Analysts Expect Heavy ’07 M&A Activity

7/06/2007 8:00 PM Eastern

Mergers and acquisitions activity is expected to reach near-record levels in the media space in 2007, but that didn’t stop a panel of industry analysts from warning media companies at an industry conference that large mergers usually don’t pan out.

Tom Rooney, PriceWaterhouseCoopers transaction services entertainment and media leader, said at the Big Four accounting firm’s Outlook 2011 conference here June 26 that there were 282 deals in the media space — which includes broadcast and cable TV, publishing, Internet and motion pictures — in 2006, valued at about $114.6 billion. Another 132 deals valued at $103 billion were announced in 2006 and are expected to close in 2007.

Including those announced deals, about 277 transactions are expected to close in 2007, with a value of about $167 billion.

“2007 is shaping up to be the most active year since 2001,” Rooney said at the conference, adding that was the year of Time Warner Inc.’s $112 billion merger with America Online.

Sector 2005 Deal Value 2006 Deal Value
Source: PriceWaterhouseCoopers
Broadcasting $10.7 billion $37.8 billion
Cable $11.3 billion $24.1 billion
Publishing $7.9 billion $20.4 billion
Motion Pictures $9.9 billion $11.5 billion
Internet & Software Services $8.9 billion $7.8 billion
Recreation & Leisure $3.8 billion $5.6 billion
Casinos & Gaming $23.4 billion $4.8 billion
Advertising & Marketing $4.5 billion $1.3 billion
Business Information $586 million $1.2 billion
Video Games $300 million $115 million
Recorded Music $275 million $81 million
Total $81.6 billion $114.6 billion

Fueling that deal growth will be private equity investors, Rooney said. About 13% of the deals announced in 2007 where the actual value was disclosed were backed by private equity. More compelling is that of those deals, private equity accounted for 54% of the total deal value, or about $34.8 billion.

That trend should continue, Rooney added, stating that 68 U.S. private equity funds raised $44.3 billion in the first quarter — a 67% increase over 2006. Another 400 funds have announced plans to raise $130 billion in capital.

Unclear is whether that money will find its way to the cable industry. In 2006, the $24.1 billion in cable deals was dominated by Time Warner Inc. and Comcast’s joint purchase of Adelphia Communications for $17.6 billion.

Later at the conference, a panel of media analysts offered their own takes on the sensibility of large media deals.

Laura Martin, long-time cable analyst and CEO of research firm MediaMetrics, pulled no punches, telling the audience that consolidation among media companies “destroys value.”

She also criticized News Corp.’s oft-praised $580 million acquisition of social networking site MySpace, as well as a deal considered to be the worst merger in history — AOL Time Warner.

Martin said that media giants should take a page from technology companies like Google, Microsoft and Yahoo, which are buying marketing services companies that monetize rather than aggregate their audiences.

While the rest of the panel agreed with Martin in principle, they differed in the concept that all large media mergers are unnecessary.

Retired Morgan Stanley media analyst Richard Bilotti said that while many large media mergers have ended up failures, consolidation within a specific media sector makes sense.

“Consolidation within a given sector can create scale advantages,” Bilotti said, using News Corp. as an example. According to Bilotti, News Corp.’s TV station business runs on “superb margins.”

Bilotti agreed that media megamergers don’t usually work out, pointing to Walt Disney’s $7 billion purchase of Pixar in January 2006 as an example.

Disney’s Pixar buy was largely believed to be a defensive move — its distribution deal with the animation company was expiring. Bilotti noted that Disney owned 50% of the Pixar product that had already been created in perpetuity. Pixar’s animated films outside of that original deal have not fared as well.

“It preserved the business, but at what cost?” Bilotti said. “It might have actually made more sense to sell the Disney studio to Pixar and take back an ownership position in it.”

The analysts were generally on the same page regarding joint ventures — most believed they don’t work, especially in cable.

Gamco Investors portfolio manager Lawrence Haverty said that the main stumbling block to JVs is that there is no clear leader in such relationships.

“Somebody’s got to be in charge,” Haverty said.

Bilotti was more blunt, especially when he focused on cable joint ventures like the failed PrimeStar satellite venture and the Excite@Home broadband consortium, which went bankrupt in 2001.

“Cable is the poster child for dysfunctional partnerships,” Bilotti said. “PrimeStar went bankrupt after it had jumped out to a 1.5-million customer lead against DirecTV. @Home, enough said. That might have been a worse train wreck than AOL.”

Martin, ever the contrarian, countered that cable has been one of the best value creators in partnerships, citing Time Warner’s takeover of Turner Broadcasting in 1996, which she called a partnership.

“I think the cable industry is the best example of guys who created value through negotiating skill,” Martin said. “That skill is exactly what will create value.”

Bilotti countered that Turner probably could have been a much larger and stronger company had it not joined Time Warner.

“I think that [Ted] Turner himself would argue that it hamstrung his decision making for the eight years he operated with cable guys on his board blocking most of his moves,” Bilotti said. “Turner could probably have been a much larger company. People forget how dominant it was as a programmer in the 1980s.”