Media congloms are down but not out

Buckle up, media dealmakers.

While showbiz is in for a bumpy ride in the coming months, the shakeout wrought by the global economic meltdown may actually spur a healthy reboot for the entertainment sector.

Yes, there will be fewer movies in release — and fewer hedge funds to sprinkle cash around and gobble up companies. The media congloms, meanwhile, will see the wisdom of their cutbacks tested.

But those could all be good things … in the long haul.

Following the dictum that the stock market recovers six months before the end of a recession, things could look brighter by next summer. But they’ll almost certainly look different.

For one thing, hedge funds won’t be throwing money at Hollywood studios, which may be a boon. Some say the easy cash was too much of a good thing.

“The money is not flowing in as much. It’s tighter and slower,” says one investor. “But that’s good for the business. It will cut down the supply. There were too many movies getting made.”

Indeed, many studios have already reduced their slates.

Also, private equity firms will no longer dominate M&A, leaving the field to actual media concerns and to a new class of buyers called SPACs, or Special Purpose Acquisition Companies.

Many such entities have sprung up already to make relatively small, piecemeal acquisitions. One, called Ideation, focuses on media and telecom investments. And Gabelli & Co., for example, hopes to launch a SPAC, the Gabelli Entertainment & Telecommunications Acquisition Corp., in the first quarter.

“Assets are very, very cheap historically, and we like to buy when there’s blood in the streets,” says one SPAC adviser. “The other thing is that you have motivated sellers who are interested in reducing leverage or narrowing their strategic focus.”

He calls 2009 “the year of the great unwinding.”

The new year certainly will be one of reckoning for media congloms, which restructured and fired thousands of staffers in 2008.

“We’ll see in the next six to nine months who made mistakes and who made the right calls. You can cut too close to the bone,” says analyst Michael Nathanson of Sanford Bernstein.

The recession has pummeled a business already knocked off balance by shifting technology. Showbiz, in fact, has been the market’s second worst performing sector after financial services — with no government bailout in sight.

In past downturns, media stocks had a floor. When they hit it, new money would flow in from bonds or Saudi princes who knew the ad market would perk up eventually. But now even those closest to the business can’t say if its ailments are cyclical or caused by fundamental shifts.

“How do you know if it’s a temporary blip in ad sales, or if a network is losing eyeballs for good?” says one media fund manager. “It’s like working in a fog,” says one media fund manager. “People are saying, ‘I’m not smart enough or close enough to it to know the difference.’ So money is sitting on the sidelines and isn’t coming in at any price.” For now.

For the big media companies, the new landscape could well see some major assets in play. Here’s how the congloms are poised for the shakeup:

  • Time Warner has more stable cash flow than its rivals due to substantial subscription businesses, led by robust cable nets. With national advertising holding up better than local, cable nets are considered plums.

The Warner Bros. studio is in good shape as well, and the sale of Time Warner Cable — announced but held up by delays at the FCC, should bring some $9 billion to TW. Publishing and AOL could also be sold.

Jeff Bewkes recently thanked Wall Street for a long honeymoon after taking the CEO reins from Dick Parsons in 2008. “He came in with a lot of potential,” says one Wall Streeter. “He hasn’t fulfilled it or disappointed it. He’s kind of in the middle.”

  • Walt Disney: Wall Street has near-universal praise for the management of CEO Bob Iger despite the company’s exposure to the downtrodden broadcast business through ABC and its theme parks, which face choppy waters but have held up surprisingly well.

“Iger somehow managed not to alienate the Pixar guys and has done a better job across divisions,” says one investor.

Disney is seen as a buyer, with market speculation centering on videogame company Electronic Arts as a possible target.

  • News Corp.: Its shares look cheap, making it a possible acquisition target, but the conglom would not be easy to buy because of the Murdoch family’s super-voting stock.

But News Corp. is exposed to the broadcast business through Fox. And the film studio, considered the best managed over the past five years, is going through a rough patch. Succession is an issue as Murdoch’s longtime No. 2 Peter Chernin mulls whether to renew his contract.

Wall Streeters expect Murdoch to “do something like he always does — buy Sky Italia, pick up some business like Premiere. And it’s the right thing to do for the future of the company, but people won’t like it,” says one.

“It will be non-advertising, and non-U.S. … programming in India, pay TV in Europe. He could buy in BSkyB, that kind of stuff,” he adds.

Another investor notes Murdoch could even make a run at Time Warner. “If you get rid of cable and publishing, it’s pure content, and no control stock.”

  • Viacom: The company has attractive, but underperforming, cable assets.

“I’m not sure what’s going on there. Something just broke. Ratings are bad. They will have to spend more on programming,” says one fund manager.

And while presentation is no indicator of substance, Wall Streeters are increasingly down on CEO Philippe Dauman‘s buttoned-up vibe. “It’s the television business, not a power utility,” says one Wall Street insider.

  • CBS: Heavy on television and radio broadcasting, CBS has the most challenged set of assets of all the big media companies. It’s taken the hardest hit in the recession and faces a tough outlook longer term.

One Wall Streeter speculates that Comcast may be a potential buyer. Comcast, which made an unsuccessful run at Disney in 2004, could also consider grabbing up NBC Universal if General Electric ever sells it. GE’s top brass insists that won’t happen, but no one believes them.

The market continues to think that if chairman and owner Sumner Redstone is forced by banks to unload assets for cash, CBS would go before Viacom.

Redstone was forced to sell chunks of CBS and Viacom stock to avoid breaching covenants on a $1.9 billion loan to his National Amusements family holding company. Half of that came due late December but the banks agreed to put a pin in the issue until the New Year.

Overall, those who make a living buying and selling media stocks are just hoping 2009 will give them a much-needed rest.

One says: “It never stops. It’s like hand-to-hand combat. There are even days I make money. But I get home and I feel like I’ve been hit by a car.”

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