Viacom, News Corp. seen able to finance deals: low stock prices may keep others out—for now

Cable World, Feb 25, 2002 by Mavis Scanlon

Following last week's U.S. Appeals court decision striking down the FCC's cable and broadcast cross-ownership rules, the stage is set for a wave of buying and selling among media companies.

The ruling "really opens up a long-range series of moves [media players] could make to change and expand the role and leverage of their assets," says Sharon Armbrust, a senior analyst at Kagan World Media, like Cable World, a unit of Primedia.

But exactly what types of deals will emerge in the wake of the ruling -- and how quickly--and which industry players have the financial flexibility to go on acquisition sprees is up for debate.

Analysts say Viacom has the wherewithal--and the appetite--to continue on its acquisitive path. News Corp., which ended the recent quarter with $3.2 billion cash on hand, is expected to focus on debt repayment, but may seek to bolster its position in key markets with station swaps or acquisitions. Prior to its pending acquisition of AT&T Broadband, Comcast was viewed as underleveraged; although it will be busy closing its merger over the next year and subsequently undergoing a massive integration of subscribers, observers have not ruled out further acquisitions from it or from AOL Time Warner, which has had its own troubles in merging the disparate cultures of AOL and Time Warner.

These days many of the large-cap diversified media companies face share prices that are dangling near 52-week lows. And some companies, notably AOL TW and Walt Disney Co., are facing hefty financial obligations and may not want to further strain their balance sheets, notes Spencer Wang, an analyst who follows entertainment and media companies at ABN Amro. Disney, for example, just shelled out $5.2 billion for its purchase of Fox Family channel, and AOL TW is in the midst of its $6.75 billion buyout of AOL Europe from Bertelsmann.

The first wave of deals will probably be smaller, possibly involving mid- and small-cap broadcast players such as Sinclair, Hearst-Argyle, Belo and Scripps-Howard, analysts say.

"Our sense is you will probably see more of smaller pure-play TV broadcasters [being bought and] station swaps and things like that before you see gargantuan deals," Wang says.

There are myriad reasons. Unlike the late 1990s, the current mode is one of belt-tightening in light of a poor economy, a murky outlook for an advertising recovery and an unstable political climate. The advertising downturn has wreaked havoc with the revenue of some of the smaller broadcasting groups, leaving them hungry for cash and making them more willing to sell. Additionally, it's the smaller deals that will have an easier time getting financed, says Brian Deevy, CEO of telecommunications and cable investment banking firm Daniels & Associates.

Larger companies with broadcasting assets may look to selectively increase their coverage areas and take advantage of duopoly rules before purchasing an entire network or station group.

A recent example is Viacom's $650 million purchase of KCAL-TV, the large independent station in Los Angeles, from Young Broadcasting. The purchase gave Viacom a second outlet in the No. 2 market, allowing it to better compete with Fox, the only other station owner with a duopoly position there.

In fact, of all the large media companies, Viacom "is probably the one with the strongest balance sheet," says Wang, at ABN Amro, and that may put it in the best position to take advantage of the court ruling.

AS Merrill Lynch analyst Jessica Reif Cohen noted in a recent research note, "Viacom has significant financial flexibility for acquisitions and/or stock repurchases, supported by the company's healthy levels of free cash flow." Merrill estimates Viacom will have more than $14 billion in excess borrowing capacity this year, "for acquisitions and additional share buy-backs, both of which we regard as highly likely."

That doesn't mean Viacom will run out and buy a cable company just because the rules have changed. Armbrust at Kagan notes that Viacom chairman and CEO Sumner Redstone has been very explicit about what he thinks works and doesn't work.

"I would be more inclined to see them do more of what they were doing when they bumped into the limits," she says, referring to Viacom's purchases of the CBS and UPN broadcast networks.

It's harder to determine what happens to broadcaster NBC and content player Disney, analysts say--both could be buyers or sellers.

For Disney, the question is "will they now be looking to broaden their station reach?" says Terri Santisi, a partner at KPMG LLP, while NBC must decide whether to build its business by partnering and joint ventures or to sell out to a company looking to further its own distribution, she adds.

In assessing the next moves for some of the large media companies, it is crucial to ask, "Is a programmer going to be looking for more distribution or is a distributor going to be looking for more programming?" says Robert Winikoff, who sits on the board of Mediacom Communications and is a partner at law firm Sonnenschein Nath and Rosenthal. The ruling "widens the playing field for a number of companies that are looking to vertically integrate."