With digital chaos rapidly upending old business models and analysts ga-ga over the likes of Google and MySpace, going private is the emerging business model for traditional media firms.
Of course, the trends that drive companies to go public or private are somewhat cyclical, but what's new in the media space this time around is private equity's ability to lay its hands on bigger and better media brand names. In just the past few weeks, stalwart old-media names such as Clear Channel, Cablevision, the Los Angeles Times and The Boston Globe all have been targeted by private-equity buyers. And a flurry of rumors are surrounding the likes of Viacom, the New York Times Co. and Martha Stewart Living Omnimedia, which actually got a bit of a boost to its share price last week thanks to the speculation.
"We've bought high-quality companies in the shape of VNU and Univision. No one would have ever thought about buying these companies two to three years ago," said former Viacom chief financial officer Richard Bressler, who joined one of the most active private-equity funds, Thomas H. Lee, earlier this year. "What's happening now is a great tsunami event. There is so much change going on in the world driven by new technology and changes in consumer habits, which drive uncertainty, and that leads to depressed equity values."
AdMedia Partners Director Jay Kirsch added: "Public market valuations for media companies are below 10 times EBITDA [earnings before interest, taxes, depreciation and amortization], and a few years ago, they were 12 to 13 times. Combine that with large amounts of private equity available and low interest rates, and it's the perfect recipe."
Underperforming media stocks
In an open letter to Viacom in July, Pali Capital research analyst Richard Greenfield underlined the major reason why so many media companies are thinking about going private: Media stocks have been underperforming the wider stock market. "The more we think about how Viacom stock continues to underperform the market, the more we think, 'Why isn't Viacom a private company?' Viacom management then would be free to run Viacom how they want, without worrying about public shareholders." (A Viacom spokesman had no comment.)
Talk of privatizing is most pronounced among traditional media businesses such as print and radio, which often were the basis of one family's fortune and now are particularly challenged by advertisers' whimsy for newer messaging vehicles. Observers last week were viewing the bid for The Boston Globe, owned by the New York Times Co., as one that could actually go through, if only because it gives the Sulzberger family a way to get its hands on enough cash to take its battered stock off the public markets. In cable, the Dolan family made an offer in recent weeks to take Cablevision back into family control. Radio giant Clear Channel hired Goldman Sachs two weeks ago to examine "strategic options," which many read as a precursor to privatization. In August, Forbes took cash infusion to boost its digital operations from Elevation Partners -- headed by U2's Bono -- rather than tap public markets.
Wall Street's limited view
The Mays family, which founded Clear Channel, likely is frustrated by Wall Street's limited view of growth opportunities for radio. It's a common complaint among CEOs who can't grasp why their stocks are down, and one most often made by family-run businesses, which may only have gone to the public market in the first place as a way to satisfy family members looking to cash out.
Newspaper companies in particular seem ripe for attracting private equity. Former Knight Ridder title The Philadelphia Inquirer was bought by entrepreneur Brian Tierney's Philadelphia Media Group earlier this year. The Tribune Co., after receiving lackluster bids for its group of newspapers, has said it will consider separately selling some of its papers, including the Hartford Courant and Long Island's Newsday, which is bound to mean many will end up in private hands. Already the Los Angeles Times has attracted interest from music mogul David Geffen. Another Tribune title, The Baltimore Sun, has attracted interest from a local investment group.
Newspaper's bottom line
The problem for newspapers was summed up in a pessimistic report from Merrill Lynch this month suggesting it could be another 30 years before online revenue represents even 50% of a newspaper's bottom line. Wall Street views the prospects for radio in similarly bleak terms. Susquehanna Radio was acquired a year ago by a private-equity partnership involving the usual suspects: Cumulus, Bain Capital, Blackstone Group and Thomas H. Lee Partners.
James Cramer, host of CNBC's "Mad Money" and founder of financial website TheStreet.com, says too many media-company CEOs just can't see reality. It's not that their businesses are undervalued; it's that Wall Street figures they just don't have any place to grow. "There are a lot of people who mistakenly believe their businesses are not in secular decline but cyclical decline. They are so sorely mistaken." Mr. Cramer is bearish on radio stocks and suggests many print titles might be better run as trusts by "rich people who don't mind taking a beating." Others agree. In a recent debate, Technorati founder David Sifry suggested newspapers might want to emulate the National Public Radio business model. (Ad Age's Media Guy has a similar idea.)
Space to retool
The stampede toward private rather than public funding is driven by other factors. It's hard to impress Wall Street with growth while traveling at top speed and trying to execute a sharp left turn. Mr. Cramer believes there are other things going on. Media companies are seeking the space to retool for the digital era, while private-equity firms are sitting on so much money that they're under pressure to make investments, and that's causing them to lose some of their discipline about what to get into. "They have to make something happen."
Private investors make a similar pitch. "Our time horizon is longer than most people buying public stock," Mr. Bressler said. "We may agree with an investment thesis, but we may have a view over a seven-year timeline about where that growth is going to come from," as opposed to the average 15-month tenure of a CEO, he said.
But will advertisers derive any real benefits from media companies opting out of the public markets? Richard Taylor, senior VP-brand marketing at Time Warner's AOL, thinks it's possible. "If their business is healthy and they're not scrambling, it could mean longer-term partnerships where you both build value over time. If going private can help further that end, then I'm all for it."
Going private also allows a company to stick to its knitting. "I spend every minute thinking about my clients and not a minute justifying what I'm doing [to Wall Street]," said Richard Edelman, head of the family-run public-relations agency Edelman.
Effectively value assets
Thomas H. Lee's old-media fund was put at $6 billion and was for a long time the biggest in the world, but private-equity executives say it's now dwarfed by other private-equity funds. How can private equity help? "They can fix companies and do things that don't fit a reporting cycle," said Tolman Geffs, managing director at Jordan Emiston Partners. "Stepping back, we're placing a big bet that well-informed private equity can, in the long run, value assets more effectively than the public markets."
Robert Routh, a media analyst at Jeffries & Co., has another opinion about why so many media firms are looking to go private: "As a result of new regulations as well as liability, it no longer pays to be a public company unless you have to be. It's much easier and cost-effective and there's much less stress on management in terms of having to deal with other parties or investors when they're private as opposed to public. They're subject to a myriad of rules and regulations ... and the cost of complying with them."