No media merger mania
Media firms aren't in a position to go shopping just yet.
February 20, 2002: 4:33 p.m. ET
By Staff Writer Paul R. La Monica
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NEW YORK (CNN/Money) - Will investment bankers soon be saying "You've got must-see TV"?
If you believe the latest Wall Street gossip, a new wave of media merger madness is imminent. And one juicy rumor has AOL Time Warner buying the NBC television network from General Electric. There's also been some buzz about the possibility of cable giant Comcast scooping up Walt Disney.
Investment bankers may be salivating at the prospects of a fresh round of consolidation in the media sector but investors should be hoping that the big media conglomerates resist the urge to merge.
That's because most of the major media companies have enough problems on their hands, given the sluggish advertising market, without taking on the additional burden of tricky merger integration issues. And more importantly, there's the question of how to finance a big deal in the first place.
Bad time to be looking to buy
AOL Time Warner, which owns CNN/Money, has more than $22 billion in long-term debt. What's more, its stock has been among the hardest hit during the advertising slowdown, making it harder for the company to use its stock as currency in an acquisition. AOL (AOL: down $1.32 to $24.20, Research, Estimates) is down more than 25 percent year-to-date and plunged to a new 52-week low on Wednesday following an analyst downgrade.
In fact, it's tough to imagine how any of the major cable companies -- AOL, Comcast (CMCSK: up $0.30 to $29.95, Research, Estimates) , Cox Communications (COX: up $0.84 to $32.70, Research, Estimates) or Paul Allen's Charter Communications (CHTR: down $0.10 to $9.50, Research, Estimates) -- could justify a large acquisition right now without incurring considerable wrath on the part of their shareholders.
"With cable stock prices under pressure, business slightly less robust than previously thought, and market concerns about debt loads, now might not be the ideal time for additional mergers," says Frederick Moran, an analyst with Jefferies & Co.
The broadcasting companies are in the same situation. Viacom (VIA: up $0.96 to $43.34, Research, Estimates), News Corp (NWS: up $0.47 to $26.74, Research, Estimates) and Disney (DIS: up $1.47 to $24.33, Research, Estimates) all have meager cash reserves, large levels of debt and stocks that aren't worth nearly as much as they were a year ago.
We've been here before
Plus, there has already been a major round of mergers in the media world -- Comcast buying AT&T Broadband, Viacom's purchase of CBS, and AOL's merger with Time Warner, to name a few. So it's not as if the media industry is a highly fragmented one crying out for consolidation.
"The big deals that have made sense have already been done," says Angela Kohler, manager of the Federated Large Cap Growth Fund. "I'd be surprised if there was a large deal in 2002."
Speculation about new mergers surfaced following a federal appeals court ruling on Tuesday, which threw out an old Federal Communications Commission rule that barred companies from owning cable operations and television stations in the same market. The appeals court also asked the FCC to reconsider the justification for a rule that bars broadcasters from owning stations that reached more than 35 percent of the national television audience.
Considering that media giants Viacom and News Corp are already operating over the 35 percent cap, it seems almost a foregone conclusion that this rule will be formally revoked at some point. With all this in mind, media pundits argue that relaxed FCC regulations will spark a mad land grab for cable and other broadcasting assets.
But investors might want to remember that merger speculation is nothing new to the media sector. Remember all the permutations predicted back in early 2000 following the merger of AOL and Time Warner? Yahoo! was supposed to buy Disney. Microsoft was going to make a bolder move into the world of content. Even broadband Internet service provider Excite@Home was mentioned as a possible buyer of media assets.
Two years later and Disney is still an independent company. In fact, it's now more likely that Disney would take over Yahoo! than the other way around since Yahoo's market value is currently about one-sixth of Disney's. Microsoft has certainly made more forays into the media world but has stopped at an outright acquisition, lest it spark another round of antitrust concerns. And Excite@Home, which had a market value of more than $10 billion in January 2000, is planning to shut down its operations next week, having filed for bankruptcy in October.
So much for all those shotgun weddings between old media and new media companies.
Some small deals are likely
That said, some transactions are likely to take place. But they probably will be on the smaller side and not the sweeping, landscape-changing mergers that some are predicting. Kohler says two small operators of local television stations could be targets: Young Broadcasting (YBTVA: up $0.44 to $21.55, Research, Estimates) and Granite Broadcasting (GBTVK: up $0.05 to $2.30, Research, Estimates). Young owns 11 stations across the country and Granite owns 9.
E.W. Scripps (SSP: up $1.31 to $75.33, Research, Estimates) could be another company that larger media conglomerates might be interested in buying stations from. The company, which owns 21 newspapers, the Food Network and Home and Garden Television, also owns 10 local television stations.
But an even more likely scenario is that the major networks will simply purchase individual stations from smaller broadcasters as opposed to making large acquisitions. That's already taking place. Viacom agreed last week to buy a station in Los Angeles, KCAL, from Young last week for $650 million. And in December, NBC agreed to buy KNTV in San Francisco from Granite for $230 million.
So don't be surprised if more small acquisitions take place. But if the media behemoths know what's good for them, there won't be another wave of mega mergers. 
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