The Congloms

Industry mergers clean up mistakes of the past

Dealmaking is the life blood of the media business. So it was with an enormous sigh of relief among investment bankers and business development execs that entertainment congloms got back into a dealmaking mood in 2003.

To be sure, many of the estimated $40 billion in media transactions last year were driven as much by desperation as opportunism.

Unlike the heady land grab of the late 1990s, when networks, production companies and record labels were gobbled up by budding congloms seeking global breadth and bragging rights, the deals of 2003 were more a clean-up of past excesses.

Overleveraged companies like Time Warner tightened their belts and sold off so-called noncore assets in an effort to streamline operations. Savvy brokers like Barry Diller (InteractiveCorp.) and John Malone (Liberty Media) stood hungrily by waiting for the right properties to come up for grabs.

On studio lots, 2003 was equally cost-conscious, with producers asked to fetch more of their own financing and co-production deals increasingly the norm.

No deal better reflects that shakeout than the auction that dominated the headlines like no other: the sale of Vivendi Universal Entertainment. Itself built up in a flurry of deals only two years earlier by then-chief exec Jean-Marie Messier, Vivendi Universal spent most of the year in a painstaking and sometimes humiliating fire sale of its far-flung assets.

In a nine-month saga of rumoring and spin campaigns on the part of buyers and seller, a half-dozen companies perused the Universal TV, film and theme-park operations. In the end, General Electric’s blue-chip charms outnegotiated the likes of MGM and Edgar Bronfman Jr. to snare VUE for a surprisingly good price.

For $3.8 billion in cash plus $1.7 billion in assumed debt and a 20% equity stake in the new business, NBC has moved into the ranks of vertically integrated media congloms at a mere fraction of the price Vivendi paid to do similarly.

The renewed appetite for mergers and acquisitions was helped in part by a rebound in the stock market, where large cap stocks managed to just beat Standard & Poor’s 500 for the year.

Smelling prime assets that could be bought at the bottom of the market and fueled by all-time low interest rates, leveraged buyout teams and private equity investors were all the rage in some of the most hotly contested auctions.

Indeed, the one sure sign that there were good pickings was the re-emergence of private equity investors like Blackstone, Providence and Thomas H. Lee as key bidders for VUE as well as Warner Music and possibly Viacom-controlled Blockbuster Entertainment. Cheap debt also enabled Lions Gate to win its long-sought after prize of Artisan Entertainment in a $160 million-plus deal.

Despite 2003 having been a year of retrenchment and fiscal belt-tightening among the industry’s giants, many big transactions — some in the name of survival and desperation — were completed.

AOL Time Warner arguably reached its nadir in 2003 with its debt pile pushing $30 billion and its share price in the toilet along with its rep. But by year’s end, the AOL prefix and much of its debilitating debt load were gone thanks to CEO Dick Parsons’ decision to sell off underperforming assets like Warner Music Group to a private equity team led by Bronfman for a not-too-shabby $2.6 billion.

TW also sold its 50% stake in Comedy Central to Viacom and annexed its CD/DVD manufacturing arm to Canada’s Cinram.

For its part, Viacom enjoyed another year as one of the sector’s star financial performers, despite its heavy reliance on advertising in a recessionary market. Its success, however, was almost overshadowed by the Sumner & Mel shootout. Their relationship may not be perfect, but the two men share one critical love in common: Viacom stock. Having added Comedy Central to its bouquet of lucrative cable nets, Viacom may well be a seller, with Blockbuster being shopped around for $3 billion or more.

Disney managed to keep itself in the headlines, but also for all the wrong reasons. Still paying for the overpriced Family Channel, the fate of chairman-CEO Michael Eisner twice came to the fore in a year when corporate governance and board independents were hot topics.

MGM tried in vain to be a big dealmaker in 2003, first trying to wrest control of Rainbow Media’s cable nets from Cablevision and then lobbying an aggressive (private equity-supported) bid for VUE. MGM ended the year back at the negotiating table, this time in talks with Time Warner about a possible merger.

On the distrib front, News Corp., Liberty Media and Comcast were all in the dealmaking fray.

News Corp. ultimately secured its most desired property, DirecTV, and at $6.6 billion for a controlling 34% stake, at a fraction of price of its 2002 offer. Comcast, having spent the year digesting its takeover of AT&T Broadband, bid farewell to its stake in home-shopping net QVC, which Liberty Media picked up for a fairly rich $7.9 billion in cash and shares.

2003 also saw the merger of leading indie producer Lions Gate with Artisan Entertainment. Deal will create a kind of indie production-distribution powerhouse with a library of over 6,000 titles. That kind of sales muscle could give publicly traded Lions Gate far greater leverage.

2004 looks likely to pick up precisely at the pace that late 2003 has set. Time Warner, newly released from its leverage woes (if not its Securities & Exchange Commission investigations) is sizing up a possible buy of MGM’s film library. Such a deal would mark a nice, noncapital-intensive business that would add overnight earnings to TW’s bottom line. TW also has its eyes on additional cable systems like Adelphia and Cablevision.

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