Breathing A Lost Art When Media Investment Goes Hostile

Michael Hedges September 13, 2016 Follow on Twitter

The air between traditional and new media is both rousing and scary. One is powered by legacy, the other by change. These are strong instincts, in their own right. Different languages are spoken, time measured by the clock or the deal. Asset value descends from the great void rather than shelf life.

Italian broadcasting major Mediaset asked the French Financial Markets Regulator (AMF - Autorité des marchés financiers) to require French conglomerate Vivendi to revise certain statements in its most recent earnings filing, reported Bloomberg (September 8). Mediaset objects to the Vivendi statement that the deal to acquire pay-TV business Mediaset Premium needs further “due diligence.” The AMF, charged with accuracy in financial statements, might or might not investigate. Vivendi had “no comment.”

Executives and, certainly, lawyers at Mediaset and Vivendi took advantage of the summer break to pick-apart their “strategic and industrial alliance” announced in April. Vivendi, in short, wants to re-negotiate terms. Mediaset is suing to hold together the original deal. “Behind closed doors,” reported Reuters (August 25), negotiations for an “alternative” are ongoing. That seems less and less possible with each passing week.

Breaking off an M&A deal is usually quite simple, if naturally expensive. It’s all in the agreement, lawyers well-paid to think of everything. Changing a deal is different, always considered rude or worse. But dealmakers do change their minds, like it or not.

In April it was all love and happiness between the two. Vivendi would acquire effectively all of Mediaset’s Premium pay-TV operation and both sides would take small stakes in each other. On further reflection, aided by accountants from Deloitte, Vivendi lost interest in taking full control of Mediaset Premium and had an altogether different deal in mind. Mediaset’s share price was immediately punished, reported Bloomberg (July 26), on Vivendi’s rejection. In its complaint to the AMF Mediaset groused about the Deloitte report was not “contractually agreed” as more than determining average revenue per subscriber (ARPU), noted corcom.it (September 9).

Shortly after its opening shot at unwinding the Mediaset Premium deal, Vivendi reported a rather dismal Q2 performance at pay-TV subsidiary Canal+. Domestic French subscriptions were off 3.3%, total sales off 3.5%. "We are still in line with expectations given early in the year, particularly in France, with an overall loss is projected at €400 million for the full year," said CFO Hervé Philippe in the investors conference call, quoted by AFP (August 25). There will be a round of cost-cutting at Canal+, €300 million, about a quarter coming this year. Vivendi’s other businesses - music publisher Universal Music Group and “activities outside France” - performed rather well.

Pay-TV today is certainly not what it was five years ago. Low consumer take-up of satellite-distributed subscription television in southern Europe was once considered a competitive opportunity. Cheaper broadband access opened Pandora’s Box and out popped Netflix (et.al.). The business models for traditional pay-TV and subscription video on demand (SVoD) services might look the same, selling access to bundles of video content.

They are similar but different, at least from the consumer’s standpoint. Fast and robust broadband means access to mobile devices. Pay-TV operators - here, there and everywhere - see the chilling reality each month. The downward pressure on pricing means less available cash for programming and, eventually, shareholder dividends.

When the Vivendi-Mediaset deal was announced back in April, oft mentioned was the opportunity of a European SVoD competitor to Netflix, HBO, Amazon Prime et.al.. An “international” SVoD service would operate in France, Germany, Italy and Spain to be named Watch. “If we don’t have an international approach we can no longer exist as a media group,” said Canal Plus Group general director Maxime Saada, quoted by Le Monde (June 10).

About the same time, French competition authorities vetoed a planned exclusive content distribution agreement between Canal Plus and BeIn Sports, depriving Canal Plus of an almost guaranteed - and much needed - subscriber boost. “We never had the final text of the agreement,” complained Autorité de la Concurance president Bruno Lasserre, quoted by Bloomberg (June 9). “We had a draft agreement. Many options weren’t settled.” Vivendi chairman Vincent Bolloré repeated threats to close Canal Plus.

When that deal fell through a strategic shift at Vivendi became apparent. A month after Vivendi set an end of year closing date for its struggling German SVoD service Watchever. Competition from Netflix, Amazon Prime and ProSiebenSat1.Media’s Maxdome was insurmountable. By that time it was clear that the Mediaset Premium deal was unraveling.

Then the coup de grace when Vivendi’s small Paris team working on SVoD was disbanded as the project was put “in the closet,” said a source to Liberation (September 5). “If the project seems not completely abandoned, efforts now seem to be on the side of Studio +,” the short-form premium video producer launched earlier in the year. The company later clarified that the big SVoD project could go forward next spring and, perhaps, the Mediaset deal will move forward.

And, notably, Vivendi’s hostile takeover this year of French mobile video games producer Gameloft and repositioning video portal Dailymotion as a short format service aims at mobile users. Of course, that means competing in the same intoxicating space as YouTube and Facebook. Investors like this.

Mediaset being a far more traditional cash-flow company than deal-flow oriented Vivendi has bottom-line concerns. The Vivendi deal would get loss making Mediaset Premium off its books by the end of the fiscal year. There are other possibilities, suggested UBS in an investors report on Italian pay-TV business, quoted by Corriere Economica (September 5). The straight-forward shareholder value approach the big Swiss bank offered was simply selling off Champions League football rights and pouring that cash back into Mediaset Premium. It wouldn’t be particularly sexy but it would ease shareholder pain.

The other possibilities are juicy: sell Mediaset Premium to Sky PLC, principally owned by 21st Century Fox or form a joint venture for the pay-TV Italian pay-TV businesses. Sky PLC has a well-developed Italian pay-TV operator in Sky Italia and tons of sports rights. The Berlusconi family meets the Murdoch family once again, maybe.

See also in ftm Knowledge

Media in Italy

The Italian media market is totally unique and very competitive. Italian consumers are quickly embracing new media and the advertising community is quickly changing. And hovering close is Italy's richest person - Silvio Berlusconi. 112 pages, includes Resources, PDF (October 2012)

Order here