Media giants travel road to recovery

Uptick in ad spending and boffo B.O. mitigate corporate upheavals, bear market

Where to begin? Low stock prices, bad accounting, fraud, mismanagement — all against the backdrop of a poorly performing economy.

“It’s as bad as it gets,” says Jessica Reif Cohen, Merrill Lynch media analyst. “We haven’t had this much upheaval in decades.”

Perversely, that’s the good news — things can only go up from here. Research groups and industry reports bolster prospects.

“It feels like things are starting to turn around,” says Reif Cohen. “Advertising is showing signs of strength. Broadcasting and cable is encouraging. The local ad market is gaining, and we’re seeing a pickup from TV and radio.” Movies, too, are setting box office records.

The Veronis Suhler Stevenson Communications Industry Reports says media spending increases offer a “silver lining for content providers and advertisers.” Even this past year, spending on all forms of media increased 4.4%, totaling $277.1 billion, according to Veronis Suhler Stevenson. Spending is expected to rise to $373 billion in 2006.

PricewaterhouseCoopers echoes those growth forecasts, and predicts that Internet expansion will lead the media pack over the next four years.

The hullabaloo over traditional media companies suffering losses because of their newly acquired Net properties may be true today, but analysts say that may not be the case tomorrow.

The problem is a slow move into convergence, says Charles Abrams, a London-based research director of the Gartner Group. The Gartner Group is well known for its “hype cycle” prediction in 1999 that 2000 would mark the peak of inflated expectations followed by a dot-com fallout, investor disillusionment and “brick and mortar” failures. “You can’t just press a button and assume new media and traditional media would converge in two years,” Abrams adds.

Some companies thought they could press that magical button.

Kirch Media, Vivendi and Bertelsmann bet more subsidiaries would add up to bigger, better companies.

A look at those companies today would show they bet wrong, but by 2008 Gartner predicts that a “plateau of profitability” will be in place for companies converging content with medium.

Still, it’s difficult to see beyond the present, says Gordon Hodge, media analyst at Thomas Weisel in San Francisco. Most of the Variety Global Top 50 media companies are showing losses this past year. Almost all of the top 10 have seen their stock price decline by half.

Some companies straddled with huge amounts of debt may be forced to sell assets just to keep up with spending, as is the case with groups such as Cablevision.

However, other companies have figured out ways to use their size wisely. Viacom may be the best example. With its stock market valuation cut in half over the past year, it is coming up with creative solutions in cross-selling advertising over its various business units, says Hodge. “They just saw a 17% increase from Procter & Gamble, from $300 million to $350 million, in cross-media ad spending.”

Hodge also points to Viacom’s acquisitions: “People gaped at the price Viacom paid for BET — 20 times EBITDA. But BET grew double digits last year through a recession.

“There are major problems with growing for growth’s sake — as many managers did. But you can grow through well-thought-out acquisitions on a long-term business plan. These will be the companies that survive after the dust settles,” says Hodge. That may mean more management changes to get that formula just right.

Vivendi Universal ditched Jean-Marie Messier; Bertelsmann, Thomas Middelhoff; AOL Time Warner, Bob Pittman and Gerald Levin. And recently, press reports indicate that two key Disney board members’ support for chair Michael Eisner has eroded considerably.

“There’s never been a time with (so many) management changes and more to come,” says Merrill’s Reif Cohen.

Paul Kim, media analyst at Kaufman Bros. in New York, says ego and brand building had a lot to do with the problems that ensnared media conglomerates. “The growth simply shouldn’t have happened. It was purely capital markets-driven,” he says.

Well, Wall Street isn’t ready to shine again the limelight on media firms soon.

Mergers and acquisitions in the media sector have fallen to 83 deals worth $1.7 billion this year, down from 372, which were worth more than $21 billion in 1999, according to Thomson Financial.

This year there were only five media company initial public offerings, barely eclipsing $1.2 billion. Only two more media flotations are on deck. Overall, IPO volume is down to 10% of 1999 levels, when 486 companies went public, raising $93 billion, according to Renaissance Capital in Greewich, Conn.

The climate worldwide, is not much better. NET, Brazil’s largest pay television provider, couldn’t immediately sell a public offering, despite having the backing of the Globo media conglomerate and a consortium of banks. China Telecom has been holding back its IPO for two years due to market conditions.

Media companies can’t rely solely on capital markets anymore to fund their businesses — operations will have to foot the bill.

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