Between all the painful transformations taking place in media and the healthy streams of cash that have long flowed from the industry, it's no wonder that private equity firms are finding it to be a fertile ground for deal-making these days. "Private equity companies are interested in media because stock valuations in the industry have been pressured for a number of years, while fundamentals have held up decently in the face of competition and are potentially showing signs of turning the corner," says Stanford Group analyst Frederick Moran. As well, traditional media companies have shown fairly reliable cash flows throughout their history, Moran notes, and their debt load is low relative to the cash flow production. "That means there's ample opportunities for private equities to come in and buy these companies at historically low valuation multiples by using heavier debt leverage and then watching the cash flows recover over the next couple of years," says Moran. Thursday's announcement from Clear Channel Communications ( CCU) that it
agreed to be taken private in a leveraged buyout makes the winning bidders, Thomas H. Lee Partners and Bain Capital, the latest brand of mass media moguls. The consortium beat out a rival group of bidders -- Providence Equity Partners, Kohlberg Kravis Roberts and the Blackstone Group -- with an offer of about $27 billion, including $8 billion in debt, for the largest broadcast radio conglomerate in the country.
While the deal, one of the largest leveraged buyouts in history, highlights private equity's attraction to the industry, it also underscores one area of weakness where the buyout mavens have been more reticent. Clear Channel, a broadcast business, was able to win a premium that pleased its owners, while Tribune ( TRB), the largest newspaper publisher, has languished on the auction block so far. First-round bids for Tribune from private equity firms were a disappointment, according to media reports, and the company has floated the possibility of selling off its empire
in pieces. "In order for private equity firms to get comfortable, they not only have to have a reasonable entry-point from a valuation standpoint, but they also have to feel comfortable that the cash flows can grow over the next several years," says Moran. "The cash flows of newspaper and publishing assets are still suspect, whereas the cash flows of radio have clearly shown signs of recovering." Publishing companies like Tribune, New York Times ( NYT) and McClatchy ( MNI) have suffered as newspapers and magazines get increasingly cannibalized by their online operations as readers gravitate toward the Internet. And private equity firms have so far shied away from big deals in publishing. When Knight-Ridder, the nation's second-largest newspaper chain, was put up for sale, buyout firms who were initially favored as the winning bidders ended up backing down to an offer from McClatchy.
Dan Primack, editor of private equity Web forum PEHub.com, points out that buyout firms have bought up some small, community newspapers in rural areas that haven't yet been hit hard by online competition, as well as some specialty and trade publications, such as the Reader's Digest ( RDA)
buyout Thursday. But overall, he says, the firms have shown a distaste for publishing. "I'll be surprised if you see real private equity firms in the Tribune deal or a buyout of the Boston Globe," says Primack. "Those are probably going to be prestige plays, where local rich folks who want to own their hometown papers step up -- just like you see rich folks buying their local baseball teams. It's very similar, and it's no surprise that none of the major sports teams in America are owned by private equity firms, even though they get bought and sold all the time." Radio and broadcast properties, while not showing much growth potential, are a different story. "Radio has not grown terribly much over the last few years, but that's not because of the Internet," says Primack. "People are still listening to the radio as they drive to and from work and so forth, and that can still make for a very effective advertising vehicle." For its part, Thomas H. Lee Partners is part of the buyout consortium that recently agreed to buy Univision Communications ( UVN ), a Spanish-language broadcast conglomerate, in yet another landmark private equity deal shaking up the media sector. But as buyout firms snap up these media assets, regulatory questions about monopolies in certain markets emerge.
Ownership rules set by the federal government in the communications industry have been relaxed in recent years, but RBC Capital Markets analyst David Bank says that could change as more buyout deals get scrutinized. So far, individual private equity buyers have avoided owning stakes in companies that exceed 50%. That way, regulators can view them as passive investors instead of majority owners, leaving them eligible to take part in more media deals. In the meantime, observers say the Clear Channel deal should clear regulatory hurdles. "There's no way that
Thomas H. Lee Partners and Bain Capital spent the last three weeks with almost every single person at these firms, working seven-day weeks to get these deals done, if there was even a hint of regulatory trouble to come," Primack says. "One thing private equity firms do not like is regulatory risk." Primack also says that the prevalence of private equity firms in the media industry should not be viewed as a trend that will lead to mass consolidation. "The reality is, these firms aren't going to own Clear Channel in three years," he says. "Either another group of private equity firms will buy it, or most likely, it'll be a public company again. That's how these firms make their money."