A QUIET SUMMER ENDS WITH YET ANOTHER PUSH FOR SCALE ECONOMICS
BY PAUL KAGAN The forgotten summer of 2003 is coming to an end, rarely to be looked back upon because, in nostalgia terms, little happened that qualifies as historic. Vivendi’s Sept. 2 proposal to swap assets with GE/NBC, after all but one of the other bidders dropped out, is the lone big business item we can put in the media scrapbook. And Arnold Schwarzenegger running for governor of California will have to take up the whole consumer section. We’re at a wide watershed in media. This has been the fourth consecutive summer of cable, satellite and phone companies budgeting very carefully for new technology, and their customers doing exactly the same. At this moment in time, Americans are trying to figure out whether to spend and invest, and how to resist borrowing the cheapest money in nearly 60 years, because they’re not sure what the future holds. (Delete NBC from that group, now that it has its own movie studio; see below.) Summers like this come and go, often midway between presidential elections, when huge amounts of money have yet to be spent to advertise the latest version of prosperity. Fortunately, such nonevent seasons are rarely followed by swan dives into greater despair, especially when they get this long in the tooth. They’re usually followed by the resurrection of hope. Universal Studios may be the bellwether: It was sold before in 1990, 1995 and 1997, all quiet years. There just may be a bull market coming soon to a screen near you. The press spent all its time on the profile of the Vivendi bidders, but now that there’s a deal on the table, the focus shifts back to value. One thing I like about this one is that just a few months after the debut of freedom fries and a boycott of French restaurants, the most American of companies is selling 20% of a U.S. television network (unheard of!) to a group in Paris. Hey, the Dixie Chicks are back up on top, too. How global of us all. Then there’s the pricing. You have to love how artfully this deal was crafted around such controversial assets. As we rejoin our story (see this column, July 7), the seller reportedly was looking for $15 bil. Buyers didn’t seem ready to pay more than $11 bil., but after the seller became too aggressive, buyers jumped the deal ship in rapid order. As a result, a studio-starved GE is paying only $3.8 bil. to own 68.8% of a Universal throwing off $1 bil. in cash. Sounds like a 5.5x multiple to me. (Congratulations to Bob Wright, an ex-CEO of Cox Cable, who will head up the new company.) Vivendi gets to reduce some debt plus move $1.6 bil. of debt off its balance sheet. The partners plan to bring NBC/Universal public and they’re already claiming the pro forma $3 bil. of cash flow is worth 14x, or $42 bil. So the French feel like they’re $5.4 bil. lighter in debt and now will own 17.2% of an American media powerhouse, worth, to Vivendi, about $7 bil. That’s a “V” for victory; de Gaulle would have been proud: 7+5.4 makes it look like the seller got $12.4 bil. for 69% of the assets, implying an $18 bil. value. (The only other bidder at the end, Edgar Bronfman/Cablevision Systems, reportedly offered $5.5 bil. cash and $2.5 bil. in debt assumption. Movies are a powerful medium. It turned out the French wanted the action more than the money.) Assuming the deal is completed, the spotlight moves to the enormous changes in American entertainment economics. For 25 years, from 1970 to 1995, broadcast networks were not allowed by the FCC to control program production. With the Vivendi deal, the four largest networks will own Paramount, Disney, Fox and Universal. Warner Bros. is owned by AOL, Columbia TriStar by Sony and MGM remains independent. With a merger of AT&T and Bell South being discussed, the celebrated bankruptcies in telecom and the consolidation of radio and TV stations and cable systems, more than three decades of chaotic government efforts to redesign the media landscape have been a giant waste of time and money. The lesson? In the face-off between scale economics and bureaucratic zeal, scale won. Analyst Paul Kagan writes exclusively for Cable World. He is an active money manager and investor and often owns shares of the companies mentioned in his columns. He owns shares of Cablevision, AOL and AT&T. He may buy and sell before and after his columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction.
