Liquidity, liquidity, come, please, to my door

Michael Hedges December 17, 2007

The final billion euro media deal of the year is very likely German publisher/broadcaster Heinrich Bauer Verlag buying UK publisher/broadcaster Emap. UK and German media wags view it quite differently, either an end or a beginning. The whole story is far more interesting because it’s very real.

Bauer, rather than a UK company, buying the Emap publishing and broadcasting assets has one main theme: liquidity. No UK media company has, nor can they find, enough liquid cash to make the deal. Private equity firms sat on the sidelines, media deals being difficult to value today making exit plans impossible to pin point.

So Emap, formed 60 years ago as East Midland Allied Press, has been effectively dissolved. It has been one of the highest of high flyers, jumping in and out of media (and other) businesses mostly with other peoples’ money. The company will continue to operate its business-to-business businesses, at least until the private equity firms emerge from their slumber.

CEO Heinz Bauer, said German business newspaper Handelsblatt, has become one of media’s elite. Bauer is paying cash for Emap. “We do not need credit,” he told a very rare press briefing (Wednesday December 12). That ability to pay cash was no doubt attractive to the Emap shareholders.

In the last month two other giant (no, gigantic) German-based media companies with world-wide footprints made ripples in the liquidity pond. Bertelsmann said it would buy out the last 10.2% it doesn’t own of RTL (€1.3 billion). Then Axel Springer renounced its 12% stake in ProsiebenSat1. Buying out the last piece of RTL gives Bertelsmann instant access to more of the broadcasters’ giant cash-flow.  Axel Springer gets about €500 million in very liquid spending money.

Heinz Bauer started as a printer 48 years ago with the company owned by his family for over 130 years. This week he’s been compared to the venerated media entrepreneur Leo Kirsch, himself making something of a recent come-back. Both Heinz Bauer and the company he heads are seen as very conservative, even, rather boring. Said one unnamed competitor in a Handelsblatt interview: “He’s very good in business.”

What strikes German media analysts about the Bauer/Emap deal is how Bauer has joined the elite European media companies in being freed from the no-growth German market. “We recognized the difficult and reduced growth possibilities,” he told the press gaggle. Bauer’s non-German market share of the company’s gross income has risen to 45%, according to the Financial Times Deutschland. Both Axel Springer and Bertelsmann/RTL have invested heavily in broadcasting and new media outside Germany. 

There was quite a different view of the deal in the UK. Not a few wags forecast – again – the ultimate end to the commercial radio sector. The Times referred to the deal as a “seizure.” Over and over the obsessive meme of the lost opportunity to compete with the BBC’s scale was heard. Most all the UK media companies wanted to bid for parts of Emap, looking for incremental market advantage here or there. When the hammer dropped, only Heinz Bauer was standing. UK wags said the bid was overpriced. The Guardian said, “People will die.” German wags thought the price was about right.

The Bauer/Emap deal did, unfortunately, come down as Ralph Bernard, GCap’s founding director, stepped down, giving greater than warranted credence to the demise of UK commercial radio broadcasting. Conventional wisdom in the UK has been that the commercial radio sector needed to consolidate further, perhaps as two giant companies, to give the BBC a run for the market share. There is little doubt that the BBC radio and television market shares affect commercial sector valuations. In a statement last week Bernard said GCap might need to close its digital platform radio stations.

GCap’s founding three years ago, combining Capital Radio with GWR, was a mighty deal that never lived up to its promise, at least not to shareholders. Consolidation, it seems, is much trickier than putting one to one and getting three, or six, or 16. Even Clear Channel, America’s poster child for media consolidation, is now valued at a fraction of where it was trading before the entire US market consolidated and the buy-out its investors have been screaming for continues to be stalled by a very nervous private equity market.

Timing, of course, is everything. These are not days for phoning up your investment banker and trying to strike up a conversation about finance. Bankers aren’t even phoning up other bankers to talk about finance. Raising money when bankers are unsure about net present and future values is neigh on impossible. Even loan sharks (also known as venture capital) are on extended holiday, deal flow screeching to a halt. 

Companies in the best position to take advantage of the moment are those privately held. Publicly traded companies need to face stock traders and shareholders day to day demands. Economists – at least those who have dispensed with the last century’s irrational exuberance – see the global liquidity crunch continuing well into 2008, maybe farther. Media companies overly attached to the traditional advertising model will continue to struggle – and fail – as the new performance-based advertising model is favored in a consumer recession.

Advertising, noted by all recent forecasts, continues to rise. All the growth and much of the rest is going to markets where consumer spending is increasing, be that Eastern Europe, Russia and Asia, or where business-to-business spending is robust. Bauer recently bought the top rated radio broadcaster in Poland, a tiny point missed by UK media wags, the Guardian excepted. Axel Springer is invested in Turkey, RTL in Russia. Axel Springer’s bid for 25% of Polish TV channel PolSat apparently crashed last week with the Polish owner demanding more money. The thread running through all these major acquisitions is multi-platform brand strength; ultimately the source of all revenue.

Heinz Bauer just bought several multi-platform media brands in the UK. While the arrival of a few dozen German accountants may increase the anxiety, the survival rate will likely be quite high. The next question is about how long German financial engine can power Europe’s media.