Beyond Haircut To Extreme Makeover

Michael Hedges November 14, 2011 - Follow on Twitter

This century has illustrated boldly the world of media moguls, their ambitions and business practices. Tough, tireless and maybe a little crazy they go after what they want, relishing in the fight. Some of this is admirable. Some of it is a crime, particularly when mixed with the ruthless pursuit of power.

Well reported was the “working lunch” held (November 7) at Silvio Berlusconi’s private residence near Milan with family members Pier Silvio and Marina Berlusconi, Fininvest managing director Pasquale Cannatelli, Mediaset chief executive Fedele Confalonieri and lawyer Nicola Ghedini. It’s a regular event, almost every Monday. What, exactly, was discussed remains private. Pier Silvio Berlusconi is vice president at Mediaset. Marina Berlusconi is chief executive at publisher Mondadori. Certainly it was clear to all that Silvio Berlusconi’s leading role in Italy’s government was coming quickly to an end. By Saturday night (November 12) it was over.

Speculation about the effect of Berlusconi’s political fall on the family media businesses abounds. Broadcaster Mediaset operates three free-to-air TV channels - Canale 5, Rete 4 and Italia 1 – plus several digital channels and the cut-rate pay-TV provider Mediaset Premium. Mediaset takes about 60% of all TV ad spending in Italy, conspicuously above the company’s aggregate audience market share.  Silvio Berlusconi founded Mediset in 1978 and the family investment house Fininvest holds a 39% stake. Last year’s annual revenue was €4.3 billion. The company reported (November 8) an operating profit for the first nine months of €370 million, 30% lower than the same period one year on. Publisher Mondadori owns a slew of magazine titles and one national radio channel.

“Questionable management decisions exacerbate the situation,” said the Financial Times Deutschland (November 9). Mediaset has been criticized for lax – or bad – investment in content for the Italian television channels. The company has benefited greatly from the Berlusconi years in power. “Mediaset could be disadvantaged by (Berlusconi’s resignation) in the future,” said analysts Nomura, quoted by Reuters (November 9)

The European Court of Justice (EJC) ruled illegal a government program subsidizing terrestrial television set-top boxes, benefiting Mediaset channels but putting satellite broadcasters at a disadvantage. “The broadcasters which benefited indirectly from that state aid are obliged to repay amounts corresponding to the advantage obtained thereby,” said the EJC decision (July 28). The amount, still unpaid, could exceed €100 million.

A week earlier (July 22) Mediaset paid out €560 million after a judgment in favor of La Repubblica publisher CIR, principally owned by Berlusconi rival Carlo de Benedetti. The case involved a corrupt judge and the Mediaset purchase of Mondadori nearly 20 years ago. The Italian parliament passed a law limiting Mr. Berlusconi’s exposure to that trial.

Also potentially expensive for Mediaset, brought about by Berlusconi’s departure, could be a change in the licensing of six new digital terrestrial television licenses. Rather than a “beauty contest” among applicants as scheduled for early December the new licenses might instead go to the highest bidders. Competing applicants don’t trust the “beauty contest” as those deciding at Berlusconi appointees.

Mediaset investments have, entanglements notwithstanding, followed a very traditional path; tactical verticals, strategic horizontals.  Mediaset Premium appeared recently to compete with Sky Italia. Mediaset owns a big advertising sales house. There’s a deal for a transmission infrastructure operation. And then there’s Endemol.

The Endemol investment has been particularly difficult. Mediaset, Goldman Sachs and John de Mol’s investment firm Cyrte bought the television production and rights holder in 2007 for €2.8 billion from Spanish telecom Telefónica, which had bought Endemol from co-founder John de Mol for €5.5 billion. In June Endemol breached loan covenants and CEO Ynon Kreiz left. The company is now €4 billion in debt. Endemol was founded on the success of reality TV icon “Big Brother” and currently produces “Extreme Makeover”.

Keeping control of the Endemol investment will be a challenge for Mediaset chief executive Confalonieri. Time Warner bid €1 billion. The would be quite a “haircut.” Some believe RTL Group has made an offer. More sooner than later hedge funds holding the debt will decide. Mediaset and private equity fund manager Clessidra Capital Partners are ready, reported Bloomberg (November 9), to buy out Endemol’s senior debt holders for €200 million then pursue a total debt restructuring through a debt to equity swap. Time Warner was told last week, said Bloomberg, the bid for Endemol was a bit light and, anyway, wait until the debt deal is done. Clessidra chairman Claudio Sposito previously served as Fininvest CEO.

Of more immediate concern to Silvio Berlusconi are the various court proceedings, stalled by a law written to prevent a sitting prime minister from juris indignitas. In one, Mediaset is accused of tax fraud for financial “irregularities” in the sale of movie rights. Mr. Berlusconi remains a member of the Italian parliament and, as such, can only request a delay in legal proceedings for reasons of ill health or travel abroad.

Media reform in Italy has been often discussed and, during the Berlusconi years, never acted upon. A 45% market share cap for television advertising sales houses was established during the second term of Prime Minister Romani Prodi. It was ignored to the benefit of Mediaset owned sales house Publitalia. At the same time, Mediaset owned television channel Rete 4 was allowed to continue free-to-air broadcasting even though the ECJ upheld a European Commission infringement decision that it must move to cable or satellite platforms. Between government restructuring and economic malaise, media reform is unlikely on any Italian politician’s hot 100 list. But any new austerity program in Italy will most certainly hit public broadcaster RAI, the directors of which have all been chosen by Silvio Berlusconi.

But, as is said about opera and that fat lady, Silvio Berlusconi sees the future. “I share your spirit and I hope to resume with you the path of government,” he wrote to neo-fascist politician Francesco Storace, quoted by La Repubblica (November 13) shortly after ducking out the sidedoor.

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)

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