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2013-06-26 08:38:21
Media empires are becoming more focused, and shareholders like it
Jun 22nd 2013
RUPERT MURDOCH, the billionaire founder of News Corporation, recently filed for divorce from his third wife, Wendi Deng. This is not the only break-up he is going through. On June 28th his company will split in two shares in both parts began trading this week with most of its lucrative film and television assets being hived off into a new group, called 21st Century Fox. The rump News Corp will be left with newspapers and other lower-growth businesses (see article).
News Corp is not the only sprawling media conglomerate that is streamlining its businesses. Time Warner said in March that it would spin off its magazine unit, Time Inc, by the end of the year. Vivendi, a flailing French group with more disparate properties than the French have public holidays, is expected to shed its telecoms assets in order to specialise in entertainment. Others to have divested assets include Pearson, a part-owner of The Economist, which has sold or merged various properties to concentrate on education (see table).
In a 2009 book, Curse of the Mogul , Jonathan Knee, Bruce Greenwald and Ava Seave analysed media conglomerates chronically poor performance, blaming it mainly on their bosses appetite for trophy assets that buy them power and visibility. This propensity for big, dumb deals has hurt investors: AOL s disastrous merger with Time Warner and News Corp s purchase of Dow Jones in 2007 for around $5.6 billion more than double its market value at the time are two examples. In the ten years to 2005, four large media conglomerates, News Corp, Viacom, Disney and Time Warner, together produced returns one-third of the average for firms in the S&P 500 index. Between 2000 and 2009 they had to write down $200 billion in assets.
More recently, media firms have sparkled. In the past month the shares of some firms have reached all-time highs, and over the past five years News Corp, Viacom, Disney and Time Warner have each delivered more than twice the S&P 500 s average return of 6.1%. Part of this is due to investors calming down about the immediate threat of Netflix and other disrupters to pay-TV. But it is also in part due to a change in media moguls behaviour.
In most businesses, conglomerates went out of favour after the 1980s. But media bosses, always fashionably late to parties, have taken several decades to follow. Their recent disposals of non-core assets have helped win over distrustful shareholders. Investors like to own a business they can understand, says Philippe Dauman, the boss of Viacom. (His firm launched the trend of deconglomeration when it separated its broadcast-TV and other businesses into CBS Corporation in 2006.) Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management.
Each media firm has had its own reasons for offloading assets, but there are some shared themes. Shareholders have become more assertive and less likely to believe the moguls flannel about synergies . In particular they are more sceptical that makers of content and hardware belong together. This week Dan Loeb, a hedge-fund manager, raised his stake in Sony, a Japanese electronics and entertainment firm, and is pressing its managers to spin off the film studio and music business. Making Skyfall is a different business from manufacturing a television.
An even bigger driver of the spin-offs is the inky mood of the publishing business. The divergence today between low-growth, low-multiple businesses and higher-growth businesses in media has never been greater, says Jonathan Nelson, the boss of Providence Equity Partners, a private-equity firm. Bosses either want to shed print assets to focus on higher-growth television, as with Time Warner spinning out Time Inc, or to unload assets that distract them from giving their main brand the attention and resources it needs, as the New York Times Company is doing by selling the Boston Globe.
When the market crashed in 2008, media companies were hit particularly hard and needed more disciplined leadership. Although Mr Murdoch, aged 82, shows little sign of stepping out of the limelight, there is a new generation of media bosses who are less flamboyant than their predecessors and more interested in making money than in wielding power and influence. Most people outside the industry will barely have heard of Jeff Bewkes, the boss of Time Warner, or Les Moonves of CBS, for example, but they are popular among shareholders.
Long gone are the days when money was scattered around like confetti at a Hollywood wedding. When Terra Firma, a private-equity firm, bought EMI, a music label, in 2007 its executives were said to be horrified on learning that the fruit and flowers referred to in expense accounts were slang for drugs and prostitutes. Today it is all about another f-word: frugality. This is particularly true in publishing. Robert Thomson, the boss of the new News Corp, promises relentless cost-cutting.
In many cases, what the slimmed-down media conglomerates are hanging on to is their cable-TV networks. After Time Warner spins out Time Inc, 80% of its operating profits will come from its networks (which include HBO), up from 32% in 2008. More than 90% of Viacom s operating profits came from its networks in 2012. Discovery Communications, one of the best-performing media stocks over the past few years, specialises in building and expanding television networks, such as the Discovery Channel and Animal Planet.
For now investors like having exposure to this cash-rich, growing industry. The rise of Netflix, Hulu and other online-streaming services has so far caused little disruption to the pay-TV business model. But should this change, these firms lack of diversification could become a liability.
A few media firms are still bucking the trend and adding a bit of sprawl. In 2011 Comcast, an American cable operator, bought NBCUniversal, a film-and-TV content company with a broadcast arm, making it the largest media group in the world after Disney: its market capitalisation is now over $100 billion. As for Disney itself, besides buying Lucasfilm, the production company behind Star Wars , last year, it also bought control of UTV, a Bollywood-to-computer-games business in Mumbai.
In businesses that benefit from scale, such as cable and newspapers, there will be more consolidation. Time Warner Cable and Charter Communications, two American cable operators, are rumoured to be discussing a merger. Having recently bought Virgin Media, a British cable firm, Liberty Global of America which already owns Germany s second-largest cable operator is now competing with Vodafone to buy Kabel Deutschland, Germany s largest. On June 13th Gannett, a big American newspaper and local-TV chain, said it would merge with Belo, a smaller counterpart, to expand its market share in both businesses (while also, overall, making it less reliant on newspapers).
The media giants soaring share prices will make it easy for them to swallow smaller firms. I think things are going to tend much more toward scale, says James Murdoch, one of Rupert Murdoch s sons. Content groups are going to get much larger. As long as they get bigger at what they do best, shareholders will be happy.