Welcome the barbarians

In four or five years we may well look back and say the biggest change in the media this decade was the role that private equity firms played.

These guys used to be called leveraged buyout firms, however they are apparently no longer barbarians at the gate but benefactors in the boardroom.

Consider the past couple of weeks.

KKR made a stunning $50 billion bid to take over Vivendi, owner of Universal Music and Canal Plus, a move that apparently was rejected by the French conglom because of tax issues. But a deal may not be dead yet. KKR was the firm that started the whole wave 20 years ago, buying RJR Nabisco for $25 billion and inspiring the “Barbarians at the Gate” book and telepic.

MGM, Warner Music, Cox and Univision were bought out by equity firms. Others are circling various cash-strapped newspaper groups, including the Tribune Co., and cable operator Cablevision and radio behemoth Clear Channel are apparently talking about similar partnerships or outright buyouts.

In Europe, meanwhile, TV station groups SBS and ProSiebenSat 1 are already in the hands of private equity firms, and rumors abound that Britain’s ITV and Pearson Publishing could be up for grabs. If the 1990s were about the growing impact of Wall Street on Hollywood, this decade may be about how equity firms succeed — or don’t — in steering media players into the digital age.

So far their largely behind-the-scenes role in the media biz has been at least politely applauded. “In some cases they’ve introduced better management and brought rigor to the accounting practices of the companies they’ve boarded,” says one analyst not directly involved in such firms.

Says another: “Essentially they’ve saved Hollywood’s ass,” pointing to these firms’ ability to choose the right (generally underperforming) targets and set them on a steadier course.

He points to the fact that Tinseltown was in the doldrums in 2000: The advertising market was sluggish, nerves were frayed over rampant piracy, the music biz was tanking, the impact of new technology was still unclear, and there were shenanigans in the boardrooms and headaches from ill-conceived mergers.

Then along came companies like Providence, Carlyle, Blackstone, Texas Pacific, Bain, Thomas Lee, Madison Dearborn as well as KKR, and a lot of media companies got a new lease on life.

Not the least of which is MGM, which under reinvigorated management is making some heady deals. Latest coup by MGM was snapping up Tom Cruise and his producing partner Paula Wagner to dust off the United Artists shingle. Presumably this is a deal the equity partners believe will help revive that studio’s fortunes.

One problem with these more complicated ownership structures is that it’s harder to judge the media companies’ underlying health. By definition they’ve been taken private, and financials are not so ready to hand. For another, the powers-that-be within these firms tend to be, well, banker types, and hence not readily accessible or press-friendly.

With Sumner Redstone and Rupert Murdoch we know who’s in charge, and we even have clues as to what motivates them and how they’re likely to act (at least sometimes). But who can name the media maven(s) at most of these equity firms?

Another potentially worrying matter is the fact that these companies tend to load debt onto the companies they take over, and at the same time demand eyebrow-raising fees from their investors.

There’s also a probe by the Justice Dept. into whether these private equity firms that form consortia are breaking antitrust laws and trying to drive buyout premiums down.

Other nagging questions include just how much these companies “get it” when it comes to the media biz; just how hard-nosed and short-sighted they’ll be when it comes to “streamlining” their operations; and just how long they’re likely to stick around to nurture their investment.

In the end, it’ll probably be hard to generalize: Some extreme makeovers will have worked, and the revamped properties will be re-introduced to the public markets with stellar IPOs; others could continue to underperform or be driven into the ground.

We’ll need to watch the process more closely.

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