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