Your CEO is a visionary who is written about in the media every week. The numbers the Street watch like a hawk are Ebitda and cash flow. Your revenues are vulnerable to the rise and fall of advertising spending. Your business is as sexy as it is complicated. You’ve got plenty of sell-side coverage but your company’s long-term strategy doesn’t always meet the Street’s thirst for short-term results. Welcome to the wonderful world of investor relations for a media company.
‘The biggest thing with a media company, particularly a content media company, is the amount of cash flow we produce,’ says Marty Shea, senior vice president of investor relations at Viacom. ‘Our [free cash flow] target is anywhere from 50 percent of our earnings or Ebitda. We don’t have businesses that we have to invest a lot of capital in; they’re very high margin businesses.’ In the media world, he adds, ‘Cash is both king and queen’.
‘The Street is very earnings-focused as they are with a lot of industries but with ours it tends to be more Ebitda,’ says Reed Nolte, vice president of IR for News Corp.
The reason Ebitda is the key number for media companies is because a lot of media players have spent a long time without real bottom-line earnings. ‘Media companies were doing a lot of mergers and acquisitions which caused a lot of goodwill which when amortized would wipe out the earnings-per-share and as a result, the industry has been very focused on Ebitda,’ adds Nolte. More recently, the Street has been focusing more on both Ebitda and EPS.
The media business is generally about delivering audiences to either advertisers or content providers. With pay TV or movies, for example, revenue is driven by subscription or box office revenues rather than advertising, but it’s the same concept.
In the last decade, the media industry has both fragmented and consolidated, even though that sounds like a contradiction. Big media conglomerates have formed through mergers and acquisitions. The most famous deals include Time merging with Warner and buying Turner Broadcasting then getting swallowed up by America Online. Viacom bought CBS; Vivendi bought Universal (which it’s now looking to sell); Disney bought ABC; Bell Globemedia bought CTV; and the list goes on. Meanwhile, the media business has become fragmented in terms of distribution channels with internet, specialty cable, broadband and DBS (direct broadcast satellite) outlets all vying for audiences.
‘As the industry becomes fragmented into more and more outlets, you examine the ability of a company to move across those outlets and protect its existing outlets for delivering an audience,’ says David Gibson, a media analyst with Macquarie, an Australia-based sell-side firm.
Common thread
Key value drivers for media companies depend on the company. ‘But if you look for a common thread, it is mainly advertising revenues,’ says Oliver Ansted, an analyst at JPMorgan. ‘But all companies have their own stock-specific quirk, whether it’s market share or cost or something that is structurally changing the business.’
‘When you are so closely tied to the ad environment, the business [outlook] can change rapidly,’ comments Randy Palmer, senior vice president of investor relations at Clear Channel Worldwide.
During the buildup to war in Iraq, for example, ‘Concerns were raised about the ad environment, especially in radio because ads can be booked very quickly and pulled very quickly,’ Palmer explains. Clear Channel is the largest owner of radio stations in the US and has equity interests in over 240 stations internationally. The Texas-based company also owns 39 television stations in the US and is a big producer of outdoor advertising around the world.
‘Advertising accounts for 75-80 percent of all of our revenue, whether it be TV or newspapers,’ says John Maguire, vice president of finance and CFO of Winnipeg-based CanWest. ‘But even when there are down cycles in the economy, we are still relatively profitable and generate a strong cash flow by virtue of not being capital intensive.’
CanWest is Canada’s largest media player, with newspapers, televisions stations, multimedia production facilities, internet publishing operations, specialty cable channels and radio networks in its home country. The company also has interests in television stations in Australia, New Zealand, Ireland and the UK.
The behemoths in the media world – Viacom, Vivendi, AOL Time Warner, News Corporation, Disney, Bertelsmann – are less dependent on advertising revenue because of their diversification across a range of businesses. Most of these players are involved in film and television production, cable and broadcast television, music production and distribution, online services, book publishing and more.
IROs at these multi-faceted businesses say ad spending is usually only half their revenue stream. ‘For Fox Entertainment (owned by News Corp), advertising is roughly half of the revenue stream and the other half comes from subscriptions from both the cable companies paying for our channels and movie revenue, whether it be from box office or DVD,’ summarizes News Corp’s Nolte.
‘Almost half of revenue is advertising but that nets down to almost 80 percent of our income. The other half is revenue from our other businesses like Simon & Schuster books, Paramount, and so on,’ says Viacom’s Shea.
Visionary at the helm
‘What is unique about media companies is that there have from time to time been visionaries who have foreseen a media market different from the then current one,’ notes Macquarie’s Gibson. Some of these include ‘Rupert Murdoch at News Corp, Steve Case and Gerry Levin at AOL and Ted Turner,’ adds Gibson. ‘People have previously purchased these stocks based on these visionaries’ long-term plans.’
Investor relations officers inside the media world are conscious that management’s long-term strategy influences the market’s perception of the stock more than in other industries. ‘One of things particular to a media company is that your intangible assets walk in and out of the building all the time,’ says Viacom’s Shea. ‘We are an idea business and once you stop programming your channels or networks the way the audience wants you to, you lose audiences then advertisers. Our challenge is to keep ideas flowing, so you have to have a creative management.
According to Shea, Viacom’s Mel Karmazin, president and COO, and Sumner Redstone, chairman and CEO, ‘do a marvelous job at maintaining a balance between creativity and financial discipline.’
Such visionaries also garner a lot of compelling media coverage. ‘There is a lot written on a weekly basis about Rupert Murdoch [chairman and CEO of News Corporation] and he is the one leading the strategic vision,’ comments Nolte. From an IR standpoint, Nolte says Murdoch’s visibility is helpful because it means investors are usually familiar with the company’s strategy.
The downside of having high-profile management with a vision for the long-term future is that the investment community wants results this quarter, not ten quarters down the line. For IROs it can be frustrating to try and bridge the gap between a visionary’s long-term goals and the Street’s focus on quarterly results.
‘That we are required to report quarterly numbers is a sharp frustration point,’ says Shea. ‘You can create a movie and collect box office receipts within 90 days and TV is the same. CSI or Everybody Loves Raymond create value over time for shareholders but they take four or five years to become major assets. And you are going to spend money to create [hit TV shows] before [advertisers] are throwing money at you.’
‘News Corp is probably criticized to some extent for having a vision that is longer-term than some analysts would prefer,’ agrees Nolte. News Corp’s Murdoch has a long-term plan for marrying content with direct broadcast satellite distribution. The company recently bought 34 percent of Hughes Electronic, owner of DirectTV, for $6.6 bn in cash and stock. The deal will eventually allow Murdoch to realize his vision of marrying DirectTV with News Corp’s Sky Global Networks to create a broadcast satellite powerhouse. Still, when the company first announced the deal, News Corp’s stock went down. ‘But it has come back pretty well,’ reports Nolte. ‘It just took people time to digest it all.’
According to Gibson, the Australian sell-sider, ‘The downturn in the equity markets over the last two years coupled with events like AOL writing down $54 bn have lessened people’s perceptions of these visionaries’ ability to create value.’
After the bubble burst, many observers suggested media conglomerates paid too much for acquisitions in the late 1990s and were now drowning in debt. ‘To a certain extent they are still struggling [to overcome their debt],’ says JPMorgan’s Ansted. It was that perception – that the visionaries were perhaps wrong – that ousted several big name media executives. Among them was Vivendi’s Jean-Marie Messier, who was tossed from the helm of the media empire he helped create out of a nationalized water company.
In the cutthroat media world, management clearly has a larger impact on the investment community’s perception of companies than in other sectors. But when their vision takes too long to materialize into profits, they often prove expendable.
Numbers game
According to Macquarie’s Gibson, financial disclosure by media companies varies. ‘If you look at the level of financial disclosure by AOL Time Warner, it’s fantastic in contrast to News Corp, which itself has gotten a lot better,’ he says.
Gibson praises AOL Time Warner for posting all its quarterly numbers in a downloadable format. ‘They provide you with a lot of information without hiding it. A lot of it may be in the 10K but you have to go looking for it.’
News Corp’s Nolte says the company has indeed been working on boosting its financial disclosure for the past couple of years. ‘Our earnings release is typically around 15 pages, which is double what is was four years ago,’ he says.
The push for greater disclosure came from the IR department’s desire to have the Street understand all News Corp’s many moving parts. ‘The best way to do that was to give more information on how each [business] was performing.’ News Corp gives Ebitda guidance to the Street once a quarter when it releases the prior quarter’s results.
Viacom has also been increasing its financial disclosure. ‘We have become much more verbose,’ notes Shea. ‘Our 10K looks like the Gideon Bible; it may be overkill, but information is the name of the game.’
Content vs distribution
The future of the media industry is paved with golden opportunities to reach audiences around the world with lightning speed through new technologies like DBS and broadband internet. Now the debate is which distribution channel will win. News Corp is one of the rare media players betting on satellite distribution. But according to Gibson, the next question is who will buy EchoStar, another satellite TV company.
Viacom is betting on content remaining king. ‘We love to think of ourselves as a content company because even our distribution channels are not large capital investments like cable networks or satellite,’ says Shea.
Over the next five years, electronic media advertising will likely outgrow print media, which is where Viacom is placing its bets, notes Shea. ‘We think the print advertising business is becoming more stagnant and there is much more growth in advertising on TV and cable networks – and with satellite it will all be more exciting.’
CanWest is another content purist. ‘We are not in the distribution business,’ comments Maguire. ‘We are an advertising company that has content. We have never made a bet as to what technology will distribute our content so we are not banking on cable or satellite.’
The next year will be a landmark year for the media industry. Just as many of the big conglomerates have grown to capacity, deregulation of the industry seems plausible. This month, the US Federal Communications Commission will rule whether to keep or drop rules limiting the number of media outlets a company can hold in a single area. At the same time, the Australian government is proposing to abolish rules on cross-media ownership (TV and radio stations) and foreign ownership. For now, New Zealand is the only market wide open to foreign media business ownership.
If ownership rules are loosened or abolished, it could result in further consolidation, which is not necessarily good for audiences because content gets homogenized while local service is downplayed. Of course, as Gibson notes, ‘If consolidation is a detriment, we kind of found out too late.’
