Where the Deals Are--Funding May Be Optional

CBS' $1.8 billion CNET acquisition may provide a glimpse into the deal dynamics slowly emerging from the economic rubble of the credit crunch, tech sea change and fears of rising inflation.

Strategic buyers with cash reserves and needy sellers with strained balance sheets will continue driving media and Internet deals. However, the rush remains on hold until banks and private equity jump back into the fray.

CNET was among 24 leveraged buyout candidates identified by Citigroup analyst Jason Bazinet a year ago as being ripe for the picking, based on their 10% or better internal rate of return. More than half of the companies are in the Internet sector. Despite the financial angst, five of those companies have been involved in completed or pending transactions, driven by corporate buyers and sellers: CNET, Reuters, Thomson, Dow Jones and Time Warner Cable. Others among Citibank's top LBO candidates are still prime for a deal, including Charter Communications, McGraw-Hill, Meredith, Monster, BSkyB, Netflix and EchoStar. Another dozen companies--including Tribune, Yahoo, Clear Channel and Time Warner--on CitiGroup's expanded list of 101 potential global private equity buyout candidates are in the throes of various transactions.



Clearly, the deals propelled by strategic need continue--albeit in lower numbers at a slower rate, without private equity as aggressively involved. Nearly $4 trillion in deal funding is sitting on the sidelines in the U.S., and an estimated $40 trillion globally, according to experts. Private-equity investors completed media deals worth $44.8 billion in 2007, accounting for 41% of disclosed U.S. media deal value in the year--compared to $19.4 billion, or 15% of total deal value in 2006, according to PricewaterhouseCoopers. This year could be just as bad, if not worse, than 2006.

Corporations with cash reserves, in need of strategic assets or engaged in restructuring, are beginning to make their moves. In the wake of its long-awaited complete spinoff, there is speculation Time Warner Cable will use its stock to acquire smaller systems shed by Comcast or all of Charter Communications for an estimated $5 per share cash and debt to compete with larger telephone and satellite rivals, according to Pali Capital analyst Richard Greenfield.

There is mounting speculation that General Electric will spin off NBC Universal (valued at about $33 billion) and merge it with the complementary assets of Time Warner (also valued at about $33 billion after its cable spin)--with or without AOL. A streamlined InterActiveCorp. could acquire AOL after spinning off most of its related assets into four new public entities--one of which, Home Shopping Network, could be sold to Liberty Media, owner of rival QVC. Eventually, something will come of Yahoo--which, by default, has come to exemplify doing business in troubled times: The difficulty in projecting future performance given shifting technology and the turmoil in advertiser and consumer spending.

Microsoft's pullback from its $41 billion bid for Yahoo is as attributable to its reconsideration of the complex economics involved as with Yahoo's frustrating procrastination. While few on Wall Street believe Yahoo's aggressive growth projections, Microsoft is rethinking the realistic returns it can expect, even in booming online display advertising. While Internet assets are generally growing, even venture capitalists (funding more than $200 million in video startups last quarter) are more cautious.

CBS based its healthy CNET multiple on the bet it will generate a combined $1 billion-plus in Internet revenues by 2010--a self-set goal that News Corp.'s FIM will miss in just ending fiscal 2008 by $100 million. With a majority of its business tied to advertising, some are speculating that CBS could continue expanding its news franchise by snatching up The New York Times for an estimated $2.5 billion from the controlling Sulzberger family.

The continuing shift from static to interactive media--complicated by tumultuous domestic and global economics--is creating a new financial framework for performance and expectations, which will set new deal multiples. Still, the deals moving forward are revealing. Banks are willing to back Time Warner Cable's $11 billion acquisition of parent Time Warner shares, while assuming some of the company's debt. Providence Equity Partners is sticking with its $51 billion Bell Canada buyout as long as the Canadian Supreme Court reverses a recent lower court ruling blocking the deal. Private-equity Bain Capital Partners and Thomas H. Lee Partners are holding a consortium of nervous banks led by Citigroup and Morgan Stanley to funding the $18 billion buyout of radio leader Clear Channel Communications (announced 18 months ago). These days, the players are willing to share the rewards in order to spread the risk.

Competitors also are more willing to combine existing resources to achieve growth, such as the $14.5 billion WiMax network deal backed by Sprint-Nextel, Clearwire, Comcast, Time Warner and other cable operators to reach 140 million people by 2010.

In better times--which may take up to 24 months--a flurry of restructurings could take place: a Facebook IPO, taking CBS private, split Sony hardware and entertainment, spinning off Fox Interactive Media. The most important catalyst to get media and Internet deals soaring again is establishing new baseline metrics.

With nearly half the year already gone, it's difficult to see how 2008 can match 2007's total 1,168 U.S. media deals valued at $108.1 billion. It looks like hedge-fund manager George Soros was right: The "end of the era of super leverage" and the "systematic failure" of financial systems means only the cunning and collapsed will deal.

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