At a recent industry party for Tom Cruise and Katie Holmes’ nuptials, the crowd of well wishers included not just agents, studio executives and producers but David Bonderman and Kelvin Davis.
Their names may not have been familiar to the media establishment, but as principals in Texas Pacific Group, which owns a big chunk of MGM and, by extension, Cruise’s newly reconstituted United Artists, they’re among the many private equity players now ever-present in Hollywood.
One Wall Streeter, referring to all equity players, says, “They like the parties. But they’ve always got to be mindful of getting in too deep. They don’t want it to appear that they’re going native. Otherwise, their investors will figure they’re being skinned by sharks.”
The concern cuts both ways. With private equity money flowing into Hollywood and PE firms now taking over companies as diverse as Warner Music Group, Spanish-language broadcaster Univision, radio giant Clear Channel and Anglo-Dutch conglom VNU, some on the media front wonder just how healthy their presence will be for the industry in the long run.
The traditional operating procedure of a private equity buyout firm is to load a company with debt, slash costs, wring as much money out of a company as they can, then sell it. It’s short-term thinking that’s being applied to a business with long-term challenges.
At a critical time in the entertainment and media business, virtually every traditional media company is struggling with how to stay ahead of, or catch up with, the digital curve. In cases where equity players are making decisions about a studio, how much will they care about the quality of a movie?
Year to date, private equity has announced 2,520 deals for $655 billion globally, according to data firm Dealogic. U.S. buyouts alone totaled 1,010, worth $371 billion and accounting for a whopping 27% of all domestic M&A activity. That’s up sharply from 14% last year — and from a mere 3% in 2000.
The media sector is on fire. In quick succession this year, PE paid $11.6 billion for VNU, $18.7 billion for Clear Channel and $13 billion for Univision. In the latest deal on Dec. 14, Kohlberg Kravis Roberts and Permira agreed to buy German TV giant ProSiebenSat 1 for $7.6 billion.
By all indications, they’re just warming up. As of November, PE firms had raised a record $178 billion in new funds from investors this year. A recent Business Week cover called them “Gluttons at the Gate.”
The vibe coming from entertainment operatives is wonderment at the pace of deals — and ambivalence.
“It’s always good to have a fresh set of eyes come in and look at a business,” says Scott Siegler, a longtime TV exec who is now a partner at Zelnick Media.
“They can be the greatest partners in the world — or the most unpleasant,” says Michael Burns, vice chairman of Lionsgate and a former investment banker. “When you crawl into bed with an 800-pound gorilla, it can be one helluva night or you can wake up with limbs missing.”
One only need look at VNU, which owns the Hollywood Reporter and Billboard, among other publications. Severe job cuts have already started in its U.S. publishing division, magnified by the fact that they are being made at publications that cover the media. There’s speculation the company may cut its current workforce of about 42,000 by 10%. While it’s likely to hang on to its core assets, AC Nielsen and Nielsen Media Research, many smaller businesses — including U.S. publishing — may be heading for the auction block.
PE firms’ seemingly insatiable appetite for the media business is making it harder to keep the low profile they covet. Firms are currently circling publisher-broadcaster Tribune Co., parent company of the Los Angeles Times and the Chicago Tribune; Barnes & Noble; and U.K. music group EMI.
Investors are throwing their money at private equity in large part because the stock market is suddenly out of favor. Big PE firms are launching new multibillion-dollar funds with unprecedented regularity. “I heard of one that has $100 million in new money coming in a day,” marvels a media insider. They’ve got to put that money to work somewhere.
Lately it’s not just quantity; it’s the size of deals that’s astounding. There was a collective gasp at recent news that KKR had tried to buy Vivendi for $50 billion — a bold move that would have been the largest-ever buyout.
It never happened. What did happen: The dawning realization that any public company, no matter how big, is fair game. The message was not lost on the Time Warners and Walt Disneys of the world. They’ve been cutting costs aggressively, trying to beat private equity at its own game.
“When we say we are going to operate a particular business as if it were a private equity business, that’s shorthand for managing it with an eye on costs,” says an exec at a major media conglom. “We talk to those guys all the time.”
Culturally private equity executives are an entirely different animal. In contrast with the typical chest-thumping, headline-seeking media mogul, private equity honchos have a distaste for attention. It’s so great that some PE flacks actually lobby to bump their client’s name from pole position in deal stories.
Bonderman, founder and principal partner of Texas Pacific, is from Southern California, went to UCLA, and is known for wearing colorful socks and Charvet ties. All that, jokes ones Wall Streeter, could make Bonderman the missing link between the two worlds.
That isn’t to say there will be any fundamental shift in the way that PE operates.
The worry is whether private equity is able or willing to reposition the media companies they buy in a confusing new world of MySpaces and YouTubes. If their track record is to flip a company for a profit — called the exit strategy — are they going to have much interest in positioning it for the future?
“You see an industry convulsing and changing before your eyes and you wonder if private equity will help that,” says one Hollywood insider.
“They are not known for innovation,” agrees another.
Let’s say a private equity group buys Tribune. There’s the underlying problem of where the TV and newspaper business is heading. They would tweak, cut costs. “But they’d also have to deal with the larger convergence issues, electronic distribution issues. They’re very uncomfortable with that,” he adds.
Naturally. When a firm spends part of its day on media, part on aircraft, part on pharmaceuticals, part on casinos, it’s easier to “figure that all businesses operate off some identical fundamentals. But that can be a dangerous, business-school way to look at it,” notes another Hollywood player.
In fact, bids for Tribune have been tepid — a fact that has pushed major shareholders, the Chandler family, to enter the fray. The former L.A. Times owners are trying to interest private equity firms in joining them to buy Tribune’s newspaper business, splitting it off from broadcasting.
On the plus side, PE firms are completely agnostic. They’re not tied to existing structures, strategies or staffers, which can make some kinds of experimentation easier.
“There’s no emotion to the private equity side. They will make decisions people weren’t willing to before,” says a former entertainment exec whose company was acquired by private equity.
Sometimes they go too far. Take MGM.
Providence Equity and TPG, flanked by Sony and Comcast, acquired the studio for $4.8 billion in 2005. So many people were let go that MGM was no longer a viable operating company. When the group finally chose Harry Sloan as its CEO six months later, he had to start hiring again, although the studio is still much leaner than it was.
General consensus is that MGM’s new owners way overpaid. But ironically the need to dig themselves out of a hole has resulted in a kind of creativity through desperation. With little to work with, Sloan’s fluid, multi-pronged strategy — the latest peg being the Tom Cruise/United Artists deal — has gotten the Lion back onto the map. It’s not clear if Sloan will ultimately succeed.
Comcast came out best from the deal, which provided a stream of titles for its burgeoning video-on-demand service. The cabler recently named Michel Angelakis from Providence, who helped put the pact together, as its new CFO — a rare instance of a private equity player moving to a major media company.
It’s more often gone in the other direction. PE firms have hired execs like former Time Inc. editor-in-chief Norman Pearlstine, who went to Carlyle, or former Viacom and Time Warner CFO Richard Bressler, who headed to Thomas H. Lee. These folks have fat Rolodexes and broad experience. It’s not clear yet if or how they’re impacting the deals.
Pedigree doesn’t guarantee success. Quadrangle Group, founded by longtime media banker and former chairman of Lazard Freres, Steve Rattner, acquired a video company called Good Times Media in 2003 for $90 million plus the assumption of $160 million in debt. Last year, Good Times filed for bankruptcy and was acquired by a concern called Gaiam for $40 million.
Warner Music, meanwhile, is considered a smashing private equity success story. It was acquired from Time Warner in 2004 for $2.6 billion by Edgar Bronfman Jr., Providence, Bain Capital and Thomas H. Lee. The new owners slashed staff and cut acts mercilessly, something TW couldn’t or wouldn’t do. WMG went public and now has a market cap of nearly $3.6 billion.
The jump in the stock defused initial criticism that the IPO, which had a rocky debut, was too soon, and payouts to the partners too rich.
In Germany, Haim Saban and his equity partners are unloading ProSiebenSat 1 after a successful three-year turnaround. KKR and Permira are likely to merge the company with Luxembourg-based pan-European broadcaster SBS, which they also own. The two firms paid $2.5 billion to buy SBS in 2005 from none other than Harry Sloan.
At Anglo Dutch conglom VNU, Wall Streeters expect cost cuts in the hundreds of million of dollars, coupled with asset sales, all presided over by the company’s new CEO David Calhoun. The highly regarded former vice-chairman of General Electric will be mopping up after previous management was stymied over how to integrate the various assets they’d collected.
“They didn’t have the ability to take it to the next level. They couldn’t create synergy,” says one insider.
Even with private equity’s draconian reputations, most media companies would prefer to be acquired by them rather than by a competitor, because PE will still need someone to run the business.
“If News Corp. bought Disney there would be a wholesale cleaning,” says one exec. “The only thing people at these companies care about is how long they can keep these high-paying gigs. (Lew) Wasserman may have looked at (the PE invasion) as having a massive impact on the business.
“Folks today say ‘I have a three year contract and I’m only half through.’ ”
Companies that PE firms take private also enjoy the freedom of not being buffeted by quarterly scrutiny and a break from raising cash.
“Instead of spending all your time raising money in the equity or debt market, you can keep your eye on the ball,” says Robert Friedman, a former Time Warner exec who now runs Radical Media, a production company that has private equity investors.
All media concerns love the high prices private equity is paying for other companies in the same business. The pricetags almost always value the acquired assets — be they radio, TV stations, magazines, newspapers or film libraries — at a hefty premium to the public markets.
Equity firms are paying so much because they can. Gabelli & Co.’s Larry Haverty calls it “a perfect storm”: there’s tremendous liquidity sloshing around in the world; investors can’t score big in the stock market; interest rates are low, which makes it cheap for PE firms to borrow even more money to finance their deals.
“This show is brought to you by low interest rates. They attract a lot of flies,” he says.
Faint alarm bells are chiming: With PE firms throwing around so much cash, they’re bound to do some dumb deals. In the pressing need to put their money somewhere, anywhere, they’re already accepting lower returns than they have in the past.
The Department of Justice is probing the impact of buddy bidding, where a group of firms join to make an offer. A number of shareholder lawsuits even accuse PE firms of conspiring to rig the bids.
Critics also slam the fat fees PE firms pay themselves as consultants for getting their own deal done.
But for now these remain mere distractions, unlikely to stem the flood. Many on Wall Street hope the deals never stop. Says one hard-nosed fund manager: “I think it’s great. If the banks put up the cash, private equity always makes money off media. Is it good for the business? Who cares?”