The privately held media conglom saw “stellar” returns from its investment in Burnett’s One Three Media, Hearst president-CEO Steven Swartz wrote in his annual “state of Hearst” letter to employees, to be released on Monday.
The sale of the Hearst-Burnett joint venture to MGM last month was one element that helped Hearst reach record revenue and profits for the fifth consecutive year, Swartz wrote.
Hearst is privately held, so Swartz’s annual letter to employees is one of the few insights available about the performance of the company that co-owns ESPN and A+E Networks with Disney, among a host of other TV, publishing, digital and data assets. Hearst’s 2015 revenue grew 6% to hit $10.7 billion, according to Swartz.
Hearst bought half of Burnett’s production company in 2011. In September 2014, Hearst and Burnett sold a 55% stake in their joint venture to MGM for $343 million. That led to the creation of United Artists Media Group, a three-way partnership of Burnett, Hearst and MGM. Last month, Hearst and Burnett sold the remaining 45% to MGM, with Burnett taking the reins of MGM’s worldwide television operations as part of the deal.
Swartz didn’t get specific but MGM disclosed that Hearst’s share of the remaining 45% buyout amounted to $114 million in cash, according to Moody’s Investor Service. Moody’s also noted in its Dec. 17 research note on the deal that United Artists Media Group “has generated better than expected (earnings) over the last 12 months.”
Hearst got less than half of MGM’s initial $343 million payment because some of that price tag covered Burnett assets that were not included in the Hearst joint venture — notably the producer’s stake in CBS’ “Survivor” and NBC’s “The Apprentice.” Nonetheless, Hearst is believed to have received more than $200 million from MGM for its share of Burnett’s banner.
“With the exception of our venture capital investments, we don’t like to sell businesses, but in this case we thought the sale was best for MGM, Mark and Hearst. It didn’t hurt that our return on this investment has been truly stellar,” Swartz wrote. He credited former Hearst Entertainment chief Scott Sassa and former Hearst CEO Frank Bennack (who is now Hearst vice chairman) with the foresight to set the partnership with Burnett in 2011.
Hearst has greatly diversified in recent years from its TV and publishing base into health care services, medical and financial data providers. That includes its purchase of a majority interest in bond rating service Fitch Group and a host of digital investments. But cable TV is still the biggest contributor to Hearst’s bottom line. Hearst owns 20% of ESPN and 50% of A+E Networks, home of A&E Network, Lifetime and History. Hearst also owns 31 broadcast TV stations in major markets.
Hearst’s cable nets are coming off a rocky year amid declining live ratings and concerns about cord cutting. ESPN, once seen as the most bulletproof property in TV, has been under scrutiny in recent months. Its MVPD subscriber base is starting to ebb at a time when bills for sports rights fees are ballooning. Swartz maintained that the cable group delivered profit growth in 2015.
“Our cable TV companies, ESPN and A+E Networks, delivered profit growth in a tougher year for their industry, and our broadcast TV group achieved record revenue in a year without elections or Olympic Games, while soundly beating an ambitious profit plan,” Swartz wrote.
“Television in all its forms remains by far Hearst’s biggest business, and for consumers, a golden age of television is clearly upon us. New technology will increasingly allow for advertising to be more targeted to consumers’ interests. And yes, packages of TV content, or bundles, will be more plentiful, more diverse, and cheaper than the standard bundle of today. Over the past 30 years there have been far more winners than losers among TV content providers, but that will clearly change going forward. We believe we possess a superior portfolio of brands and talent that will allow our TV companies to continue to win,” Swartz wrote.
Through A+E Networks, Hearst has jumped on the Vice Media bandwagon. Swartz said A+E’s investment in Vice and partnership in the linear Viceland channel — a remake of the flagging History sibling H2 that is set to launch in February — was a bid to draw younger viewers across multiple platforms. The same goes for A+E’s two-year-old lifestyle channel FYI.
“If the promise of streaming TV is in part dependent on getting the millennials to sign on, (Viceland and FYI) will no doubt help lead that charge,” Swartz wrote.
Among other highlights from the letter:
- Hearst’s newspaper group, which encompasses big dailies including the San Francisco Chronicle and Houston Chronicle, saw profit growth for the fourth consecutive year. The magazine group — Cosmopolitan, Elle, Good Housekeeping, Harper’s Bazaar and Esquire, among other titles — delivered its second consecutive year of profit growth.
- Hearst is hunting for “bolt-on” acquisitions to complement Fitch Group’s financial data operations. Healthcare-related acquisitions are also a priority.
- Swartz emphasized his faith in ESPN maintaining its primacy in the digital future, calling the sports powerhouse “the most unique asset in television.” He sought to dispense with the criticism that has swirled in recent months. “No traditional media brand has been able to transfer its leadership position in the new streaming, digital world better than ESPN. Sports rights have gotten more expensive and cord cutting and cord shaving have caused modest losses in the number of ESPN households, however, we are confident that this brand and this team have many years of strong revenue and profit growth ahead of them, as there simply is no substitute for ESPN,” Swartz wrote.