Congloms bet bottom dollar on orphan cablers

Sales of Comedy Central, USA highlight phenomenon

Congloms are stalking the media jungle like Armani-clad velociraptors, ready to swoop down on low-flying cable nets, increasingly vulnerable in the new age of accelerating takeovers.

The most endangered cable net species fall into two categories:

  • Standalones like Hallmark, the Weather Channel, Oxygen, and Discovery and its siblings.

  • Nets owned in part by at least one media giant, such as Lifetime, A&E and Court TV.

Over the last few years, cable nets have broken through to become the priciest beachfront property on the media landscape.

The industry is still agog over the $1.22 billion Viacom ponied up for AOL Time Warner’s half of Comedy Central last month, stamping a value of close to $30 on each of the net’s 82 million subs.

Spencer Wang, media analyst for JPMorgan, says that just four years ago, the cable-net average was less than $20 a sub.

Just last week, Edgar Bronfman’s surprise offer with Chuck Dolan’s Cablevision to buy Vivendi’s media assets — showcased by the lucrative USA Network and Sci Fi Channel — threw a spotlight on the phenomenon.

What Dolan brings to the Bronfman bid is his highly profitable AMC network and its more modest cable siblings WE: Women’s Entertainment and the Independent Film Channel (IFC), which together could be worth $4 billion, based on the Comedy Central model.

Linked up in a grouping with USA and Sci Fi as part of a reborn Universal, the Dolan nets would move closer to parity with the extensive cable holdings of Viacom, Walt Disney, AOL TW and News Corp.

The reason cable nets are hell-bent on banding together is that strength in numbers has become a must: The nets face off every day against natural antagonists — cable operators and satellite distributors — that also keep ballooning in size.

At 22 million subs, Comcast controls more of the cable market than any other distributor in history. There may soon be a plethora of cable net purchases because values are at their peak — and now is the time to sell.

The Hallmark Channel is Exhibit A, a net with relatively high costs because of its reliance on scripted movies and series. Hallmark’s ad revenues are on the rise from $46 million last year to a projected $62 million this year. But it manages to pull in only $32 million from operator license fees, the 2003 forecast by Kagan World Media.

Where deal negotiations get trickier is with nets owned by more than one company.

Case in point: A&E and its History Channel sibling, whose owners are Disney, Hearst and NBC.

NBC is the most logical buyer because A&E and History would fit neatly with the upscale nets it already owns: MSNBC, CNBC and the recently purchased Bravo.

And Disney has quietly put the word out that it might be willing to sell non-strategic cable assets such as A&E and Lifetime to help reduce its whopping debt. Hearst hasn’t tipped its hand because it’s privately held.

But if NBC were willing to cough up a premium price — and Hearst could steer clear of a humongous tax bill — the deal could get done.

Discovery, which consists of five fully distributed nets and nine digital spinoffs, is not a classic standalone because its owners include John Malone’s Liberty Media (a 49% stake), Cox and Advance/Newhouse.

Malone says he’d love to buy the whole Discovery enchilada. But here’s the hitch: The other owners have no interest in selling.

By keeping its operator license fees low and drawing up long contracts with the ops (10 years is standard), Discovery has engineered a business plan that may allow it to co-exist with its increasingly bloated rivals.

Henry Schleiff, chairman and CEO of Court TV, says he’s confident that his net will continue its winning ways — a still-growing sub base, steadily rising Nielsens and cable-operator-friendly contracts — while still operating under the dual ownership of AOL TW and Liberty Media.

“We’re steering a successful neutral course, just like Switzerland,” says Schleiff. “And what country has had a longer and more glorious existence than Switzerland.”