Mergers, market mire mark '00
Consolidated biz facing challenges
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When Internet shares tanked last spring, it marked the closing of the longest bull market in history. That and a slowing economy fed an advertising dip late in the year that spelled bad news for TV and radio and reverberated throughout the entertainment sector. Ironically, Hollywood studios, often derided by Wall Street as bad business, could prove to be a pocket of strength in 2001.
"Film is a great business to be in now. So is music. They're not driven by advertising," said one fund manager. As a stand-alone company, a retooled Universal "would probably have had the best earnings of all" this year, he added.
Universal Studios and Universal Music were absorbed by France's Vivendi in December, and the new Vivendi Universal is trading in New York and Paris. Many analysts Stateside, however, aren't sure they'll continue covering the merged entity, which is based in France.
The down market pummeled media stocks. Bellwether showbiz shares, such as Time Warner, Viacom, News Corp., Fox, MGM, Sony and USA Networks, fell an average of 30% from Dec. 31, 1999 to Dec. 29, 2000 -- the last trading day of each year. Disney alone ended 2000 nearly unchanged at $29 -- but the figure was still down a whopping 34% from Disney's 52-week high in May.
Including the Mouse, members of the showbiz club plunged 50% on average from their respective highs in 2000, with most trading near their 52-week lows. Some pure-play broadcasters were hit even harder. That has some Wall Streeters bargain hunting, especially if this economic slowdown never evolves into a full-blown recession.
The Federal Reserve is doing its part with a surprise interest-rate cut that goosed the market and media stocks in the first week of 2001. Still, the markets ended last week foundering again after a few good days, and many observers maintain the move won't ultimately stop the economy's slide.
Showbiz stocks in 2000 ultimately mirrored the tech-heavy Nasdaq market, which began its downward spiral in April. The Internet bubble burst, and Net stocks crashed and burned; most haven't recovered. The Nasdaq ended 2000 down 39% -- its worst year since it was created in 1971. It was off 54% from its year high.
The more traditional, less techie Dow Jones Industrial Average was down only 6% year on year and off 16% from its high -- still its worst performance in years.
Entertainment execs who had been loudly playing up their Internet businesses and planning or launching Net IPOs in early 2000 dropped those plans, and fast. Once-hip Internet companies scrambled to change their names -- Hollywood.com is now known as Hollywood Media Corp. And Viacom topper Mel Karmazin joked at a conference that he should be named "Internet executive of the year" for neglecting to bundle CBS online operations into a separate public company.
As cyber stocks dropped, Net advertising dried up. That squeezed radio and TV late in the year even as they came off a splendid 2000 bolstered by the Olympics and the elections, which also created a ratings bonanza for cable news networks. A flood of year-end profit warnings and layoffs in big ad categories, like automakers and computer makers, further scared the pants off investors.
Rocky markets forced the delay of more than 200 initial public offerings planned last year, in all sectors, including those for News Corp. satellite group Sky Global Network and Gotham-based film company Artisan Entertainment.
Media mega-deals, meanwhile, speeded up. Three giant mergers closed, or nearly so, in 2000. Viacom and CBS, Vivendi and Universal parent Seagram, AOL and Time Warner all walked down the aisle. The latter coupling rewrote all the rules as it was the first time a big Internet player acquired an even bigger traditional media powerhouse, using high-flying stock. By year-end, however, shares of both AOL and Time Warner had been battered.
The result of the dealmaking is an enormous consolidation of assets, a new set of managers and three Hollywood studios that are now even smaller units of a giant parent company.
Viacom's Paramount, now joined with CBS, is flanked by assets including MTV cable nets, CBS and UPN broadcast nets, TV stations, several hundred radio stations, a global outdoor advertising biz, a syndication powerhouse led by King World, Spelling Entertainment, Simon & Schuster and Blockbuster Video.
The combination of Seagram and France's Vivendi unites Universal Music, Universal Studios and theme parks with Vivendi's pay TV giant Canal Plus, Havas publishing and a host of technology and telecom interests throughout Europe.
AOL/Time Warner, the mother of all deals and the biggest media merger ever -- worth $160 billion when it was first announced -- carries far-reaching implications for content and distribution in a broadband world. Warner Bros., Warner Music, Time Warner cable, Turner Broadcasting, Time Inc., HBO and the WB netlet will be fused with AOL's massive online family of 26 million subscribers.
A host of smaller deals announced last year have either closed or are still pending. These include Tribune's purchase of Los Angeles Times parent Times Mirror, News Corp.'s acquisition of TV station group Chris-Craft, Viacom's purchase of cable net BET Entertainment and Univision's deal for a handful of TV stations from Barry Diller's USA Networks.
The latter agreement cements Univision's dominance in the Spanish-language TV broadcast biz, which many on Wall Street see as an increasingly lucrative piece of the media landscape going forward.
Other deals are still in the works. Satcaster DirecTV is up for sale by parent General Motors/Hughes. Most showbiz players are interested, with News Corp. the most eager. Cablevision is shopping Rainbow Media and its assorted cable nets like AMC, Bravo and the Independent Film Channel, with USA Networks' Barry Diller seen as the likeliest buyer. And German media giant Bertelsmann is in talks about combining its music business with the U.K.'s EMI.
Disney needs to make a big move, many say, and so does GE's NBC.
"They will. When you asked Time Warner executives a year ago what their strategy was, they said the company was 'strategically complete' on its own. If you asked Viacom, they said they don't want a TV network at all. You don't listen to what they say, just to what makes sense," said one Wall Streeter.
Here's the outlook, company by company, on Wall Street:
- Time Warner: A new company called AOL Time Warner still needs the FCC's stamp of approval and will probably get it imminently. In the media space, this is by far everyone's favorite stock. Analysts call the combination of assets unbeatable. "It's the new must-own media company," said SG Cowen's Ed Hatch.
"They're uniquely positioned," agreed First Union's Scott Davis, particularly in such a fast-changing media world. The merged company is the only big media player, some say, with a coherent Internet strategy -- even though the FTC's open access condition forces the company to let outside Internet service providers onto its cable lines for high-speed services.
Deal's closing, once the FCC approves it, will be a catalyst for the stock, which some say could double or more during the year. AOL Time Warner is surely eyeing other properties on the market and could well make other acquisitions.
And the stocks are cheap. At year end, Time Warner shares were down 51% from their high and off 23% from the end of 1999. The merger put a huge premium on Time Warner stock, which soared to a high of $105 after the deal was announced before coming back to earth to end 2000 at $52.
AOL, which closed the year at $35, fell 60% from its high and was down 54% year on year.
- Viacom: Toppers Sumner Redstone and Mel Karmazin were alone in the wilderness challenging naysayers who predicted a major ad slowdown.
While of the group it's the media conglom that's perhaps the most exposed to the pitfalls of an advertising slowdown, after its purchase of CBS Corp. -- the first of the big media mergers to close last year -- company insists that growth is still good and business healthy as ever. Execs are salivating in anticipation of Jan. 28, when CBS' one-two punch of the Super Bowl followed by the season premiere of "Survivor 2" should make for the biggest ad revenue day in TV history.
Meanwhile, Karmazin continues to be aggressive on the acquisition front. He agreed to pay a hefty $3 billion for BET and is bidding for Cablevision's Rainbow Media. Company may also be eyeing DirecTV, Yahoo! and any number of other potential targets. Like Fox and others, Viacom is eagerly waiting for a newly constituted FCC to loosen the current restriction on broadcast ownership so it may purchase more TV stations.
The company agreed to buy back outstanding shares in its radio and outdoor group Infinity last year and is considering doing the same with its Blockbuster unit.
Viacom shares fell 22% during the year and ended 2000 at $47, down 38% from their 52-week high. Analysts love the stock below $50. After a few strong trading days early in 2001, the stock is back in the low $50s. Some see it moving to over $80 in the next 12 months.
- Walt Disney: The company has a new chief operating officer, Bob Iger, and new studio head, Peter Schneider, plus a new head of consumer products charged with nursing that ailing division back to health. Consumer products, including licensing, merchandising and the Disney Stores, have weighed on the Mouse's earnings and share price since late 1998.
The slow (although steady) turnaround was masked in part by stellar numbers at Disney's television division, led by ABC gameshow "Who Wants to Be a Millionaire." That's been the motor of growth, and it helped the stock perk up during the year, only to plunge last fall when execs revealed that ratings had been slipping. Wall Streeters promptly cut their own ratings on Disney.
Chairman Michael Eisner described Disney recently as a race car accelerating, but not on all cylinders, with consumer products and filmed entertainment the weaker links. Many on Wall Street believe the company must make its own major acquisition to achieve the heft of its merging competitors. While Eisner hates more than most to overpay, a weak stock market may throw out some bargains. Yahoo! would be a particularly good fit, some fund managers and analysts say.
A new accounting rule likely to kick in this year will make it easier for the Mouse to make purchases without taking a hit to earnings. Revised regs will also aid General Electric's NBC. GE and Disney are earnings-driven, as opposed to News Corp. and other congloms that urge investors to focus on cash flow instead.
Disney shares were nearly unchanged for the year, closing out at $29, although they ended 2000 down 34% from their high in May.
Even naysayers liked the stock at under $30, although it's moved back into the low $30s range in the first week of 2001.
- News Corp./Fox Entertainment: Rupert Murdoch's family-controlled company has a lot on its plate.
Chief operating officer Peter Chernin continues as Murdoch's right-hand man even as the mogul's two sons rise up the corporate ladder with promotions that put them in charge of big swaths of the company's business. Lachlan, 29, was recently named deputy chief operating officer and chairman of News Ltd. James, 27, is the head of News' Asian satellite biz. Both report to Chernin.
Company recently hired top Seagram/Universal exec Brian Mulligan to run Fox Television, further deepening the executive bench.
In the coming months, News Corp. will need to work out a settlement with Haim Saban, Fox's partner in Fox Family Worldwide. In December, Saban exercised an option in his contract forcing News Corp. to buy out his half for cash; he wants a hefty $2 billion. News Corp. could opt to sell the cable net, buy it all in, or find another partner. Company is working to close its $5.4 billion acquisition of Chris-Craft and find a way to buy DirecTV, then take its worldwide satellite biz public.
News Corp. shares ended the year at $32, down 16% for the year and off a steep 52% from their high in 2000.
Shares of News Corp.'s Fox Entertainment, which houses its U.S. showbiz assets, fell 28% for the year to close at $18 -- down 49% from their 52-week high.
- MGM: A free-standing studio lacking its own pipeline, MGM continues to hunt for a cable network or other form of distribution. And it's still waiting for that big breakout pic as it ramps up production under new management led by Alex Yemenidjian and Chris McGurk.
The pair has turned the company profitable and injected some new energy into the once moribund studio. The film slate in 2001 is one of its busiest in recent memory. "They're playing a game to see if they can survive and do something with MGM," said one analyst. "It hasn't had a hit movie. It needs to figure out distribution. It needs to be sold," he added.
But MGM's an unusual case since about 90% of its stock is held by billionaire corporate raider Kirk Kerkorian. He's invested billions of dollars in the Lion and is in no hurry to make a deal in which he wouldn't get it all back and more.
MGM has held on and off talks with Liberty Media's Starz Encore and Cablevision's Rainbow Media for a merger or partnership that could create an MGM-branded cable network, utilizing its valuable film library.
MGM ended the year down 29% at about $17, off 45% from the company's 52-week high. Given the uncertainly surrounding the company's future, most analysts don't recommend the stock.
- Sony: The Japanese giant stuck it out in Hollywood, and Wall Street gives the company credit for nursing its studio back to health after some costly missteps.
Under the leadership of Sony Corp. of America chairman Howard Stringer, company continues on its quest to meld the software and hardware components of its business, and it has a lot to work with. For Sony, unlike its Hollywood peers, entertainment is a tiny asset compared with its huge electronics division.
Company created a new unit, Sony Broadband Entertainment, last year to house its U.S. entertainment assets. Many still believe the move heralds the long-awaited public offering of a separate U.S. showbiz company that would allow Sony to buy broadcast assets without running up against foreign ownership restrictions.
Sony also eyed cable networks and satellite assets, but so far has kept its deals relatively small and strategic.
Sony shares have had a wild ride. They ended 2000 at nearly $70, down 50% for the year and off 55% from their 52-week high.
- Vivendi Universal: This transatlantic powerhouse was born in December when France's Vivendi bought Seagram, absorbing its Universal Studios and Universal Music entertainment assets and divesting Seagram's historic wine and spirits biz to create a new conglom run by Vivendi chairman-CEO Jean Marie Messier.
Company is channeling its energies into Internet and content distribution via hand-held devices like mobile telephones through alliances with European telecom players and using a portal called Vizzavi. Many U.S. investors have a "wait and see" attitude toward the company and stock. Some find the combined company harder to understand now since it's based in France and a chunk of its cash flow still comes from Vivendi's old water utility and waste management businesses.
They agree that Universal Studios' hookup with Vivendi's Canal Plus does give the studio some powerful leverage in European markets.
The combined company now trades on the New York Stock exchange, where Vivendi was listed officially for the first time last month. Vivendi shares plunged after the deal was announced from about $80 to as low as $60. The merged company started trading as one Dec. 11 and ended 2000 at $65.
Seagram didn't exist at year-end as a free-standing stock. In 2000, however, it followed its media cohorts, fluctuating between a high of $65 and a low of $43.
- USA Networks: Barry Diller's USA Networks looks especially intriguing, Wall Streeters say. It recently agreed to sell off its underperforming TV station group and focus on revamping the USA Network cable net and expanding the fast-growing Sci Fi Channel. USA Films, a small piece of the overall business, has a surprise bona fide hit on its hands with "Traffic."
USA also owns Home Shopping Network, Ticketmaster and a host of online properties.
Diller badly wants to buy Cablevision's Rainbow Media, a stellar collection of cable networks, but has promised investors he won't do a big, expensive acquisition unless it makes real strategic sense. He's got more freedom to do deals now that controlling shareholder Seagram is part of Vivendi U, which has promised to be more supportive of big purchases, particularly in distribution. If NBC is put up for sale, Diller will be the first in line.
USA shares fell 26% for the year and ended up 31% off its high.
