Following a federal court decision earlier this week that could allow greater consolidation in the broadcast and cable industries, the stage could be set for a new wave of mergers and acquisitions. But as long as some of the largest companies' stocks remain at depressed levels, don't expect any big deals yet.
That's the take from George Nichols, a Morningstar analyst who specializes in media stocks, on the federal appeals court ruling announced Tuesday. The decision potentially would allow a single media company to reach as many as 50% of television households in the U.S., vs. the current 35% limit. The ruling, if not overturned by the Supreme Court, also would allow a media company to own both a cable channel and a broadcast station in a single market. Viewer-rights advocates already have voiced concerns about a possible reduction in choices, but Nichols believes that even in such a scenario, consumers still would have many stations to choose from. Although consolidation may be around the corner, Nichols doesn't expect much activity soon. According to him, stock prices for the major media companies need to rise in value before there will be any deals sweet enough for a takeover target to embrace. TSC: Do you expect this week's ruling to lead to many mergers and acquisitions among broadcast and cable companies, and if so, what kinds of companies do you think will be most sought? Nichols: First of all, the media industry has historically been a mergers and acquisitions factory. This hastens the consolidation trend. It's hard to predict exactly what will happen, but broadcasters like Paxson ( PAX) or Sinclair ( SBGI) could have suitors banging at their door. Mid- to large-size companies like the Tribune Company ( TRB) are also interesting because they could either snap up affiliate stations, or be bought out by a media conglomerate like an AOL ( AOL). And there are other players in the game, like a Gannett ( GCI) or McGraw-Hill ( MHP). It's more likely these companies will be buyers than get bought out themselves. In fact, on the last conference call, Gannett management said they would be on the lookout for strategic acquisitions, although they did make a point of saying that
valuations of newspaper companies were looking reasonable, but that broadcasters were looking expensive. It will take more than just regulation to push them into acquisitions. TSC: So how active an M&A environment can we expect in this sluggish market environment, even in light of the courts' and regulators' reception to consolidation? Nichols: The news helps, but overall, the market for M&A activity is way down. Thomson Financial just came out with a report confirming how dramatically M&A transactions are down. One of the reasons is that companies are less likely to have inflated stock as acquisition currency. Look no further than AOL. Their stock has plummeted to the $24 range. It makes them less likely to buy up other companies. TSC: Why would the courts and the regulators allow for more consolidation among media companies now? Nichols: There were several regulations on the books, and the spirit behind them is promoting diversity. There have been longstanding concerns that a select few media giants would control television and other major media, and not give consumers any choice. But many of these regulations are quite outdated. We are no longer in an age where consumers rely on just the big three broadcast networks: ABC, CBS, NBC. There are at least a hundred channels for viewers in most markets, and multiple news sources. So, it's not like there's only one voice being reflected in the media market of today. Of course, consumer rights advocates disagree and have been very vocal about any consolidation. In a market that becomes a duopoly, a consolidation of programming could result. TSC: Viewer-rights advocates aside, from investors' point of view, could the court's ruling mean a shot in the arm for the media industry? Nichols: Yes, this helps. The 35% limit was pretty arbitrary. Raising it to 50% lifts uncertainty for companies that were currently in violation, namely Viacom ( VIA) and News Corp. ( NWS). And this will allow many other media companies to make strategic acquisitions to boost their audience reach and to cut costs. The media giants are good at that, cutting overlapping functions. And it's part of the trend where media companies can now turn to their large Fortune 500 advertisers, point to their broad reach and sell them large advertising packages. A one-stop shop of media services.
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Charles W. Mulford