Timing Is Everything

Michael Hedges May 17, 2005

UK media consolidation took another step forward this month as The Wireless Group (TWG) shareholders and Ulster TV (UTV) agree on a price. And the GWR-Capital Group merger – GCap Media - becomes official.

UTV’s bid for TWG, accepted at €144.5 million and announced on May 9th, adds UK national radio channel TalkSport and 17 local UK stations to its several radio stations in Ireland, the ITV franchise in Northern Ireland and a stake in Liverpool radio station Juice FM. Recently UTV was awarded a Belfast license. Last year TWG won an Edinburgh FM license. The press statement announcing the deal said UTV would benefit from €2.2 million in savings from combined operations.

Kelvin MacKenzie, TWG chairman and chief executive, looked far and wide for new financial partners. The one he found, venture capital company Veronis Suhler Stevenson, backed out. Timing is everything.

Liberalized media ownership rules in the UK were expected to draw together new partnerships and, hopefully, outside money. Unintended consequences, sometimes, look nothing like the expected end result.

Business sectors turn to consolidation for one reason: buying market share becomes less expensive than earning it. As any sector matures from the entrepreneurial growth stages to managerial stages, individual companies choose either to go gracefully or stumble around until the marketplace decides to turn out the lights. In the airline sector, SwissAir and Sabena come to mind. A telling difference between European and US media strategies is the speed in which Europeans choose to race through growth stages, preferring the calm of management – or accounting – stages. American media companies have preferred to linger in the growth stages at all cost, at least until recently.

Market share in commercial media is only marginally related to audiences. It’s about ad spending. As companies become progressively more managerial and less entrepreneurial, shareholder happiness is determined more by profit margin and dividends than market share. For financial investors there is only one happy day: exit day. Media buyers – the spenders – are sending confusing messages to media companies and their financial partners. Ad spending is up, generally, but not in traditional media, except in emerging powerhouse markets like Poland, Hungary and the Czech Republic. In February the second biggest radio ad spender in the UK, behind the Central Office for Information, was MG-Rover. Oops!

When asked about prospects for Western European media investment, one VC fund manager – who preferred anonymity – laughed. “I can throw $100 million into Mongolian mobile phones and come out in five years with $500 million.”

Rupert Murdoch’s News Corporation and John Malone’s Liberty Media, together holding a 51.2% stake in TWG, wanted to exit. TWG was a financial investment, not strategic. MacKenzie’s mistake, arguably, was seeking management buy-out salvation through venture capital money. This year, like last, venture capital is very picky.

Advent International invests in European media, radio stations and television content producers. Its holdings include Hungarian station Radio Danubius, purchased from GWR, Poland’s Radio ZET and Radio 538 in the Netherlands. All are market leaders. Last year Advent purchased Sportfive from RTL and Canal+ for €560 million. Advent is – among many - interested in Hungarian transmission services company Antenna Hungaria. Advent failed in its 2003 attempt to purchase the Bulgarian transmission services company, Bulgarian Telecommunications after mentioning it wanted to make 6000 employees redundant.

Its third central European investment fund closed in April at €330 million, targeting several sectors, including media. The previous two funds invested in 26 companies, half now unloaded into new investors or IPOs. A buy-out fund, targeting companies valued between $50 million and $500 million in North America and Europe, was also closed after subscriptions topped $3.3 billion.

Venture funds like those managed by Advent have plenty of cash. Though Advent has rarely made an exit from a media sector investment, when the right amount of money is on the table, they’re ready to talk. With Ron Lauder’s CME paying $900 million for Nova TV in the Czech Republic, venture capitalists are willing to wait.

Patience is not enduring, as venture capital company Hicks, Muse, Tate & Furst showed, dumping its stake in US media giant Clear Channel, announced May 13. Hicks, Muse was instrumental in building Clear Channel from a regional broadcaster to the biggest US radio operator and, among other interesting parts, the second largest outdoor advertising company in Europe. Earlier in the month Clear Channel announced it was spinning off its entertainment division, which promotes concerts and other events and owns several venues. An independent motocross promoter recently won a $90 million judgment against the company for tortuous interference with a contract. And CC declared a $4.7 billion loss for the fourth quarter 2004. Still many European media regulators and public broadcasters claim that Clear Channel is set on destroying the world.

When share prices gasp for air, companies grasp for “restructuring.” Hicks, Muse pushed for ditching the entertainment division but, according to an insider, “it wouldn’t happen quick enough.”

Restructuring typically follows “synergy” in the management stage lexicon. Synergies – that illusive cost saving, revenue boosting theory – rarely work. Smart money is bet – and that’s what investors do – on core businesses. With changing technologies and consumer habits, media companies are struggling to figure out exactly what that means.

Another giant US media company, Disney, is floating its ABC Radio division for possible sale. New CEO Bob Iger distanced himself from the ”rumors” but those close to the source said the asking price is 15 times cash flow. Strategic investors might pay that price, but not financial investors. VCs sell at that price and buy closer to 6. Key investors asked the last CEO to define Disney’s core business. He couldn’t. He’s gone.

GCap took its new form May 9th, creating the UK’s biggest commercial radio company, capturing about 40% of the UK’s radio ad spending and 35% of audience shares. Within hours – literally - the share price dropped 7% as the company advised traders that “April was bad and May isn’t looking better.” The consolidated market capitalization lost 25% since the merger was announced, from €1.05 billion to €775.5 million.

GCap owns 55 local analogue stations, one national channel and 93 digital stations. Last September after announcing the pending merger, the companies boldly suggested “taking on the BBC.” In the most recent RAJAR UK audience survey, the BBC widened its lead over the commercial radio sector. That, on top of unpredictable ad sales figures, add to the case for consolidation.

Probably not the last photo of Kelvin MacKenzie

“We brought these two companies together in the first place to help us better endure these cold blasts of air that come from time to time,” said chief executive Ralph Bernard to the Telegraph.

MacKenzie, former Sun editor, raging bull of UK media and always good copy for UK media columnists, will receive €9 million for his TWG shares, light considering his contribution. While he painfully irritated his competitors – notably agitating for the move to electronic measurement – he scored points for looking over the edge and asking “Why not?” And that’s never a popular question in the accounting department.