The ongoing infusion of as much as $15 billion in private equity into new and old media deals will alter some ownership and economic dynamics of an industry that's already being transformed by digital
(The Hollywood Reporter) -- The ongoing infusion of as much as $15 billion in private equity into new and old media deals will alter some ownership and economic dynamics of an industry that's already being transformed by digital interactivity.
This phenomenon is giving bulk buyout firms like Kohlberg Kravis Roberts -- whose investments span chemicals, tobacco and food, computer services and toys -- a greater economic stake in such cultural cornerstone businesses as television and film, and a more influential role in reshaping media and entertainment companies seeking a foothold in a digital broadband marketplace.
Consummate dealmaker John Malone, chairman of Liberty Media, said "the broad trend" is a direct reaction to widespread regulatory crackdowns on corporate ethics, disclosure and liability that has yielded the complex Sarbanes-Oxley Act and the ouster of top executives, some of whom have faced criminal charges. As a result, large public companies now are more conservative spenders and operators.
"I see this as a real tension between the forms of ownership and the willingness of the private equity world, including the hedge funds, to leverage the bejesus out of things with cheap money and pay top prices, because they can play this game. And the returns on equity can be very attractive," Malone said March 29 during the Banc of America Securities Media, Telecommunications and Entertainment conference in New York.
"Money is pouring into the private equity world because of that phenomenon. And the corporate world is scared to death of taking risk and going to high leverage. They would rather sit there and pay full tax rate on the margin and produce relatively low ROE (return on earnings)," said Malone, who made himself and other Liberty shareholders wealthy in the 1980s by leveraging the portfolio company's assets and strategic investments.
Because this latest cycle of increased private investment in media comes during a period of digital transformation, there could be some unexpected outcomes. The cost-cutting, value-squeezing ways often associated with private equity could take a toll on the industry's creative process, on its need for innovation and on digital conversion efforts, some experts fear.
"In the past, private equity investors generally kept their hands off of the fundamental processes of the businesses they bought into, even though they cut costs. But the search for new business models could see some of these private non-media investors playing a larger role in the industry's reconstruction," a prominent executive close to the action said.
The doubling of private equity media deals in 2004, after a boom in media transactions just two years earlier, included typical investments in such slower-growing, predictable, high cash flow traditional media businesses as TV and radio stations. As private pure plays, their risks and rewards can be better realized without short-term fixation on quarterly results. As such, Viacom's broadcast TV, radio and outdoor properties eventually could be candidates for private equity backing if the media giant opts to divide itself, Wall Street experts say.
But private equity's more recent big-time involvement in the industry's creative sectors, such as recorded music and film, has been less tested.
Last year, there were a record-high 61 private equity media deals, or 11% of the overall total of 552 equity transactions involving U.S. media concerns. The volume of private equity dealmaking more than doubled from 2002, which was a record year for media deals overall, according to statistics recently compiled by Veronis Suhler Stevenson. The New York-based investment banking firm has private equity investments in all forms of media, with a collective value of $7 billion.
A record one-third, or about $20 billion, of the $60 billion in enterprise value of overall media deals last year was tied to private equity participation, which actually amounted to $6 billion in actual investments, the firm said.
Private equity investments already are booming this year, spurred by continuing stagnant stock prices for many media and entertainment companies, the increasing spinoff of noncore, cash flow-rich assets by media giants, relatively low interest rates, a huge build-up of funds, and a veritable void in industry dealmaking caused by big public players over-paying and over-leveraging for a decade of acquisitions.
The latest wave of private equity investing that began about a year ago is expected to top $10 billion and total as much as $15 billion during the next several years, experts say.
However, there are some who believe that the mandates and expectations of private investors seeking returns in a relatively short period of time, and the motives of dealmakers, could be problematic for the industry's creative businesses.
Already compromised by or lost in the shuffle of past deal maneuverings, industry artistry and innovation also could be the casualties of unresolved digital rights management issues such as piracy and ad-skipping, according to Bernstein Research analyst Tom Wolzien.
While private equity firms continue to look for media entities that the conglomerates want to unload, venture capital will look at higher-risk, higher-reward areas such as online advertising, search, gaming, niche distribution plays and a variety of delivery mechanisms to get intellectual property to the consumer on a generation of new devices.
"When you have dislocation and lack of clarity about the future in a mature market, there is usually tremendous opportunity for venture capital and private equity to fill in, take calculated risk, and win," said Dennis Miller, managing director of Constellation Ventures, Bear Stearns Asset Management.