MEDIA: BREAKING UP IS EASY TO DO Viacom, Disney, and Liberty Media are all spinning off businesses. It may just be the only way to recapture the Street's respect Tom Lowry and Ron Grover – BusinessWeek The media moguls built them up, and now they are breaking them apart. After a decade of unprecedented consolidation, massive media conglomerates with stagnant stock prices are looking to break off pieces of their companies in an attempt to unlock value.
On Mar. 16, Viacom confirmed that it was considering splitting the $22.5-billion-a-year company. One piece might comprise CBS, Infinity Broadcasting, and outdoor advertising, say sources, while the other would consist of red-hot MTV, its other cable networks, and the Paramount studio. Its theme park and book-publishing businesses may be put on the block. Wall Street applauded the news, with the stock rising $2.70, to $37.
Viacom is among a growing number of media outfits that feel frustrated by how the markets perceive their businesses. Of late, investors have been less than enthusiastic about the industry. In the past year, the Bloomberg Media Index, made up of 37 companies, posted a 3% return, vs. a 10% gain for the benchmark Standard & Poor's 500 Index.
REDSTONE'S EXAMPLE? "These companies feel misunderstood and undervalued," says Gigi Johnson, executive director of the Entertainment and Media Management Institute at the UCLA Anderson School of Management. "There was a time when size mattered more than consistency, but it turns out it's hard for investors to decipher these companies and assess their business risks on their own. If you are buying Viacom today, you're buying an overly diversified media company, one in almost every sector of the industry's future."
The moguls are conceding that it's time to try a new strategy. "For whatever reason, [media stocks] have fallen out of favor with Wall Street, and I can't explain that," says Viacom Chairman Sumner Redstone who, over the course of 50 years, built his family owned drive-in operation into the huge corporation it is today. "As Shakespeare said, 'A rose by any other name is just as sweet.' Now I'll have two roses."
Does Redstone think other outfits will follow Viacom's lead? "Every media company is facing the same thing right now," he says. "I don't know if any of them will do what we have done, but I know that every one of them will be considering it."
They have already started. Just a day before Viacom's announcement, John Malone's Liberty Media, a holding company of sorts with a jumble of investments in various media companies, announced plans to spin off its 50% stake in cable networks Discovery Communications, along with a Hollywood post-production outfit, Ascent Media.
GARAGE SALES. On Feb. 25, Walt Disney sold off its Mighty Ducks hockey team for $60 million, a paltry gain on the $50 million the company spent to launch the team in 1992. This follows last November's sale by Disney of its U.S. chain of 400 stores to The Children's Place. The Mouse House is also considering exploring the sale of its European chain of retail stores, which it valued at $36 million as of last September.
And consider the poster child of media merger mania: Time Warner, which agreed to sell itself to America Online in 2000 at the height of the Internet boom for $130 billion, a record deal. It created a $40-billion-a-year company that was widely viewed as having too many disparate pieces.
After the stock of what was then called AOL Time Warner took a beating in the market, newly appointed CEO Richard Parsons began in 2002 to sell off what would eventually total more than $5 billion in assets, including the Warner Music Group, a CD manufacturing business, a 50% stake in Comedy Central, and two Atlanta sports teams. Now the company, whose stock has risen 80% -- to about $18 -- in two years, is mulling a public offering of its cable business.
"SYNERGY" DISCREDITED? There's a huge catalyst for splitting these companies: the current abundance of private equity money looking for investment opportunities. It makes for an enticement to executives seeking to jettison declining but steady cash-flow businesses. Private equity firms have been gobbling up media companies from Warner Music to PanAmSat to Hollywood Entertainment, as well as taking a major position in a Sony/MGM venture.
After years of bombardment with unrelenting sales pitches from media companies about the importance of scale and "synergies," should investors now feel duped as they witness the companies pull themselves apart? "In the end, it's probably a good thing for shareholders that this is happening," says UCLA's Johnson.
It was Wall Street that dictated to the media companies what they wanted to see, not vice versa, says Robert Kindler, global chief of mergers and acquisitions at JPMorgan Securities, which is advising Barry Diller's Interactive Corp. on its spin-off of online travel business Expedia. "The best companies are the ones responding to what investors want. And investors today want more focused businesses. They have less faith in conglomerates."
Yet it's far too early to know whether media deconsolidation will benefit investors in the long run. The only guaranteed winners will surely be investment bankers like Kindler, who get the fat fees whether they're putting companies together or taking them apart. |