Commentary

Market To Media Cos: Let's Make A Deal

Unusual circumstances, painfully low stock prices and a latent need to rearrange the media landscape could contribute to a new wave of deal-making amid the financial chaos and a protracted recession. The self-funded opportunists are beginning to gun their engines.

Deals will begin to flow again as a counter to the heavy financial blow of dramatically reduced advertiser and consumer spending. An incoming Democratic presidential administration and Congress may make it more challenging to concentrate industry economic power. Even joint ventures and strategic alliances may be stiffly scrutinized as evidenced by the delayed--and possibly denied--regulatory approval for the proposed Google-Yahoo advertising search deal. There are signs that the bottom-fishing has begun.

Despite players being spooked by frozen credit markets and deteriorating economics, there is plenty of available money from corporate reserves, private equity, venture capital and individual investors. Parting with funds in a volatile market will require more stringent rules of play. It generally will cost more to borrow under more rigid stipulations. Values will need to be reset, and new comparative price bottoms established. Earnings multiples will be reconfigured according to lowered forecasts. The pace of consolidation and asset spinoffs will accelerate over the next 18 months as equity and foreign investors increasingly put their billions on the line.

Rupert Murdoch says his company has $5 billion in cash, and he's not afraid to use it. Liberty Media CEO Gregg Maffei says he and Malone see opportunity for lucrative financial engineering in deals acquiring cheap assets and cheap debt. With so many companies hitting new lows, and others trading lower than their available cash and marketable securities, funded players will not be able to resist unprecedented deals.

Any restructuring of Sumner Redstone's debt and controlling ownership stakes in Viacom and CBS--funneled through his privately held National Amusements--could be a buying opportunity if he is forced to flip part or all of one of his companies. Both News Corp. and Liberty Media have indicated early interest.

Given their outstanding interests in satellite, it's possible that either company could take a closer look at a $1 billion merged Sirius XM Satellite Radio or an alliance--if not an outright merger--between DirecTV and Dish. As owner of DirecTV and QVC, Malone might finally make a move for Home Shopping Network or another of InterActiveCorp's newly spun assets.

Maybe Time Warner or Liberty will acquire NBC Universal, now that corporate parent General Electric is suffering credit-crunch problems. Or Vivendi could exercise its right next month to unload its $4 billion stake in NBCU. Disney could continue making selective new media acquisitions that complement its businesses. Analysts have mentioned The Knot or Netflix, or even a closer alliance with Apple CEO and creator of Pixar, Steve Jobs, who has an 8% interest in Disney. The well-funded Comcast will likely continue to pick off smaller content and interactive properties. News Corp. could resume its interest in a complementary new media social network such as Digg or LinkedIn. NBCU's acquisition of Weather.com and CBS' CNET are the kind of Internet rollups that will continue as original investors press for ROI.

Some are already positioning for action. Just this week, activist investor Carl Icahn disclosed a 9.17% stake in Lionsgate. Although his strategy is unclear, Icahn also remains a shareholder and boardmember of Yahoo, which he wants to see in a deal with Microsoft.

Universal Studios is negotiating the sale of its Rogue Pictures independent specialty film unit to Relativity Media LLC, a private production and finance company that structured and consummated more than $4.22 billion project deals. Paramount and Warner Bros recently took similar steps.

MGM's private-equity owners--including Providence Equity Partners and TPG as well as Comcast and Sony--are seeking to break even on their $5 billion debt and equity acquisition of the studio four years ago. Content may be king, but it's not always lucrative. Yet that hasn't stopped India's Reliance Entertainment from financing Steven Spielberg's independence as well as shopping for other content and application investments--particularly in mobile. Similarly, Abu Dhabi is investing in media here to create its own version of Hollywood there.

While the crush of economic bad news has not been accommodating for selling assets for Cablevision Systems (considering selling some Rainbow Media pieces) or CBS (trying to auction 50 radio stations), there are signs that the ice will thaw. Yahoo is said to have been in active talks with Time Warner about merging with its AOL unit for a jointly owned Internet entity. Yahoo's record-low trading price (only one-third of what it was when Microsoft's bid for the company was rejected) has analysts obsessing about all kinds of mix-and-match scenarios. They include Yahoo-CBS (its own market capitalization down to $6 billion). Microsoft could buy Yahoo for about one-third the price it would have paid earlier, or spin off its Internet operations into a stand-alone Yahoo entity. Or, Microsoft could spend some of its cash hoard to pick off defensive counter-Google buys like Research in Motion.

With venture capital still plowing money into tech (more than $9 billion last quarter), the bidding for newer, focused firms will stand in sharp contrast to the sale of struggling print media. While Sam Zell continues to struggle to slash costs and sell assets against his privately owned Tribune Co. and its $12.5 billion in debt, the price tag for Reed Elsevier's trade magazine unit may go as low as $1.5 billion from an original $2.3 billion asking price.

Then again, the recent sale of the legendary TV Guide by owner Macrovision Solutions to OpenGate Capital for just $1 made any price possible. Macrovision is loaning $9.5 million at 3% interest to OpenGate, which will assume liabilities for the magazine, losing $20 million annually. Welcome to the new world of valuations and deal math.

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