Middle Eastern investors are interested in more than just plowing money into U.S. financial firms such as Citigroup ( C). They're looking to break into the U.S. media arena, normally the domain of heavy hitters including Rupert Murdoch. Commercial real estate investment firm Blumberg Capital Partners is planning to launch its first fund to invest in U.S. media companies, and its investor base will consist of Middle East-based entities, TheStreet.com has learned. The fund, for which CEO Philip Blumberg says there is interest amounting to at least $500 million, would target newspapers as well as Hollywood movie studios, online media outfits, broadcast news and possibly radio businesses. Including the use of leverage, the fund will have buying power of approximately $1.5 billion and could kick off by the second quarter next year, Blumberg says. Philip Blumberg has nurtured the idea of a fund to invest in U.S. media for about a year -- a notion sparked in large part by existing real estate clients in investment hotbeds like oil-rich United Arab Emirate states Dubai and Abu Dhabi, which have expressed a desire to own Western media and entertainment companies. "There is a high degree of interest in U.S. entertainment in the Middle East," says Blumberg. The interest in U.S. media firms from the Middle East comes as foreign investors take advantage of a deflated U.S. dollar to buy into cash-strapped U.S. entities or firms that appear cheap. Investors in the Middle East are rich from global growth and demand for oil, which has sent the price of a barrel to hover near $100. The inflation-adjusted record oil price, according to some analysts, is $102, reached in 1979.
On Tuesday, the Abu Dhabi Investment Authority gave the writedown-plagued Citi a $7.5 billion cash injection. On Monday, the government of Dubai announced a nearly 5% stake in Sony ( SNE). And earlier this year, Abu Dhabi put $7.5 billion into private equity firm Carlyle Group. But foreign investments in U.S. companies have drawn the ire of lawmakers concerned about maintaining the integrity of U.S. infrastructure. Sen. Charles Schumer, (D., New York) has been one of the most vocal leaders warning of the perils of foreign investments. In the summer, Schumer asked for a tough review of Borse Dubai in the Nasdaq Stock Market and was also critical of a Chinese government fund's $3 billion investment in the Blackstone Group ( BX), prior to the private equity firm's initial public offering. Lately, however, lawmakers have appeared more open to what has been a series of minority stake investments by foreigners, including Abu Dhabi's recent purchase of preferred shares in Citi, which represents a 4.9% stake. The Abu Dhabi investment arm is estimated to have over $1 trillion available for investment. Still, foreign investment in media is not without other challenges and would be sure to raise eyebrows domestically. "There is a much higher degree of awareness there that U.S. media can affect non-U.S. interests in a direct way," Blumberg said, referring to some of his contacts' and clients' unfavorable perception of the U.S. media's coverage of the botched deal for Dubai to buy U.S. ports in 2006.
For one, Federal Communications Commission rules put a 20% ownership limit on foreign buyers of U.S. broadcast media. Blumberg says he is conscious and observant of such rules and said the planned media fund would aim to integrate regulated and less-regulated types of media without tripping over any regulations. News Corp. ( NWS) CEO Rupert Murdoch, an Australian by birth, got around the foreign-ownership rule by becoming an American citizen in the late 1980s, when he purchased several U.S. television stations. "It will be like creating a private media company," says Blumberg, emphasizing the importance of making his investment properties work together. He adds that he will consider any type of media as fair game for investment, public or private. The investment vehicle will be structured as an open-ended investment fund. The fund's creation also comes amid a freshly heated debate in Washington and around the country about whether the FCC should allow more consolidation of media in the U.S. Next week, the Senate Commerce Committee is scheduled to vote on a bill that could stop the FCC from loosening cross-ownership between broadcast and newspaper media outlets. Perhaps the most significant challenge to deep-pocketed foreign buyers is that the media business is not a growth business. Media outlets mostly have been floundering as the U.S. economy embarks on a slowdown, which typically dampens its advertising revenues.
Florida-based Blumberg, which manages about $1 billion, says his real estate funds have generated an average of 15% returns over a period of more than 15 years. While he can't make promises from his media fund, he claims the two asset classes are not so different. Both are "high-risk, capital intensive" industries, he argues. Many in the market expect to see more large investors swoop in for bargains in the U.S., now that stocks are in correction mode and the dollar remains weak, many marquee foreign bets of late have seemed a tad early. China's Blackstone investment has fallen 29% from the firm's IPO. And, Chinese bank Citic Securities of China's $3 billion investment in Bear Stearns ( BSC) has fallen 17.5% since the deal was struck in October.