[opendtv] News: Big Media a Tough Sell to Jittery Investors
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Thu, 3 Nov 2005 07:40:10 -0400
http://www.nytimes.com/2005/11/03/business/media/03funk.html?th&emc=th
November 3, 2005
Big Media a Tough Sell to Jittery Investors
By GERALDINE FABRIKANT and RICHARD SIKLOS
The media moguls are busier than ever. In the last few months, Rupert
Murdoch, the News Corporation chairman, has announced a series of
Web deals including the purchase of Myspace.com, a social networking
site. Time Warner is in talks to sell a stake in a suddenly hot AOL.
Walt Disney, meanwhile, agreed to shake up its business model and
distribute some of its television shows on the latest Apple iPod.
Viacom is splitting itself in two. And Comcast announced a deal with
Time Warner and other cable operators yesterday to add Sprint
cellular service to its range of video, voice and high-speed Internet
services.
While much of this activity is simply undoing some mistakes of the
past, it is also meant to show that America's giant media companies
are defending their turf and are well positioned to conquer the new
digital era.
Media stocks bumped up yesterday on the prospects of financial moves
at companies like Time Warner and Knight Ridder. In general, though,
Wall Street is still not buying the new story.
Media stocks have been stuck in a malaise that has only deepened of
late. Since Aug. 2, the share prices of News Corporation, Viacom,
Comcast and Cablevision have fallen 6 to 17 percent in a period when
the Standard & Poor's 500-stock index lost 2.4 percent. Many other
media stocks, including those of newspaper companies, have followed a
similar trajectory.
What investors cannot figure out is just how technological changes
will affect audience behavior and how the growing competition from
online media, including Google and Yahoo, as well as ad-skipping
devices like TiVo and other digital video recorders, will affect
traditional media companies.
Beyond those concerns, they worry that with slower advertising
growth, the profitability of media properties like television and
radio stations could be affected. And even if the ad market were to
become robust again, just how many of those dollars might flow to the
Internet and away from traditional media is an open question.
"New technologies have always ended up giving content more advantages
than disadvantages," Richard D. Parsons, the chairman and chief
executive of Time Warner, said yesterday. "I think they will again
this time, but it's not clear to the market yet."
Indeed, Time Warner is an exception to the market trend, up about 5
percent since the beginning of August. But analysts said that was not
so much because of the company's improving financial prospects as it
was a reaction to attacks from the investor Carl C. Icahn and the
news yesterday that the company will try to mollify Mr. Icahn and
other investors by increasing a share buyback to $12.5 billion, from
the $5 billion previously announced. Yesterday, Time Warner's stock
rose 1.9 percent, closing at $17.90.
"There is a buyers' strike," said Dennis Leibowitz, general partner
at Act II Partners, a media hedge fund. "People are afraid to touch
the old media. No matter how cheap they have gotten, people are
fleeing. The environment is scaring them, and they can't figure it
out."
The frustration is palpable. On Tuesday, the largest shareholder in
Knight Ridder, the nation's second-largest newspaper chain, demanded
that the company put itself up for sale after a string of strategic
and financial moves by its management failed to stem a slide in its
stock over the last four months.
At the News Corporation annual meeting two weeks ago, Mr. Murdoch
acknowledged repeatedly that the company's stock had taken a beating.
"It pains us as it pains you," he said. "We are living in - certainly
as far as media goes - a bear market. You can't ignore that."
In the meantime, shares of Google and Apple have soared as investors
championed them as businesses positioned for digital riches. So why
are investors ambivalent about big media's forays online?
In part, the legacy of overpriced deals - many driven by an earlier
rush into digital media - has saddled companies with billions of
dollars of debt. After an acquisition binge that depleted earnings in
the 1990's and into 2000, media companies like Time Warner have
finally cut their debt levels.
Richard Bilotti, a media analyst at Morgan Stanley, said that
investors worry that companies could again be wasting their money on
ill-advised acquisitions.
"Many of the deals of the last 10 years," he said, "were made with
two principal assumptions: advertising growth would remain reasonably
far ahead of nominal gross domestic product, and that size could be
used to extract cost advantages. Those didn't particularly prove
right."
Some executives complain that the current wave of buying is likely to
lead to some of the same mistakes made during the initial Internet
frenzy of the 1990's.
Last week at an advertising industry conference, Sir Martin Sorrell,
chief executive of WPP, the giant advertising group, accused Mr.
Murdoch of "willy-nilly" buying of Internet companies and said that
most of the companies were being run by 50- to 60-year-old executives
who have trouble "getting it."
What is odd about the investor reluctance is that earnings at the
major media companies are relatively strong and executives, including
Mr. Murdoch, have track records of breaking into new markets.
The News Corporation reported record operating income in the fiscal
year ended June 30 - its third consecutive year of double-digit
growth in revenue and operating income.
Time Warner has said it expects record revenue and free cash flow in
2005, and yesterday reported an 80 percent increase in third-quarter
earnings. Until media stocks regain favor, Mr. Parsons said, all he
can do is manage his company's businesses and capital for growth.
Aryeh Bourkoff, who follows media companies at UBS Securities, said
that media stocks were generally trading around 15 times next year's
free cash flow. (Free cash flow is the money left over after
companies pay all their cash expenses, including taxes. Investors
often use this as a performance gauge because free cash flow is
effectively what is left to pay investors.)
By that measure, the stocks are not expensive, offering media
investors an effective return of about 6 percent.
But that has not alleviated worries about the future, particularly
because companies are still struggling to figure out, among other
things, a model for selling content over the Internet or on
cellphones. And investors recall the many wayward Internet
investments that big media companies made late in the dot-com boom,
most notably the financially disastrous combination of America Online
and Time Warner.
"It is not clear that anyone understands the Internet," said Bruce
Greenwald, a professor of finance who teaches a course on the media
at Columbia Business School, "so why should media companies expand in
yet another direction?"
Traditional media companies are also in danger of losing advertiser
loyalty. This month, at an advertising conference, Wachovia's chief
marketing officer, James J. Garrity, told an audience that an
analysis of the effectiveness of its ads would make Yahoo and Google
executives "very happy" and broadcast television sales executives
unhappy.
At the same conference, Jerri DeVard, a marketing vice president at
Verizon, said her company had increased Internet advertising to 11
percent of spending from 3 percent since 2001 and reduced spending on
broadcast television.
Distribution companies, too, are facing increased competition from
telephone and direct satellite as well as eBay's $2.6 billion
purchase of Skype, the free Internet voice service. EBay's chief
executive, Meg Whitman, has said she believes that online phone
service will essentially be free as an inducement for other services.
That calls into question what cable investors have long viewed as a
source of new revenue for cable pipelines.
Those factors have helped cast a pall over investor enthusiasm for
Comcast, the nation's largest cable company, and probably limited the
stock price of Time Warner, the second-largest cable operator. Even
Cablevision sank last week after its controlling shareholders, the
Dolan family, cited decreased cable valuations and pulled back its
offer to take the company private.
Mario J. Gabelli, chief executive of Gamco Investors, whose mutual
funds own shares in numerous media companies, is betting that prices
will rise when leveraged buyout firms begin making more acquisitions
in this area.
"What we need is a transaction of an L.B.O. group coming in and
reconfirming some multiples here," Mr. Gabelli said.
But the situation may get worse before it gets better. Eventually,
though, new opportunities are bound to emerge.
"The market is just dumping these stocks en masse," Mr. Gabelli said.
"They're all coming together at a classic bottom."
----------------------------------------------------------------------
You can UNSUBSCRIBE from the OpenDTV list in two ways:
- Using the UNSUBSCRIBE command in your user configuration settings at
FreeLists.org
- By sending a message to: opendtv-request@xxxxxxxxxxxxx with the word
unsubscribe in the subject line.
Other related posts:
- » [opendtv] News: Big Media a Tough Sell to Jittery Investors
