Big 4 Media's Options: Sell, Merge, Shut Down, or Reinvent Assets

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Includes: CBS, DIS, GE, NWS
by: Diane Mermigas

Big media will never be the same again, but some of the survivors are becoming more apparent. For the conglomerates ensconced in broadcast television, some industry analysts are casting their financial bets: Disney/ABC (NYSE:DIS) wins, CBS loses, NBCU (NYSE:GE) gets flipped and News Corp./Fox (NASDAQ:NWS) is up for grabs.

In the 18 months or more it takes for an economic recovery (or nearly two TV seasons), the Big 4 network parent companies could sell, merge, shut down or reinvent enough assets to dramatically reshape the face of media. Complex debt and structural issues, coupled with declining advertising, are compounded by permanent change in industry economics and competition. The broadcast networks now count scores of new online video services and social video sites like YouTube along with DVRs and cable networks as rivals.

All will impact the networks' waning upfront ritual, where the difference between advertiser spending pullback and broadcasters' inventory management will be the economy and dramatic shifts in the flow of money to ad-supported media. The relative dribs and drabs in digital ad dollars and continuing cost cuts are not offsetting the overall losses.

Still, broadcast television's quandary is a small part of a bigger problem. Secular change at their corporate parents also will shape the fate of broadcast networks and other traditional media that are suffering transformational angst.

Consider the fate of NBC Universal. General Electric could sell its 80% interest in NBCU to calm bondholders and shareholders over the $525 billion in GE Capital debt overshadowed by $797 billion in industrial assets. GE has slipped below $6 a share, giving it the same low $71 billion market cap as Google (NASDAQ:GOOG). Widespread market devaluation notwithstanding, it will become even more challenging to separate cyclical and permanent financial change at any of the broadcast network companies.

NBCU's 2009 operating profit is expected to decline 15% to about $2.6 billion on an 11% decline in revenues to $15 billion, according to Sterne Agee. Its film studio, cable networks and theme parks would be a reasonable fit for prospective cash-rich buyers, such as Time Warner (NYSE:TWX) or Liberty Media (LCAPA). But no one is sure what to do about broadcast networks and owned TV stations, whose advertising and retransmission fees-supported business model is taxed by legacy infrastructure, labor costs and dependable audience metrics. That will become more acute as 2009 revenues continue to fall 18% for local stations and 10% for the Big 4 broadcast networks (to under $13 billion), according to revised Bernstein estimates.

The broadcast networks' retrans fees appear to be a de facto segue to becoming general entertainment cable networks with dual revenue streams. TV stations are consolidating same market resources; it's a first step to a major shakeout. Broadcast television is recalibrating its connections and commerce. No one knows how much improvement to expect in a rebound from tough times, since the status quo no longer is an option.

How bad is bad? News Corp.'s television earnings are expected to decline 85%--more than for filmed entertainment or even newspapers--as the company's overall fiscal 2009 earnings fall more than 30% to $3.6 billion. Fox Interactive Media revenues will slip right alongside the Fox TV Network and TV stations (where revenues will drop 34%).

Strapped by nearly $7 billion in debt, CBS has absolutely nowhere to run and hide. Barclays Capital reports that slashing its dividend still leaves CBS nearly $1 billion short of funds to meet pending loan deadlines amid "significant earnings weakness, free cash flow deterioration, higher leverage, ratings slippage, new debt issuance and new loan hedging." CBS 2009 earnings are expected to fall 30% to $1.8 billion on a nearly 8% decline in television and advertising-dependent revenues of $13 billion.

CBS chairman and controlling shareholder Sumner Redstone and his holding company, National Amusements, have their own complicated debt issues that--worst case--could prompt sales at National Amusements, CBS and Viacom (NYSE:VIA), its sister company.

The only potential safe haven among network TV corporate owners is Disney, which draws its strengths even in grim times from an archive of branded evergreen content and niche franchises that translate well into the digital universe. Little wonder, then, that Disney is keeping its own counsel about online video aggregation, commercial placement of its content, its careful release to Apple's (NASDAQ:AAPL) iTunes and the creation of an online TV and movie subscription service (a la Netflix).

Disney is probably the best-case scenario and the only self-sustaining model among the four broadcast networks and their parent companies--and even its numbers are horrible.

Revised fiscal 2009 estimates from Credit Suisse analyst Spencer Wang call Disney's broadcasting division the company's "most secularly challenged," with a 73% decline in earnings (more than at its studio or theme parks) on a 10% decline in revenues. The ABC-TV Network is expected to lose $54 million on a 12% decline in revenues, compared with year-earlier earnings of $384 million. The once-coveted ABC-owned TV stations will see earnings decline 49% on an 18% drop in revenues. Disney's media group overall will likely see a 16% decline in earnings to $4 billion, since even its popular cable networks will see earnings drop 4%. Disney's fiscal 2009 earnings will fall 24% to $6.4 billion on nearly $35 billion in revenues.

In a new report, Wang concludes that Disney's core businesses are structurally sound; it can rebound from the most profound cyclical advertiser and consumer spending pullback due to its strategy for producing "hit" content. Still, as with all of its peers, high-content production and acquisition costs are Disney's Achilles' heel. A 7% year-over-year increase in content costs, driven by ESPN sports rights fees and other original programming, exceeded a mere 2% rise in overall cable revenues. Disney has similarly high fixed costs at its ABC TV Network, TV stations and theme parks.

While Wang and other analysts are taking a cautious, measured approach to financial estimates for 2010 and beyond, executives at the broadcast network parent companies are loath to provide even quarterly guidance. There is no script to follow to secure future fortunes.

Disclosure: Diane Mermigas does not directly own media and Internet stocks.