It's just the kind of math John C. Malone likes. British cable company Telewest Communications PLC (TWSTY) is struggling under a mountain of debt, so the Colorado-based cable mogul is magnanimously offering to buy up the company's bonds--for 40 cents on the dollar. Such is the state of the European media market that some bondholders are taking Malone up on the offer. At last count, Malone's Liberty Media Corp. (L) already owned 11% of Telewest's corporate debt and had offered to buy an additional 20%. His plan: convert the bonds to equity and, along with a 25% Telewest stake he already owns, take control. Then, Malone hopes to force NTL Inc. (NTLD), another struggling British cable operator, to merge with Telewest and give Malone a mightier rival to Rupert Murdoch's British Sky Broadcasting Group PLC. (BSY)
Malone is by no means the only vulture to smell opportunity in Europe's media market. An unprecedented number of broadcast, cable, and pay-TV properties are either on the block or ripe for takeover. And some of these assets are juicy. Many cable systems--particularly those in England and Germany--spent billions of dollars to upgrade their systems, with the notion of being able to sell phone, data, and TV services to their customers. But the companies took on too much debt in the process, and now they or their creditors are desperate to sell assets at almost any price. "For people who buy cheap and sell high, the environment right now is ideal," says Wolfgang Bock, head of the European media practice at Mercer Management Consulting. That's a bit too optimistic--some of these deals could still be sticky, for various reasons. But players with cash and a stomach for risk have a lot of opportunities.
In Paris, Vivendi Universal's acute financial woes could force it to sell media assets such as Canal+, the Continent's biggest pay-TV operator. Vivendi, struggling to pay down $19 billion in debt, has already sold its Scandinavian pay-TV unit to Norwegian telephone company Telenor and is trying to sell Telepi?, its unprofitable Italian pay-TV business, to Murdoch. In Munich, the bankruptcy of KirchMedia freed up the film library controlled by mogul Leo Kirch, as well as his broadcast business, ProSiebenSat.1 Media. Together with Bertelsmann's RTL Group, ProSiebenSat.1 dominates the German commercial TV market. And Bertelsmann is expected to sell its BertelsmannSpringer scientific publishing unit.
Interested buyers are queuing up. More than 50 companies have expressed interest in pieces of Kirch's bankrupt empire. Bidders include smaller regional players such as German newspaper and magazine publisher Axel Springer. It's unlikely, though, that these smaller companies can raise the necessary money on short notice. That leaves the field to the few who can--notably Malone and Murdoch. True, Malone has already sunk more than $2 billion into troubled companies such as Dutch-based cable operator United Pan-Europe Communications. Likewise, Murdoch's BSkyB recently wrote off $1.4 billion on past investments in the Kirch pay-TV operation. But these moguls' pockets are deep enough to withstand such losses--and both are known for patiently stalking their prey. "We're long-term investors," Malone said in a recent Liberty Media investors conference. "And what seemed to be cheap gets cheaper the longer we wait." Malone has nearly $3 billion in cash and access to billions more in debt.
For Murdoch, the biggest prize could be ProSieben, which would finally give him traction in the German market. That deal could conclude within weeks; KirchMedia is all but paralyzed while it undergoes restructuring, and creditors are eager to find a buyer before KirchMedia loses any more value. "We're going to be seeing plenty of consolidation," says Tarak Ben-Ammar, a Paris-based dealmaker who represents Murdoch on the Continent.
Britain fueled the latest round of activity in May when the government introduced legislation that lets foreigners own private British broadcast companies. The most likely targets are Granada Media PLC and the smaller Carlton Communications PLC. They're both relatively healthy but considered too small to remain independent. And if merged, they would hold a controlling stake in ITV, Britain's biggest commercial broadcast network. That's why Viacom (VIA) President Mel Karmazin flew to London in mid-June to size up potential acquisitions, although insiders say Viacom doesn't expect to make a move until next year at the earliest.
If consolidation is inevitable, it still may not come quickly. Because many of the properties for sale are in distress, potential buyers are cautious. Murdoch's News Corp. (NWS), for example, says it is lowering its initial $1.5 billion bid for Telepi? because it has had trouble lining up backers for the deal. Murdoch wants to combine Telepi? with another money-losing Italian pay-TV group, Stream, in which he holds a 50% stake, but he wants outside investors to hold half of the merged company.
Likewise, the Byzantine bookkeeping of Kirch Group is proving an obstacle. A team of consultants, accountants, and Kirch employees has been laboring to untangle the mess. But one person involved says it is impossible to expose every problem: "The lack of transparency was just too great."
Fear of hidden liabilities has already discouraged buyers such as Bertelsmann. The German media giant is eager to expand and can readily afford it. But Bertelsmann already considered and rejected buying KirchPayTV, Germany's only major pay TV service. A source close to top management says Bertelsmann isn't interested in Vivendi assets, either. Too complicated--and Bertelsmann thinks the Vivendi prices should come down some more.
Other potential buyers have their own battered media operations to shore up. "In the current climate, a lot of people simply don't have the cash flow or financial resources they need to buy assets," says Adam Bird, who heads Booz, Allen & Hamilton's European media consulting practice. Take AOL Time Warner Inc. (AOL), which once hoped to become a big player in European cable. It's saddled with $30 billion in debt, and its shares are down 59% this year. After shelling out $7 billion recently to buy back a 50% stake in AOL Europe formerly owned by Bertelsmann, it can't afford any major European acquisitions. So it has to content itself with niche buys, such as its recent $50 million purchase, pending regulatory approval, of a controlling stake in German music-TV channel Viva Media.
Nationalism is still a problem, too. Although most European governments have loosened restrictions on foreign ownership, some still erect barriers. France, for example, allows no more than 20% of any television company to be foreign-owned. "France is going to be the last, the very last country where foreigners are welcome," laments Murdoch agent Ben-Ammar. But there are other places where big players like Malone and Murdoch can grab choice media real estate. "They have the money and the competence and the ambition," says Mercer's Bock. Not for the first time, the big will probably get bigger. By Carol Matlack in Paris and Jack Ewing in Frankfurt, with Stanley Reed in London, Ronald Grover in Los Angeles, and Tom Lowry in New York