Media conglomerates in the past, panel says

Media conglomerates in the past, panel says
By Georg Szalai

June 27, 2007

NEW YORK -- Is the heyday of media and entertainment conglomerates behind us?

A panel of industry analysts and bankers discussed this and other deal making questions as part of a PricewaterhouseCoopers event here Tuesday, with several of them arguing that conglomeratization has no real benefits, especially in the digital age.

"Consolidation in the old media world destroys value," said Laura Martin, founder and CEO of Media Metrics LLC. "They are buying stuff (and audiences) because they don't know what else to do."

She argued that online and digital deals with a monetization rather than a traffic focus are key, citing Google as a firm that has made smart acquisition decisions, while signaling that media giants are often otherwise inclined.

Martin also said that the young technology entrepreneurs that make a difference in today's world want cool and hip work environments. "That's not the big media companies," she said.


Former Morgan Stanley entertainment and media analyst Richard Bilotti said that consolidation can at times create scale advantages, such as when News Corp. expanded its TV station group in recent years to reach duopolies and what he called "superb margins."

But he argued that the Walt Disney Co.'s acquisition of Pixar -- while strategically positive -- may have taken a form that didn't benefit Disney shareholders much. Bilotti argued the price paid was fairly high for the CG-animation studio. "CG looks like it is in the seventh inning," he said on a bearish note, suggesting Disney could have instead sold Pixar its own studio operation and then taken a stake in it.

Gamco Investors portfolio manager Lawrence Haverty said the Internet and cable and satellite TV spaces are all sectors where consolidation makes sense due to "natural economies of scale."

PwC is predicting continued merger, acquisition and alliance activity in the media and entertainment space.

"With content now distributed on multiple platforms, content producers/providers, distributors and technology companies are looking to expand their presence among the proliferating channels, resulting in an increase in merger and acquisition activity," PwC's latest "Global Entertainment and Media Outlook: 2007-2011," which was formally launched at Tuesday's event, states.

Last year, media and entertainment deal volume exceeded $70 billion, according to PwC.

And 2007 is "on track to be the greatest year in volume since 2001," when the AOL-Time Warner merger happened, Thomas Rooney, partner, transaction services at PwC, told attendees Tuesday. PwC expects more than 1,000 sector deals with about $167 billion in deal volume across various sub-sectors pending already.

However, Tuesday's panelists were also largely bearish on the value of partnerships, arguing that they limit companies' flexibility and create the risk of dysfunctional marriages.

The experts, however, differed in their takes on the increased role of private equity groups in recent media industry deals.

Haverty predicted that "we're heading for a train wreck" given the rise in leveraged buyouts that boost debt levels for the acquired firms and recent upticks in deal prices. "We've seen this movie before."

Bilotti though said he prefers such deals over ones that see publicly traded companies dilute their earnings by issuing a lot of stock to finance deals.

The PwC report simply highlights today's importance of PE players for the sector.

"Private equity is having a significant impact on the entertainment and media industry," Rooney said. Of deals announced year-to-date, 74, or 13%, involve PE firms, while they have a 54% share in deal volume where announced, he told event attendees Tuesday.



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