Rumors In A Time Of Free Cash Flow

Michael Hedges March 15, 2012 Follow on Twitter

The great financial crisis has caused considerable pain in the media sector. And, too, there’s been the hysteria as new media takes more and more attention space. Buy the rumor, sell the facts, say the traders.

The techie tribe went absolutely Gaga on the rumor that Time Warner could be about to acquire techie social media news aggregator portal Mashable. Reuters blogger Felix Salamon reported (March 12), from the South By Southwest techie fest in Austin, that the CNN division would soon announce the US$200 million or more investment. In true new media form Mashable was created by 19 year old Pete Cashmore in 2005 in a bedroom at his mother’s house. The site now has monthly traffic in excess of 20 million. As the week progressed no real announcement has been forthcoming.

In the year or so since AOL bought the gossipy news portal Huffington Post for US$315 million and ceded control of content to Ariana Huffington, big media companies have started taking a harder look at available opportunities in low-cost, high-potential Web businesses that can partner – or lead – existing brands. Cashmore reportedly turned down an offer from AOL in 2010. Time Warner merged with AOL as the century began and divorced in less than ten years, corporate cultures being in constant clash.

“Major news organizations trying to sprinkle themselves with tech-startup stardust often end up looking like a dad borrowing their teenage kid's iPod for an office party,” opined The Telegraph’s thinker-in-chief Tom Chivers (March 13), who noted that News Corporation still owns MySpace.

Time Warner is the world’s largest media conglomerate and second in the entertainment sector to the Walt Disney Company. Its business is film production, television production and operations and publishing. The company’s 2011 revenue was just a shade under US$29 billion. It owns HBO. The Turner Broadcasting subsidiary owns CNN, CNN International, Cartoon Network, TNT, TCM and more.

While acquisitions – or rumors thereof – of a largely US-based social media portal attracts attention of the techie tribe, Time Warner CEO Jeff Bewkes has far bigger plans, much of it international expansion, as he mentioned on announcing 2011 financial results. A week earlier (February 7) Time Warner announced RTL Group CEO Gerhard Zeiler would join the company as president of Turner Broadcasting International. A week later (February 24) CNN International applied for a terrestrial TV license in Finland.

“The international subscriber base for HBO increased 25 per cent and this year the company said the premium network would roll out to several more countries,” reported Screen Digest (February 16). “Overall international revenues for the Turner and HBO networks were $3bn, with operating profit of $650m. Last year saw the launch of HBO Go in eight international markets and the company said it would complete the rollout in Central and Eastern Europe and Latin America this year.”

More interesting speculation (aka rumors) about Time Warner’s expansion plans were posited by the Wall Street Journal (WSJ) (March 12) involving Central European Media Enterprises (CME), in which Time Warner holds 39% equity. A year from now, March 2013, CME needs to cover US$130 million in debt to creditors. And, notes the WSJ, it probably doesn’t have the free cash. As of December 31 CME’s net debt was US$1.2 billion.

CME operates television channels in the Czech Republic, Romania, Croatia, Slovakia, Slovenia and Bulgaria as well as a slew of web portals. Recent years have been tough in these advertising markets and keeping shareholders and stock analysts happy has been a challenge. Also in March next year the shareholder agreement allowing CME principal Ronald Lauder to vote the Time Warner shares expires, giving Jeff Bewkes the option to buy all outstanding shares.

“Buying CME wouldn't strain Time Warner's balance sheet,” offered the WSJ.  “Assuming a premium for the shares that Time Warner doesn't already own, and the assumption of CME debt, the total takeover cost could be less than $2 billion. That compares with a consensus estimate for $3.7 billion in free cash flow at Time Warner in 2013.”

That would make CME about ten times more interesting than Mashable.

See also in ftm Knowledge

Big Media Deals - Consolidators, Moguls, Private Equity and End Games

Big media deals are exciting to watch. The recent biggest deals - Dow Jones, ProSiebenSat, the Tribune Company and Emap - show the effects of the business cycle meeting dreams, strategies and private equity. This ftm Knowledge file details these four BIG MEDIA DEALS and their effects. 83 pages PDF (March 2008)

Order here