Summer's Here and the Time Is Right for Buying Red-Hot Entertainment Assets

If the government opens up its files on UFOs, as the Sci Fi Channel requested last week, it may coincide with the identification of other flying objects soon to be released by Sci Fi’s owner, Vivendi. The frenzy for the French company’s media properties is so intense that MGM last week sold its share of three cable networks back to Cablevision, at a loss, in order to raise cash to bid, even though Cablevision wanted them as a prelude to its own bid. Sacre bleu! It’s fascinating to see some of America’s most revered entertainment assets (Jaws, American Graffiti, The Incredible Hulk and Animal House) return to the U.S. after a long sojourn of ownership by Japanese, Canadian and French investors. But if I’m waving a flag, it’s not for any one country. (Globalism is thriving with last week’s purchase of England’s Chelsea football club by a Russian billionaire.) No, the significance of the Vivendi sweepstakes is the resilient value of entertainment assets, rising higher over the years despite ping-pong investors and perennial mismanagement. This is a critical issue when the biggest source of conflict in cable is the growing discomfort with its content creators. Back in 1990, MCA sold this bundle of programs and parks for $7.1 bil. to Matsushita (11x projected cash flow of a mere $645 mil.). Eighty percent of it was sold again in 1995 at roughly the same value and with about the same cash flow. Barry Diller paid $4 bil. (13x proj. cash flow of $315 mil.) in 1997 for just the cable networks and TV studio. Vivendi came along in 2000, paying 10x proj. cash flow in a $22 bil. deal. Universal is trying to catch up to MGM as most-often traded studio. Leo the Lion has been swapped back and forth seven times over 16 years, and probably will be again, whether it lands Vivendi or not. The root cause of all this traffic: competing cable and satellite distributors, built for scale economics, gaining increasing access to the digital household. So the long-term asset value of program providers remains strong, and rising. It is not difficult to understand why the bidders for Vivendi are NBC, Liberty Media, Viacom, MGM and one former owner, Edgar Bronfman, partnered with Cablevision. It’s enough to make a small cable operator sell out to a big one. Or even incite two or more big MSOs to merge. Just look back to Time-Warner (1989), Viacom-Paramount (1994), TW-Turner (1996) and Viacom-CBS (1999). It isn’t over ’til it’s over. Bids for Vivendi’s entertainment assets are supposed to be in the $10-15 bil. class, but like Cablevision’s $500 mil. buyback of 20% of AMC/Rainbow/WE, I think it’s cheap. With a raft of companies needing to unload debt, it’s a great time to be a buyer. Take Cablevision: Last summer, Wall Street drove its stock under $5 and demanded asset sales. Last month (June 6) it was $24/share. Citigroup has what I think is a conservative target price of $28, and new financing may be on the way. It’s an El Niño change in the weather from last summer to this one, even if the purchase prices don’t reflect it. P.S.: MGM originally bought the package to help create a new cable network around its historic film library. Ted Turner did just that with the same library in 1986 (the foundation of TNT) but MGM couldn’t. However, if it can acquire the Universal library and TV production, it can redefine the term “programming scale.” Meanwhile, John Malone’s Liberty, the morning-line favorite to win the Vivendi bidding (because it has the largest cash horde), is rumored to be thinking of merging Universal with DreamWorks and its Steven Spielberg-Jeff Katzenberg-David Geffen management. Add to that the plans of Discovery (50% owned by Liberty) to spend $3 bil. on original programming over the next five years, with an emphasis on high-definition fare. Discovery thinks there will be 1-2 mil. HD homes by the end of next year, but that number isn’t relevant. How about 10x that before John Hendricks has blown his wad? All it takes is a couple of rounds of juicy price cuts at Best Buy and Circuit City to put HD in 10-20% of American homes. And digital distributors smoking a peace pipe with program providers. 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, Liberty, AOL Time Warner and Viacom. He may buy or 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.