Analysts offer strategies for maximizing digital assets
Netflix, a relative newcomer to the media club, took in $2.2 billion last year — a puny sum compared with the $26.9 billion in revenues of media behemoth Time Warner.Yet Netflix’s $13.7 billion stock market capitalization stands at close to one-third of the giant conglom’s Wall Street value. Not bad for a company that Time Warner topper Jeff Bewkes, in a December interview, likened to the Albanian army trying to take over the world. Recent IPO’s from LinkedIn and Groupon have again cast a spotlight on the topsy-turvy world of media stock valuations, in which some online media businesses command booming valuations, while the traditional media giants that own major networks and studios can only look on with envy, since their stock prices don’t enjoy the same sizzle with the investment community. Online games outfit Zynga is expected to mount an initial public offering valuing itself at around $10 billion, which would represent a breathtaking ascent for the company, founded in 2007. Netflix, whose business is built on content supplied by Hollywood studios, sports a hefty stock market capitalization, as investors are jazzed by its video streaming. By comparison, Paramount Pictures parent Viacom and Time Warner carry $33.4 billion and $37.3 billion stockmarket capitalizations, respectively — comparatively low numbers considering they dwarf Netflix on a revenue basis. Studio congloms like Walt Disney, News Corp. and Viacom have a foothold in hot digital media segments, but their stocks aren’t getting the same “wow” factor from Wall Street. “The traditional media companies do have these digital distribution businesses, but they’re treated like stepchildren,” says James Mullany, managing partner at Salem Partners, the investment banking and wealth management firm. That’s because Wall Street investors tend not to affix a high value for new-media pearls if they are buried within the oyster of vast traditional media operations. Investors tend to value all operations with the same multiple-on-cash-flow yardstick applied to traditional media, and not the more generous metrics, such as potential subscribers, used to value embryonic tech media companies. So how can traditional media companies deal with this? One option is to spin off high-value digital assets into separate companies or tracking stocks, which puts those hot businesses under investors’ noses. “Certainly, there have been discussions months ago that Hulu might go public,” says Jeff Logsdon, managing director at BMO Capital Markets, referring to the ad-supported video platform whose shareholders include Disney, News Corp. and NBC Universal. There’s speculation that Lions Gate is considering a spinoff vehicle for its stakes in online video network Break Media, Epix, TV Guide and/or FearNet businesses, hoping to value those businesses at around the company’s market cap of $840 million. Disney’s Interactive Media Group generated a sizable $761 million in fiscal 2010 revenue, which comes from games, other content and a Disney-branded mobile phone service in Japan. However, Disney’s interactive arm is gushing red ink. The spinoff of hot assets has been tried before by a media conglom. In 1998, News Corp. bundled its Fox movie studio, then awash with profits from “Titanic,” and Fox Broadcasting into a separate company called Fox Entertainment, selling 18% to public shareholders. The value of Fox Entertainment’s stock that News Corp. retained was clear from the prices of publicly traded shares. News Corp. bought out public shareholders in 2005, regaining full control. The move was considered a success. Many Wall Streeters take the view that such corporate restructuring to try to unlock value isn’t warranted at this juncture of the digital media gold rush. “There’s no need for financial engineering,” says Christopher Marangi, a portfolio manager specializing media and telecom stocks at Gamco Investors. “Many of these old-media business are evolving into new-media businesses, and that evolution will be recognized by investors eventually.” Another strategy is to buy digital media assets, rather than grow them internally, but that risks overpaying. “Technology companies had similar valuations 10 years ago, but ended up losing 95%” of that when the big Internet bubble burst, says Dave Davis, managing partner at entertainment consulting firm Arpeggio Partners. Emblematic of this stock value destruction was Time Warner’s ill-fated $106 billion merger in 2001 of AOL, which was spun off in 2009. Despite earlier missteps, major-studio parent companies have kept plugging away at buying and building digital media assets using buckets of money, with mixed results. IHS Screen Digest estimates that Disney, Warner Bros. and Viacom have pumped over $4 billion dollars into building inhouse videogame businesses since 2004, including via acquisitions. Yet in 2001, Disney took a mammoth $790 million writeoff on its Web portal Go.com. Viacom bought Harmonix, the parent of the Rock Band videogame, for $175 million in 2006 and when the new-media company fizzled, wound up unloading it at a loss late last year. RBC Capital media analyst David Bank feels that, rather than be judged with the highest fliers in cyberspace like Facebook or Zynga, a more appropriate benchmark for traditional media congloms are maturing technology companies like Google or Yahoo, which have built-out businesses. “Compared to such later-stage digital oriented companies, I think that the valuations large-cap entertainment companies are surprisingly robust,” Bank says. Still, infatuation with digital media crops up constantly. When Dish Network acquired Blockbuster earlier this year, Blockbuster’s online streaming business was a big attraction. Liberty Media told investors a key reason for its surprise bid to buy bookstore chain Barnes and Noble — a quintessential old media business — is the company’s strong-selling Nook electronic book reader. Traditional media corporate bosses find it hard to escape unflattering comparisons that crop up from time to time. In a Time Warner earnings conference call last year, an analyst noted that Netflix and Coinstar, the parent of Redbox DVD rental kiosks, previously told investors they got “incredible” deals licensing Warner Bros. film and TV content. “Their stocks are both up almost 100% since the day you signed them,” the analyst pointed out. “I was just curious whether you thought you got enough of the leverage on your side vs. theirs?”
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