Betting on Media

With lots of money to
spend and a penchant for making even more, investment firms have set their
sights on media companies.

April 2007

By Victoria Silverman

Ten years ago, few people
had heard about private equity. Today, millions of us work for companies that
are either wholly owned or partly owned by private investors. And, with three
of the biggest private-equity deals in the last decade happening in the media
sector, it’s time for even the most die-hard financial-­news
dodgers to take note.

Broadcasting is a cloth
that private-equity investors like to wear, and whatever you are, an assistant
or a VP, and wherever you live in the world, the on­ward march
of this sort of investment is liable to affect you at some point.

The biggest-ever private-equity
tran­saction in the media business was made last year when a consortium led
by Bain Capital Partners and Thomas H. Lee Partners announced a deal to
purchase Clear Channel Communications for $26.7 billion. The company boasts
1,150 radio stations and 42 TV stations in the U.S. The transaction is still
pending regulatory approval.

What exactly is this much
bandied about term, “private-equity investing”? It simply means that a wealthy
individual, or a group of firms, invest in a company—usually in the short
term—to make it thrive and then either sell it or float it publicly.
Treas­uries around the world often grant tax relief to these venture
capitalists, and the cost of borrowing at the moment is cheap, with banks
lending aggressively.

Private-equity analysts
argue that it’s about making business vigorous and fit for purpose. Cast your
mind, however, to Holy Trinity Anglican Church in Clapham, South London, on a
Sunday morning last year. Outside of the church stood a group of protestors and
a camel. The protestors were filling the sunshine with shouts about it being
easier for a camel to pass through the eye of a needle than for a rich man to
go to heaven. The object of their wrath was at worship, one Damon Buffini, whom
The Sunday Times described as “the
most important person you’ve never heard of.”

Worth an estimated $200
million, Buffini has offices in London, Paris, Stockholm, Frankfurt, Milan,
Madrid, New York and Tokyo. His private-equity firm, Permira, owns swathes of
businesses around the globe, and in recent years has snapped up ALL3MEDIA in
the U.K., SBS Broadcasting in the Netherlands and the German commercial
broadcasting group Pro­SiebenSat.1 Media.

Buffini and his 28
business partners own everything from retail fashion chains to an automobile association.
In fact, the union protesting outside the church saw them take over Britain’s
Automobile Association, the AA, in 2004 and slash the workforce from 10,000 to
6,000. Those on Buffini’s side argue that without his intervention, the company
might have stumbled, regardless. And, who’s to say that a non-private-equity
owner wouldn’t have taken the same action? Plenty of companies, after all, have
been downsized by shareholders.

BUILDING VALUE

Also, it’s not as if
private-equity firms move into broadcasting and simply unpack what’s there. In
the case of Apax Partners—which has in its portfolio companies such as
Central European Media Enterprises (CME), one of Europe’s leading operators of
TV stations, and NEP Broadcasting, a supplier of outsource media services to
live sports events—the company does bring something to the party.

Apax, like most
private-equity investors, has advisory boards in each of the sectors it invests
in. Its European and U.S. media panel includes Greg Dyke, the former head of
the BBC and now the chairman of HIT Entertainment. “We understand the industry,”
says Paul Fitzsimons, an Apax media specialist. “Twenty of our people make
media investments, and we support companies when we acquire them.”

Fitzsimons points to the
example of HIT Entertainment, the children’s production company (the owners of Bob
the Builder and Thomas &
Friends) that Apax bought in March 2005 for $939.8 million. “HIT
is a content business and content travels well internationally, especially
between the U.K., U.S. and Australia. We’re helping HIT to keep content cheap
and to provide it with a strong platform for growth. We try to make a
difference and bring in the best managers or work with the good ones in situ.
For example, HIT brought in Bruce Steinberg as CEO. He’s ex-Jetix and MTV, a
really experienced operator.”

Apax insists on having
local offices. “It’s common among private-equity groups,” says Fitzsimons, “but
we insist on it. This helps us with the regulatory angles, which are always
different in different countries.”

Apax is opening offices in
Mumbai and Hong Kong, but has not yet done any deals. “There was a lot of talk
about the emerging economies even ten years ago,” says Fitzsimons. “But they’re
only just coming onto our radar.”

Time Warner’s chairman and
CEO, Richard Parsons, maintains that these countries would be good to buy into
in the long term. He describes China as too regulated and heavily pirated, and
India as not yet possessing a strong enough retail infrastructure. “Rupert
Murdoch and others talk the emerging markets up, but despite their high
populations, they present a slow burn at the moment,” explains Parsons. “Europe
is good for international businesses because governments are stable and the
market is free.”

Indeed, Europe has seen a
75-percent rise in media deals by private-equity investors. Pricewaterhouse­Coopers’
media sector leader for corporate finance, Olivier Wolf, expects U.S. trade
buyers to increasingly focus on Asia. “Poland and Turkey are also exciting
markets,” he says.

With only 46 million TV
sets in Africa, it’s unlikely that private equity will turn its head to
broadcasters there for some time. But in Russia, the number of private-equity
deals, particularly in the media, is growing. “The market is quite robust,”
says Ekaterina Stolkin, the director of investor relations and corporate
communications at Delta Private Equity Partners, which is based in Moscow. “Many
Russians or Russian speakers with personal fortunes are returning to this
country in pursuit of economic opportunity. So we are benefiting from that
talent inflow, as many of them do start businesses or buy out and reshape
companies.”

ACROSS THE POND

North American media
companies have certainly not been immune to the scrutiny of private-equity
groups.

Univision Communications,
which operates Univision, the leading Spanish-­language network in the U.S.,
was recently bought by Broadcasting Media Partners Inc. (BMPI), an investor
group that includes Madison Dearborn Partners, Providence Equity Partners,
Texas Pacific Group, Thomas H. Lee Partners and Saban Capital Group for $36.25
per share in cash, or approximately $13.7 billion in cash and debt assumption.
The group beat out a rival bid by the Mexican Grupo Televisa, the world’s
largest producer of Spanish-language programming.

Earlier this year,
Alliance Atlantis Communications, a leading Canadian media company with
specialty channels and production businesses, reached a deal to be acquired by
the Canadian media giant CanWest Global Communications Corp. and Goldman Sachs
Capital Partners (GSCP) for C$2.3 billion ($1.96 billion). The deal is subject
to approval by the Canadian media authority CRTC, and when that happens,
Alliance Atlantis and CanWest’s television businesses will eventually be
combined.

A survey by the
international law firm Simmons & Simmons with Société Générale Corporate
& Investment Banking found that the key areas for significant growth in
investment for 2007 are China, Germany, and Central and Eastern Europe. The
Middle East ranked fourteenth, behind India, France, Italy, Scandinavia, the
U.S., Spain, Japan, Southeast Asia, Benelux and Australia.

In other words, companies
in every corner of the planet are ripe for private-equity takeover. Tiger
Aspect, an independent production and distribution company in the U.K., was
bought by IMG Media, which is owned by the private-equity firm Forstmann Little
& Co. Asking not to be named, one of Tiger Aspect’s producers comments, “Of
course, we all worried at first about the security of our jobs. Lots of people
in our game are freelancers, but we feared that private-equity owners might
strip all the assets and undo all our years of creative input into the firm.

“The opposite, however,
has been true. Our private-equity owner has money to invest, big money. So far,
we’ve had more opportunity for research, more publicity and people. Our owner
is showing every sign of being a collaborator and a friend.”

REGULATORY CONCERNS

While the actions of
private investors on the ground might be positive, with the added bonus of not
being beholden to shareholders, there are some fears about the financial cement
behind the big deals.

“We are concerned about
conflicts of interest between the private-equity fund, the investment bank and
their corporate prey,” Philip Jennings, the general secretary of the UNI Global
Union, told the Davos World Economic Forum in January. “Private equity is the
source of fees to investment banks; investment banks are the source of capital
to private equity. In other words, the same investment bank is advising the
company in question. It all looks rather incestuous.”

Jennings worries that
pension funds will be looted to pay for this, with a cost to us all. Regulating
private equity, however, poses several dilemmas for the world’s fiscal governance
bodies. Unlike listed companies, organizations owned by private equity don’t
have to file accounts and annual reports under the same strict financial laws.

Charlie McCreevy, the
European Union’s commissioner for internal market and services, believes,
however, that further regulation won’t work. “Any European-wide legislation
would simply result in the firms’ moving their capital to different
jurisdictions,” he warned in the Financial Times.

While believing that it’s
healthy for businesses not to be under the short-term pressure of the share
price, Jon Moulton, the managing partner of the investment house Alchemy
Partners, accepts that those who lose their jobs must feel pained to see
private-equity bosses flying in private jets. “Victims see this conspicuous
consumption, and that’s not great for the reputation of private-equity owners,”
Moulton told the press. “But on their side, they have the speed to make
decisions. If a chief executive fails his team, I can change him or her in five
minutes. That’s good for any business.”

Private-equity firms
raised more than $400 billion globally in 2006 and that could top $600 billion
this year. Some of that will doubtlessly pour into television and film
companies. “Most markets are buoyant at the moment,” says Simon Gluckstein, the
managing director for corporate advisory and private equity at Hawkpoint Partners.
“From football to educational books, there’s a wall of private-equity money out
there, and a lot of it is going to be spent in the next year or so.”

In the meantime, the deal
machine grinds on. Bertelsmann, Europe’s largest media company, is working with
Citigroup Private Equity and Morgan Stanley Principal Investments on a €1
billion ($1.3 billion) investment fund. Telefónica has finally confirmed its
intention to sell part, or all, of its 75-percent majority stake in Endemol,
which has created format hits such as Big Brother and Deal or No Deal. Telefónica has retained Lehman Brothers as its
financial advisor and has asked Merrill Lynch to offer “stapled financing” to
the purchaser.

A number of individuals,
and companies, have shown interest in the Dutch format powerhouse. John de Mol,
backed by Goldman Sachs, is reportedly set to bid for Endemol, which he helped
set up in 1994. And Mediaset said last month that it had signed a
confidentiality agreement with Telefónica over the negotiations. But at press
time, all bets are still open. One thing is certain, though, you can bet one or
more private-equity firms will be involved in the transaction.