dwarfed as it is by Google's YouTube, as well as video game, ad server and ad network entities also will be swooped into the consolidation mix.
The new dynamics of wireless mobile interactivity will shape cross-sector media distribution deals, many of which could take the form of alliances, partnerships or investments. Liberty Media's Directv will likely go to a telecom company seeking to cross the wireless divide. Many struggling content companies - MGM, The Weinstein Co. and Lionsgate - will likely be absorbed by larger players. Broadcast and newspaper groups will continue to be the subject of distress sales, consolidation and bankruptcy - perhaps the worst example of which is Tribune Co., which remains in bankruptcy two years after being sold for $8.5 billion to real estate baron Sam Zell.
Still, other non-industry buyers will continue to place their bets as caches of private equity money sidelined during the recession goes back to work. Chief among them is Providence Equity Partners, Bain Capital and THL Partners. The participation of Foreign investors and sovereign wealth funds assures the increased value of deals.
We do not believe acquisitions necessarily stand in the way of incremental return of capital strategies into action, given their large cash balances and low leverage ratios," says Anthony DiClemente, Barclay's Capital analyst.
In 2009, third-quarter mergers and acquisitions numbered 153 for a total of $7.3 billion across seven broad media and advertising segments, according to investment bank Petsky Prunier. Big media deals such as Blackstone Group's $2.7 billion buyout of Anheuser-Busch InBev theme parks and Disney's $4 billion acquisition of Marvel point to resurgence of buyouts.