LONDON — Investors seem to be world-wary.
In a parallel to what’s happening to American congloms, much of Europe’s media sector is bumping along the bottom of the stock market, despite the overall buoyancy of the market in 2005.
In its initial public offering in November, Dutch TV production giant Endemol (“Big Brother”) was valued at $1.3 billion. That sounds impressive — except that Spanish telco Telefonica paid $5.9 billion for the company five years ago.
That was at the height of the dotcom bubble. Today, however, you could spend a long time combing through the listings in London, Paris, Frankfurt, Amsterdam, Milan or Madrid, without finding many media stocks that could charitably be described as warm, let alone hot.
Traditional media is being pressured to make bold moves into the Internet — mirroring such deals as Fox’s acquisition of MySpace — or to merge with rival firms as telcos and dotcoms invade their turf. And predatory private equity groups are stalking the Continent, looking for bargains.
“The markets are not convinced there’s a growth story in traditional media,” says Theresa Wise of consultancy Accenture. “In part, it’s a hangover from the dotcom boom. In part, it’s that the next big thing isn’t going to be in traditional media, but in the likes of Google and Yahoo.”
In the U.K., Granada and Carlton merged in early 2004 to form a single ITV, at a share price of $2.60. For most of the past two years, the stock has languished at 33% below that level, although it enjoyed a small uptick this month on vague rumors of a takeover by telco BT.
Satcaster BSkyB, despite being rated a buy by many analysts and delivering strong operating results, saw its value decline by 20% in 2005 after a similarly lackluster ’04.
German paybox Premiere floated last March at $34 per share, but was already heading south before its recent loss of local soccer rights knocked it way down to $11.
Even the Endemol IPO only scraped through at the bottom end of its expected range, although investors have since enjoyed a 10% rise.
Faced with stagnating stock prices and with their core business under threat from the many-headed hydra of digital competition, Europe’s quoted media players are being forced to consider bold strategic leaps.
ITV has struck a $308 million deal to buy the Friends Reunited Web site. Sky is paying $371 million for broadband provider Easynet.
Problem is, those are exactly the kind of speculative and expensive-looking deals that spook investors and make the stock wobble.
Indeed, Europe’s publicly quoted media companies are caught in a Catch-22. Cautiously concentrating on their traditional business is a recipe for a deflating stock price and shareholder agitation. Yet striking out in new directions is interpreted as an act of desperation — a damaging admission that the core biz is in terminal decline, and that the company is only guessing what to do next.
As such, there is reluctance to take an audacious step akin to Viacom’s split into two separate companies.
Speaking at the recent European Media Leaders summit in London, Anthony Fry, chairman of media at Lehman Brothers, said, “With the challenges media companies are facing, I wonder if being public makes it more difficult to do the things that are needed, when their shareholders want them to do what’s necessary, but also want dividends to be paid and the share price to go up.”
The classic example is GCap, the Brit radio group that has lost two-thirds of its value since it was formed in May by the merger of GWR and Capital Radio. GCap’s announcement of a radical strategy to win back listeners by slashing advertising airtime only succeeded in tipping its sinking share price over the precipice.
The company has now become a takeover target for private equity groups. The same has happened to Dutch publishing conglom VNU after its own activist shareholders blocked its $7 billion takeover bid for a U.S. medical information outfit. That left the management high and dry, with private equity investors drawing up buyout bids.
As David Elstein, chairman of Sparrowhawk Media, says, “The only reason for being a listed company is to use your paper rather than cash in order to grow. If you’re just sitting there performing the same tricks, it’s not surprising that your stock price languishes. What’s the point of being a public company if you’re not going to have an aggressive growth strategy?”
Sparrowhawk bought Hallmark’s international channels in April for $242 million, backed by private equity coin.
As publicly quoted companies are increasingly stymied by stock market skepticism, private equity players are rushing in to make media deals, even to the point where some wonder whether they’re overpaying.
One Euro stock analyst estimates 60%-70% of all deals in European media in recent years have been initiated or driven by private equity investors. PricewaterhouseCoopers predicts the surge in mergers and acquisitions will continue this year, again due to the influence of private equity investors.
Some of the continent’s most experienced media execs, such as former BBC topper Greg Dyke and former United Media boss Clive Hollick, have now teamed up with private equity firms to scout for investments.
In May, Apax took kidvidder Hit Entertainment off the stock market with a $860 million takeover. In August, Kohlberg Kravis Roberts joined forces to do the same for pan-Euro broadcaster SBS, for $2.5 billion.
Providence Equity bought out its partners in Kabel Deutschland, Apax and Goldman Sachs, in a deal valuing Germany’s biggest cable operator at $3.9 billion — nearly double what the trio paid two years earlier.
Private equity bidders also are circling Fastweb, the publicly listed Italian broadband operator that offers TV services. Sparrowhawk, backed by its private equity partners, was also the highest bidder in the aborted auction of Flextech, the programming arm of Brit cabler Telewest, which is in the final stages of merging with NTL.
The wave of dealmaking has underscored a “dichotomy” — as the Euro stock analyst puts it — between the multiples on offer from private equity firms and the much lesser valuations the stock markets are willing to support.
“Who’s right and who’s wrong?” the stock analyst says. “If you believe private equity has something strategic to offer that the stock market can’t, then they could both be right. But it’s not clear what that extra thing could be.”
Ynon Kreiz, European partner of venture capital firm Benchmark Capital, shares this concern. Kreiz formerly headed the publicly quoted Fox Kids Europe and was one of Haim Saban’s key lieutenants in his private equity-backed acquisition of ProSiebenSat 1.
“Often the stock market values companies pretty reasonably, but the private equity buys them at a premium, either because they know something the market doesn’t or, more likely, because they are under pressure to invest,” Kreiz cautions.
Although the deal now looks likely to stumble over regulatory hurdles, Axel Springer’s $5 billion offer for ProSiebenSat 1 seems to offer encouragement to other private equity players that there’s a fast buck to be made in flipping Euro media assets.
But Saban’s purchase of ProSiebenSat 1, Kreiz says, was a “a unique situation,” and should not be taken as proof that private equity players can generally find value where the stock market does not.
SBS founder Harry Sloan was clearly delighted with the $2.5 billion he got for his firm, double what the stock was trading at 18 months before. That has left many observers questioning how Permira and KKR hope to squeeze any upside from the deal.
Speaking at the European Media Leaders summit, Sloan expressed wonderment at the price of other recent deals. He cited RTL’s acquisition of the 35% of U.K. web Five that it didn’t already own, CME’s purchase of Czech web Nova and Modern Times’ takeover of rival Czech web Prima.
“As a recent seller, I have to ask myself what some of the largest, smartest companies around know that I don’t,” Sloan said.
Sloan did acknowledge that in all of the deals, the valuations could be justified by a strategic rationale. SBS, for instance, gives its new owners the chance to participate in the further consolidation of European media.
The prospect of such consolidation is the one silver lining for investors in media stocks. When prices languish for long enough, competitive threats force execs to swallow their pride and consider combining with rivals or selling out to private equity.
The merger of deadly foes Canal Plus and TPS was driven in part by their mutual desire to protect their turf against the invasion by telcos and dotcoms. When the deal was announced, their respective stock prices jumped.