The media mega-merger sweepstakes were launched with a vengeance one Monday morning in late July when Michael Eisner, chairman and CEO of The Walt Disney Company, kicked off a week that would see his company bid $19 bn for Capital Cities/ABC and Westinghouse offer $5.4 bn for CBS. Soon after, Time Warner Inc threw its hat into the ring with its $8 bn bid for Turner Broadcasting System.
Despite the stakes, there was little tension in the air that Monday morning when Wendy Webb, vice president of IR at Disney, introduced Eisner to the nearly 500 investors and analysts gathered around speaker phones across the US to participate in a historic conference call. To break the ground, Eisner waxed comically about his own ten year stint at ABC: ‘I started my career at ABC by picking Marlo Thomas up at the airport and getting her dry cleaning. I went on to run day-time television and to become part of the group that put All My Children and One Life to Live on the air.’
CFO Steve Bollenbach, meanwhile, concentrated on the numbers: ‘We are going to be borrowing a lot, but the nice thing is there is plenty of liquidity around in the bond market and banks are dying to lend to our kind of business.’ Bollenbach expects to borrow an estimated $10 bn in coming years to finance the merger. ‘It depends on what shareholders elect,’ he added. ‘If they go for an all cash option, we may have to borrow more than $10 bn. BuBt this should be taken in context of a company that will have over $40 bn in market cap, and coverage of over 400 per cent in a friendly debt market.’
Warren Buffett, the biggest investor in Capital Cities, was also on-hand for the festivities. Buffett had just pocketed an estimated $400 mn profit on his Capital Cities shares, more than 16,000 times the amount the average American earns in a year. ‘I have been a critic of many deals that have taken place over the years,’ Buffett said in the teleconference, ‘but this is the most sensible deal I have ever seen, from both a financial and operational standpoint.’
Buffett said he had other reasons to be pleased, too. Eisner had just handed him a $100 bill for his prediction that Disney stock would open higher on the news of the takeover: the less confident Eisner had taken the other side of the bet. ‘I feel $100 richer at the moment,’ joked the billionaire, ‘but I think I’ll feel even richer a little later on.
Just two weeks before that conference call, on July 14, Eisner attended an exclusive investors’ retreat staged in Sun Valley, Idaho by media and entertainment banking specialists Allen & Co. All the big boys were there, so it was hardly surprising that Eisner should run into Buffett.
In 1993, Buffett had tendered a third of his Capital Cities/ABC stock to the company for $630 mn, racking up a tidy $100 mn profit. Now he was ready for another pay-off and Eisner was not just ready to talk: he desperately wanted the deal. Ironically, he had had to leave the same Allen & Co conference, held a year earlier, because of severe chest pains which heralded the start of one of Eisner’s toughest years. The chest pains were dealt with by quadruple bypass surgery, but Eisner was already stunned by the loss of his friend, Disney president Frank Wells, in a helicopter crash. The pair had spent a decade transforming Disney, and many wondered whether Eisner would get over the loss.
In the fiscal 1994 annual report, Eisner dedicated much of his opening statement to a eulogy to Wells, along with some Eisner-style home-spun philosophy about his surgery. ‘It may seem easier for our life to remain constant,’ wrote Eisner, ‘but change is really the only constant. We cannot stop it and we cannot escape it. We can let it destroy us or we can embrace it… For an organisation like ours, change is the engine of growth and the muse of creativity…. Change makes the adrenaline kick in and motivates us toward achievement.’
Indeed, Disney went on to another solid year, with earnings before interest, taxes, depreciation and amortisation (Ebitda) of $2.2 bn. But Eisner wanted more, and Capital Cities was one way of achieving it.
Of course, the Disney-Capital Cities/ABC deal is just one of many recent mergers, in industries ranging from banking to railroads, that have pushed M&A activity in the first half of 1995 to a record-breaking $164.4 bn.
Each deal has its own characteristics, but one thing they have in common is a high level of IR input. While institutional and retail shareholders in all these companies will have their say in the end, the ability to handle the most strategically important shareholders is critical. Disney managed its crew well, but so did Westinghouse. Having won the support of CBS chairman Larry Tisch, something few potential suitors have been able to do in the past, Westinghouse waltzed into the CBS boardroom and pulled off a minor coup without any challenge.
And from the word go, many media analysts have greeted the Westinghouse deal with gusto. Merrill Lynch, CS First Boston and Smith Barney all changed their ratings to buys, while NatWest Securities confirmed its buy recommendation.
Though more pessimistic observers might wonder why an ailing manufacturer would be interested in buying a third-ranked network, Wall Street seems to be supporting the transaction. In quick order, Westinghouse collected a $7.5 bn revolving credit from a group of bankers to finance the all-cash CBS buy. Meanwhile, analysts predict that the value of Westinghouse could rise substantially as it turns itself from industrial conglomerate into media mogul. At the time of writing, the Westinghouse deal was about to be completed in close to record time.
The Disney and Westinghouse deals may have progressed smoothly but Time Warner chairman Gerald Levin has a very different task in his bid to create the world’s largest entertainment company (total revenues: $18.5 bn). Levin’s first success was to convince major investors to come along for the ride: Japanese investors Itochu and Toshiba quickly agreed to swap their billion dollar stake in the Time Warner Entertainment partnership for stock in Time Warner Inc.
But that turned out to have been the easy bit. Since then, Levin has had to face hardnosed John Malone, builder of the TCI cable TV empire and one-time saviour of Turner Broadcasting, whom he persuaded to exchange his 21 per cent stake in Turner for a 9 per cent stake in Time Warner (with 5 per cent of the vote put in trust for Levin). Malone is currently cooperating with Levin and Turner, due to a sweet package of concessions; whether he will continue to do so is anyone’s guess.
But Malone is the least of Levin’s problems. By the end of September US West, another shareholder, had launched an angrily-worded law-suit against Time Warner Inc. In 1993, US West bought a 25.5 per cent stake in TWE for $2.55 bn. That’s now worth an estimated $4 bn, but US West is showing no gratitude: instead, CFO Doug Holmes (who, incidentally, was formerly executive director of IR at US West) cried foul on a much publicised conference call to the American financial media.
The US West law-suit seeks to block the Time Warner merger with Turner, relying on its contention that the deal would violate a key part of the US West-Time Warner 1993 partnership agreement, which prohibits Time Warner from competing with TWE. Holmes says that since Turner is in the same business as TWE, Time Warner has violated its fiduciary responsibilities and created a conflict of interest that could well threaten the US West investment. Levin says the suit will amount to nothing, but the Street is not so sure.
Meanwhile, Levin has been attacked by another group, this time from within the Turner camp. Cable companies Comcast Corp and Continental Cablevision Inc are significant shareholders in Turner, with seats on its board. They, too, were around during the Turner rescue, and are publicly condemning Levin’s move to placate Malone. ‘We are deeply troubled by the preferential treatment afforded to one shareholder to the detriment of all the others,’ they said, ‘and we are currently considering all our options.’
And Levin is not likely to get good news from another Time Warner investor, Seagram. It was the wily Bronfman family that kicked off the current round of media mega-mergers with its $5.7 bn 80 per cent takeover of MCA-Universal, a surprising purchase which took Seagram out of its major stake in Dupont, changing the company into a media and liquor distributor. Seagram already had a 15 per cent stake in Time Warner. With Time Warner diluting its stock and going into the entertainment business, it is hard to believe the Bronfmans will support Levin for long.
With Levin unable to bring the big investors into line, others are beginning to worry about his basic valuation criteria. TWE’s assets are a smaller part of a bigger pie, and some shareholders are worried that Levin’s vision for simplifying the corporate structure is leading nowhere. Though analysts believe the strategic thrust of the deal makes sense, they are less sure about the cost. The future hangs on whether shareholders like the idea of dilution. And if Time Warner’s stock price does not perform well, Levin may face more trouble.
‘These deals are being done on a friendly basis between captains of industry,’ says Greg Stanton, president and CEO of Dover Film Finance Group, a boutique specialising in unique finance structures. ‘Basically, two CEOs are getting together and coming up with ideas. Investors are pleased not to have to read about the ugly battles in the papers. The share price is rising and institutions are happy. But what happens down the road when these vocal institutions see objectives are not being met? That’s something that could prove a dilemma for the captains.’
Stanton says the trend in these large transactions is for investment banks, in some instances, to play a more limited role. In some cases, their role has been more concerned with investor relations and research than with traditional banking. ‘Disney may need financial advisers,’ says Stanton, ‘but at the end of the day they do not need an investment bank to architect the Capital Cities deal. The two CEOs have agreed with each other on the worth. These companies are throwing off such large cash-flows that they don’t want long-term debt.’
Not everyone is taking a sanguine view of valuation, however. Paul Marsh, for instance, a top entertainment and media analyst at NatWest Securities, is worried. ‘IR people are trying to have their companies valued on a multiple to cash-flow basis rather than a PE ratio,’ he says. ‘If you put them all on a cash-flow basis you can compare the group. They are all trading in a 9-to-11 multiple range, and they all claim to be able to achieve double digit cash flow growth to justify these multiples.’
Marsh has just gone through a list of similar companies and found that only a few have ever been able to achieve double digit cash-flow growth. From his perspective, Time Warner’s purchase of Turner, which must be justified by a 30 per cent growth rate, is looking expensive. ‘When the flurry dies down next year, analysts are going to take the companies to task for not meeting goals. Companies that do not meet growth rates are going to see stock punished. And, if there are no acquisitions on the horizon, everyone is going to go back to valuing companies on an operating basis. So you may well see investors getting vocal and banging down doors.’
This question of cost also interests Peter Ezersky, a managing director of Lazard Frres & Co LLC and a prominent entertainment industry banker. Ezersky believes Disney paid a reasonable price for Capital Cities/ABC, in view of the obvious commercial benefits that can flow from combining a content powerhouse with a distribution powerhouse. ‘Westinghouse bought CBS at a full price, considering where CBS seemed to be heading,’ he says. ‘Whether Westinghouse received good value will be a function of its ability to rejuvenate the network, which has fallen from first to third in the ratings and lost certain important affiliates. Had Turner not been involved with Time Warner, Westinghouse might have had competition.’
Ezersky points to the Seagram acquisition of MCA as another example of a well-priced, if initially misunderstood, acquisition. ‘The company has gone from a Dupont-dominated company to a beverage and MCA-dominated company,’ he says. ‘The new dynamic means higher growth. Seagram’s stock price was hammered when news of the deals – both the sale of the Dupont stake and the acquisition of MCA – leaked, because investors thought Seagram was selling Dupont for too little and buying MCA for too much. However, when the facts became known, it was soon clear that Seagram had done two very attractive deals and its stock price recovered quickly.’
Richard Intrator, managing director of LSG Advisors, a division of Societe Generale Securities Corp of New York, notes that there are different kinds of risk involved in overpaying on a cash – as opposed to a stock swap – basis. ‘If you are overpaying with cash, there is a risk you may not make your interest payments, and you may jeopardise your company,’ Intrator says. ‘If you overpay in stock, you have an opportunity cost in that the stock could go higher. But there is no immediate gun to your head in terms of having to make the interest and principal payments.’
In the end, Intrator says that all these questions of valuation may amount to nothing. ‘It all depends if you overpay over a three year or a 20 year horizon. None of these deals is being done on a three year view. And 20 years from now no one will remember what Disney or Westinghouse paid. Does anyone remember what Capital Cities paid for ABC ten years ago?’
Deal of a Lifetime
The stars of the Disney-Capital Cities/ ABC M&A show had names like Michael Eisner, Tom Murphy, Warren Buffett and Steve Bollenbach. But behind the scenes, Wendy Webb was doing her best to ensure that the second largest merger in US history would roll as smooth as silk. For the vice president of IR at The Walt Disney Company, that entailed a weekend of intense work from morning to midnight at the New York control centre.
The alarm bells started to ring for Webb when her boss, financial wizard Steve Bollenbach, now CFO of Disney but formerly CEO of Host Marriott and CFO for Donald Trump, called her into his office for a meeting. He asked her how she would like the chance to work on the ‘deal of a lifetime’, noting matter-of-factly that it would mean working in New York over the weekend.
En route that day in the Disney jet, Webb discovered that she would be supported in New York by Disney corporate communications specialist John Dreyer and they would have back-up from M&A guru Robert Siegfried of Gershon Kekst & Co. By Friday morning she was in the Disney war room at the mid-town law office of Dewey Ballantine. The tax lawyers were in one room, the merger agreement lawyers in another, the financial advisers from Bear Stearns and Wolfensohn & Co were shuttling between the two, and investors Warren Buffett and Sid Bass were roaming the halls.
‘The most incredible thing about this deal is that it was kept secret,’ recalls Webb. ‘Given that negotiations were going on all day Friday while the markets were open, and all weekend when the press had its ear to the ground, the idea that it came as fresh news was astounding. And because there was no leak, we were able to explain the deal the way we wanted to.’
Bright and early on Monday morning, Webb was the master of ceremonies for a Disney IR operation that started with a conference call to analysts and investors. That was followed by a press release, then a press conference.
On the news that Disney was going to be involved in a mega media merger, the stock price rose by more than $3. Trading in the stock was only halted for 20 minutes, compared with four hours when Time and Warner merged. In the most recent cases of both Time Warner and Westinghouse, their stock prices dropped initially on the merger news.
‘It was important to get the stage set with Wall Street first,’ says Webb, who was responsible for coordinating the Capital Cities side of the investor equation with IR counterpart Joe Fitzgerald. ‘The conference call had a capacity of 500 lines. We had 465 people on the call, and all were spokespeople for their organisation. Having briefed these opinion leaders, we were assured that when the press followed up, they would receive informed comment from the financial community.’
Fitzgerald, a veteran IR professional who was around ten years ago when Capital Cities bought ABC, was in step with Webb’s initiative. ‘Our shareholders were on the list when the news was released and they were included on the conference call,’ he says. ‘There was some overlap between the two investor bodies, but in terms of how we communicated, it was identical to Disney.’
The key IR message from the management of Disney and Capital Cities was that the two companies were complementary, rather than overlapping, entities. Investors were informed that this was not a merger where the value created would come from heavily cutting costs. It was a marriage of two media companies where the combined assets would create all sorts of synergies and new revenues. As Eisner put it, ‘In this case, one plus one equals four.’
For Webb, the IR initiative could hardly have gone better. And if the proxy to ratify the deal proceeds as planned, the merger programme could serve as a model in an arena often beset with potential pitfalls and problems.
Westinghouse: Beating the Odds
Some bankers and analysts are shaking their heads as to why manufacturer Westinghouse is buying CBS for $5.4 bn. But from an IR perspective, the transaction seems to be running as smoothly as any in the current spate of entertainment M&As. If all goes to plan, CBS shareholders will give the go-ahead sometime in the fall.
The IR initiative was led by Larry Bridge, vice president of IR for Westinghouse Electric Corp, supported by just two staff. Right from the start, Bridge was faced with a challenge when the Disney-Capital Cities/ABC announcement was made the day before Westinghouse’s planned launch. Bridge responded by sticking to his pre-determined plan and avoiding the distractions of the media blitz.
‘We had to communicate appropriately a substantial transformation of the company to our existing shareholders and potential new investors,’ says Bridge. ‘We also had to consider a possible change in analysts covering our company. After a five year restructuring due to failed opportunites in the financial services sector, and the introduction of our new chairman Michael Jordan, investors had begun to feel more comfortable. Yet CBS added a major twist. Suddenly we had a company where 50 per cent of revenues earnings would come from the media business.’
An important issue for Bridge was to maintain the integrity of both companies should the merger fail. ‘In the Disney deal shareholders were clearly amicable. Yet, our CBS deal was all-cash and there was an opportunity for competing bids,’ notes Bridge. ‘There was also concern in the market about whether Westinghouse had the financial clout to get the job done.’
With regulatory hurdles now being passed, and a CBS proxy expected soon, Bridge is keeping tabs on his shareholder base. He does not feel it is Westinghouse’s job to convince CBS shareholders about the deal; that’s for Larry Tisch and co.
Another difference between the Disney and Westinghouse transactions is that while the Disney deal seemed to come together over a weekend, Westinghouse had plotted its acquisition for some time. With a long history in broadcasting as an owner and operator of TV stations, The company had close dealings with networks. Management understood the issues facing CBS, and Bridge says the integration of the companies had in fact started well before the conclusion of the takeover negotiations.
On the valuation front, Nicholas Heymann of NatWest Securities Corp believes the market will readily value Westinghouse media interests separately from its manufacturing operations. Heymann calculated that if the broadcasting operations were valued at prevailing industry averages, based on their projected Ebitda forecasts, and the rest of Westinghouse was sold, the share price (net of debt) would be undervalued by about 43 per cent or $6 per share. Rolling this forward to 1997 the stock seems to be undervalued by $25 per share.
To achieve this, Westinghouse will have to bring on board a whole new group of shareholders. Currently, one-third of the shares are being held by institutions, and by this summer most momentum-oriented institutions had sold the stock. More recently, according to a NatWest report, many of the remaining investors, who had bought Westinghouse as a turnaround play on expanding global infrastructure sales, also sold their stakes. So at this point, Westinghouse has in fact largely completed a massive turnover of its investor base.
The upside potential for Westinghouse will come from the opportunity to participate in the domestic and international syndicates of shows they air and produce, according to Heymann. With recent changes in regulation allowing the television networks to distribute and sell their programming, the dynamics of the business have changed dramatically. This alteration in the production and sales dynamic was also important in the Disney purchase of Capital Cities.
Bridge concludes that Westinghouse can no longer be deemed an industrial conglomerate, and investors will have to be brought up-to-date with the new strategy. ‘We have always been valued on a PE basis, whereas media businesses are typically valued on a multiple of cash-flow basis,’ he says. ‘This is a positive change for us. We know the investor constituency will be altered, as well as the analyst coverage. This will create an IR challenge for some time.’
