More – and bigger - media business

Michael Hedges September 27, 2004

Media watchers are tuned in to the UK this week, hoping for word of one mega-merger or another.

Read the entire story - Merger Creates Billion € Company

A bit more than a month ago, the largest radio part of Metromedia International Group was sold to Communicorp; hardly the biggest deal but interesting (“Communicorp Buys MIG Stations,” RWI, September 2004). The most interesting aspect of the MMI / Communicorp deal was how long it took. Very long. Three years. MIG pioneered – along with Lagardere and CME – investment in Eastern European broadcasting. They went to Moscow and Budapest when these were very cold places, investment wise.

In the last year big media companies have shuffled assets, particularly in the Nordic countries, Belgium and Holland. SBS and MTG have expanded through acquisition while Aller and Clear Channel retreated to core businesses. In Europe Clear Channels core business is outdoor advertising and Norsk Aller is a publishing giant.

A rumored Capital Radio-GWR Group merger, estimated to value between  £700-750m, is in a whole different league. Bankers are fond of saying that there’s no difference – in terms of their effort – between million euro and billion euro deals. It’s only paper. The difference, of course, is scale. Big deals are the only deals worth their attention.  Boards of both companies confirm merger talks.

The biggest European media companies are in a financial bind. National regulations tend to set ceilings on audience capture by individual companies. Cash-flow growth is limited to the rate of ad growth. Vertical expansion has its limits; witness Vivendi. What’s a CEO to do? 

Most major names in European media are owned by families or individuals who like having a megaphone as much as making money. Only small percentages of voting shares are publicly held, exerting very little pressure on managers. When that billion euro media deal takes place, the world changes. The investment bankers will take board seats.

The notion of non-Europeans (read: Americans) taking over media in Europe bred “anybody but Clear Channel” restrictions in several countries. The UK largely changed that – the thinking, but not the reality - with the new communications law, removing ownership restrictions but strengthening operational boundaries. Only the Czech Republic has similar unrestricted media ownership rules. So far.

National regulators have learned that ownership restrictions – particularly with stalled ad growth – have a nasty effect on local media. Ownership rules - cross-media, foreign ownership and audience thresholds – divert investment into other sectors. Local, privately owned, commercial media suffers.  

As the media deals move into the hands of the investment bankers the business changes from operation to transaction based. The bigger money will be made on buying and selling business units rather than operating them, increasing pressure on quarter to quarter results as well as pressure to scuttle the least profitable units in favor of the most profitable.

The Daily Mail & General Trust (DMGT) weighed into the Capital Radio-GWR Group discussion last week insisting, by virtue of their 29.9% stake in GWR, on a board seat and creation of a non-executive board committee to oversee senior executive appointments. 

Western European commercial broadcasting is almost a generation separated from its highly entrepreneurial beginnings while in the East broadcasters are in the throws of it. A mature business is a boring business. CEOs hate boredom, but their investors and bankers hate it even more.

Coming Up

For the next RWI deadline I am working on articles about digital switch-over in Europe, a new entry in electronic measurement and affects of the Dutch EU presidency.

Digital switch-over is more than a policy discussion. Rather than setting hard near-term dates, regulators are opting for loose mid-term “evaluation periods.” In the long-term, digital radio will migrate from the current FM band but probably not from AM.

I’ll have some details on the second generation of electronic measurement devices. Confidentiality agreements prevent me from writing more for about two weeks.

The last Dutch EU presidency gave Europe the Amsterdam Protocol, codifying public service broadcasting. This term may exceed the former as the audio-visual sector migrates from DG Culture to DG Info Society.

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