Private Equity's Media TargetsSteve Rosenbush
At the height of the last tech boom, shares of French entertainment and communications conglomerate Vivendi traded in the $80-a-share range. Its stock suffered a comedown during the subsequent bust, dropping into the single digits. Vivendi (V) has regained some but not all of its value in recent years. Its market cap, at about $40 billion, is roughly half the valuation of five years ago.
On May 17, Vivendi acknowledged it had received a takeover bid from private equity player Sebastian Holdings (see BW Online, 7/2/05, "Vivendi Ups the Ante"). The firm, which acquired a 4% stake in Vivendi in March, is controlled by Norwegian investor and businessman Alexander Vik. He wants to separate the company into different businesses, focused on entertainment and distribution. He has reportedly offered $50 billion for Vivendi, which operates Universal Music, the NBC Universal TV production house, Vivendi Games, French pay-TV player Canal +, and French telecom company SFR.
Vivendi's stock initially rose 6% on the news. But it ended the day 1% lower, at $35.33, after Vivendi downplayed the prospects of a deal. "The supervisory and management boards have rejected the idea of breaking up the group, which is inherent in Sebastian Holdings' approach. On the contrary, the boards have reiterated Vivendi's strategy...and consider it the best way to create value for shareholders," Vivendi said in a prepared statement.
There's nothing odd about a big private equity player trying to acquire an underperforming asset and boost its value through a restructuring, spin off, or sale. If Vivendi were a small or midsize auto-parts company in the Midwest, no one would bat an eye. But the fact that a private equity company could apply that strategy to a publicly held media giant, with a market cap of $40 billion, is a major turn of events.
The assault on Vivendi shows once again that private equity companies have accumulated enough capital to play a major role in mergers and acquisitions of large-cap companies, something that was unheard of just a few years ago (see BW Online, 3/1/06, "KKR Hedges Its Bets"). Until now, such large deals usually have required a publicly traded corporate buyer with a stock that can be used as currency.
Media companies are particularly attractive to private equity investors these days. Just a few months ago, financier Carl Icahn waged an aggressive but ultimately unsuccessful battle to take control of Time Warner (TWX). The company has disappointed investors ever since its infamous acquisition of AOL. Earlier this month, the management of Emmis Radio offered to take the company private for $567 million. And private equity and financial players, including Bill Gates's Cascade investment group, are vying for control of Spanish-language media giant Univision -- a deal that could be worth $12 billion.
STUFFING THE PIPES.
The allure isn't hard to understand. The Internet has disrupted the media business, becoming an alternative for both the production and distribution of content. That has put media companies from record labels and Hollywood studios to cable-TV and satellite operators on edge. Even promising upstarts such as satellite-radio players XM Satellite Radio (XMSR) and Sirius Satellite (SIRI) are rivals on the Web. All that has pushed media valuations lower. "Time Warner has a very low multiple," analyst Susan Kalla of Caris & Co. said. Its enterprise value is about eight times earnings.
The strategic value of the content that media companies produce is increasing all the time, though. Buyers such as Microsoft (MSFT), Google (GOOG), News Corp. (NWS), and Yahoo! (YHOO) are aggregating content at a fast clip (see BW Online, 5/10/06, "Microsoft: Let's Make More Deals"). That's because the value of online advertising is surging as broadband and wireless Web devices become commonplace, and you generally can't get people to watch ads without the inducement of content to go with it.
Private equity players are seizing an opportunity to buy valuable media assets for relatively little money because their value is often smothered in the larger corporate picture. Companies such as Time Warner and Vivendi are conglomerates. The value of their media holdings is obscured by lower-margin businesses such as communications. And media businesses within these conglomerates must compete for capital with other divisions.
Private investors such as Vik want to break up the conglomerates, cutting costs and eliminating the need for media divisions to compete for capital with their in-house corporate siblings in book publishing, cable-TV systems, and wireless phones. They think the content can find a lower-cost home on the Web. Vik comes from the Internet business. He's the chairman of Xcelera, which controls Internet tech company Mirror Image.
It's a good bet that private equity investors will have their eye on more big media companies. Time Warner, for example, bought itself some time by fighting off Icahn. But if its stock price is still floundering next year, institutional investors might be more receptive to an offer from a private equity investor offering a premium over the company's market price.
As the Internet continues to put financial pressure on the media industry, its ever-valuable assets may very well wind up changing hands.