Pent-Up Demand for Deals Will Spur Media M&A as Much as FCC Rulings

The FCC’s easing of decades-old media ownership limits in early June is widely expected to touch off a media merger wave. Under the new rules, the percentage of homes that a broadcaster’s stations may reach nationwide increased. The FCC largely ended a ban on joint ownership of a TV station and a newspaper in the same city and relaxed local TV ownership restrictions so that a company can own more stations. Although a Senate panel voted in mid-June to repeal the FCC’s revised rules, passage of a final bill is not guaranteed. While the new rules would create fertile ground for a fresh round of media dealmaking, some industry professionals say that an improved economic outlook and pent-up demand could be just as influential in spurring industry m&a. According to Bob Sell, a Senior Partner in Accenture’s media and entertainment group, the FCC ruling may induce some small to medium-sized mergers. “What the FCC ruling provides is an opportunity for small and mid-size companies to move forward with some creative ideas. I think we will see some plays that will really test the limits that the courts are willing to accept in this new competitive scenario,” he says. Larger deals, he adds, will be driven more by the need to rationalize and synergize operations. “The big players are going to move on their own, as opposed to being moved along by the FCC ruling or economic reports. But until the they get their operations as efficient as they should be, I really don’t think you will see much major m&a activity in the media patch,” he states. The duopoly debate The rulings also allow for creation of more TV duopolies, which Robert Winikoff, Managing Partner of the New York office of Sonnenschein Nath & Rosenthal, thinks will be an important driver of deals. Agreeing, Jeff Kilrea, Director of Media and Communications Finance/Corporate Finance at CapitalSource, expects the bigger broadcasters to continue to create duopolies because they can leverage certain efficiencies such as programming and technical expenditures, like upgrading to digital, and they would have “more power with advertisers.” Yet Sell doesn’t expect to see much of that activity because he “knows what media companies are dealing with from an operational standpoint.” Rather than outright acquisitions, some industry followers expect to see more asset swaps prompted by companies’ desire to improve market share in specific markets. Some believe there is pent-up demand for media properties. In fact, according to a survey of senior media executives by AdMedia Partners, conducted in December 2002, 70% of the nearly 1,000 respondents anticipated that pent-up demand would increase consolidation as the economy improved and media ownership rules were changed. Also, 24% of respondents reported holding off on selling a property last year because of the economic climate and 26% shelved acquisition plans for the same reason. Talking recently with Mergers & Acquisitions, Mark Edmiston, Managing Director of AdMedia Partners, said that with the military operation in Iraq complete, he now sees signs that media executives are turning their attention back to m&a initiatives. In an indication that survey respondents generally felt that the market for media m&a would improve in 2003, the survey reported that 51% of respondents foresaw increased activity in the consumer magazines sector this year, 61% in business-to-business publications, 58% in information publishing, and 72% in radio and TV, while smaller percentages of respondents expected to see stepped-up activity in newspapers, professional publications, books, and interactive media. Citing a renewed interest in advertising-driven media properties, Graham Elton, Vice President in London office of Bain & Co., says that buyers believe that the advertising market has bottomed out and think it is now a good time to look at those types of assets. “That will drive activity as much as the removal of some of the media regulations,” he notes. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com