‘Media Is Still A Wonderful Area For Private Equity To Invest In,’ Says Carlyle Group MD, But Most Agree Investments Will Be At Lower Valuations And Favor Emerging Markets

Many of the speakers at the Dow Jones/Nielsen Media and Money Conference echoed the point that high-risk, high growth economies will see the bulk of private equity expansion.

A sample quote from Julie Richardson, managing director of Providence Equity Partners, seems to set the theme: “One of the things we‘ve found that worked really well is traditional media deals in emerging markets. We are seeing real opportunities in high-risk economies, but ones which also promise high growth.”

Providence has invested, for instance, in Turkish pay TV platform Digiturk, and investment she said was going “gangbusters”, and in a wireless firm in India, and also in Univision, tapping into the Hispanic market.

Carlyle Group Managing Director James Attwood said there was still plenty of money available for deals, with markets probably coming back in Q1 or Q2 next year but he did think they will likely be smaller deals priced at lower values.

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“The last two years have been really unique. Credit costs have been low, and with the banks saying don’t worry about covenants, a lot of risk was mispriced and there was a lot of risk-taking that was untraditional in our market. That said, media is still a wonderful arena for private equity to invest in,” he said.

The reason that private equity companies love media investments, Atwood said, is because “cash flows are so strong.” As Jonathan Doherty of KPMG Transaction, said, “Newspapers are high margin businesses, but the margins are in decline. The question for the private equity people is what private equity would do to transform the business model.”

Herbert Granath, Media and Entertainment Holdings Chairman and CEO, and vice president of the CME that has properties in many East European countries, says he still sees that part of the world as having the best changing demographics. “The economics of those countries that are either part of the European Union or are going to be part of the EU are on the up,” he declared.

And what kind of European investments is he interested in now? “There are still a number of content companies out there, mostly in Europe, that are family-owned businesses.”

Note that none of the talk is about investing in mature markets such as the US or Western Europe.

In the US it is generally accepted on Wall Street that publicly traded newspaper companies are probably priced some 30 – 40% below fair market value, and yet they still don’t attract private equity. Only McClatchy, for instance, bid for all of Knight-Ridder, and when Tribune was in play there were nibbles of interest, but nothing concrete.

Atwood said that Carlyle Group had looked at Tribune, particularly its TV properties, but Tribune did not want a deal in which it sold off parts to different buyers He said at a cheaper price Tribune would have made a good buy since newspaper companies will survive, but without doubt their business models have to change. Perhaps for that reason Richardson of Providence Equity Partners, made clear that “In the past two years we have not invested in newspapers or radio or cable in the US.”

And Carlyle senior adviser Norman Pearlstine didn’t give much sympathy to private equity getting involved any time in the US traditional media business as long as owners are insisting on valuations that don’t fit market conditions. He said, for instance, that Carlyle had looked at Clear Channel and Univision but the prices didn’t make sense.

No one said it, but it was only with a “way over the odds” bid by Rupert Murdoch that Dow Jones has fallen. Private equity groups looked at the $60 a share price tag and none of them could figure out how they could make money at that expense, and there were no counter bids.

“Essentially, a newspaper is designed to deliver timely news and be supported by classified ads,” Pearlstine explained. But newspapers cannot compete with the Internet on the timeliness of news, or for that matter in the delivery of the classified ads, and therefore he is convinced that margins have further to fall.

And that kind of thinking is likely not to change for as long as research companies like eMarketer continue to deliver analysis showing that 69 of the 100 largest US ad spenders in 2006 put smaller budget shares into TV, radio, newspapers and magazines, than they did in 2005.

And while Borrell Associates issues a report as it did Thursday saying that online profits for newspaper web sites globally are skyrocketing but it is still going to take a very long time for online ad revenues to make up the ad losses that print still suffers.

Borrell says that US newspaper operating profits are now around 23% -- a very healthy number even if it has been decreasing for some years -- but the survey points out, “Mature online operations are generating 40% and higher profit, suggesting that achieving a critical mass of online revenue translates to profit at a much higher rate than print revenues.”

But for all that, “few Internet operations make up more than a 10% of a newspaper company’s revenue, the average in the US being 5.5%, although Borrell projects that will grow to around 10% by 2008 – 2009.

That is much too slow for the private equity firms who want to invest in countries where valuations are lower, and where the media story is not so much doom and gloom for the traditional products even if new media revenues are on the rise.