August 6, 2008

What Recession? Cable TV Is Booming

Chuck and Jim Dolan, the father-and-son team that controls Cablevision Systems (CVC), may finally be willing to part with their television-programming business, a move that Wall Street has long felt would make the most sense. The Aug. 5 announcement by the Long Island [N.Y.]-based cable operator that it will explore spinning off or selling businesses to help enhance its share price will almost certainly mean that its collection of cable channels, including AMC of Mad Men fame, will be shopped around. The company also owns three New York pro sports teams, Madison Square Garden, and Radio City Music Hall. Cablevision shares jumped 8.8% to finish at 28 on the news.

The timing of a possible sale of Cablevision's Rainbow Media unit comes as large media companies are taking a close look at rolling up a shrinking pool of cable channels, among the hottest properties in the business today. For traditional media, which has been weathering its share of gloomy prospects lately, cable programming represents a big upside, and this is creating opportunities for both media buyers and sellers. "The cable networks are growing at the highest rate among traditional media segments and therefore are deserving of a premium valuation," says a none-too-disinterested Aryeh Bourkoff, a media banker with UBS Investment Bank (UBS). He was an advisor on the sale of the Sundance Channel to Rainbow in May.

While much of cable TV is controlled by Viacom (VIA) through its MTV Networks and BET, by Time Warner (TWX) through its Turner holdings, and by NBC Universal (GE) through its Bravo, USA Network, and Sci-Fi channels, properties are still out there for the taking, or could presumably be acquired for the right price. The Hallmark Channel and the TV Guide Channel are being shopped. While its management denies it is for sale, the newly public Scripps Networks Interactive (SNI), with its popular Television Food Network and Home and Garden Network, is attracting interest. Barry Diller's Home Shopping Network will soon be split from parent IAC/InterActive (IACI) into its own separate company, fueling speculation it could be for sale. And majority owner John Malone is busy restructuring Discovery Communications Holding, the owner of 12 English-language channels, which could make it a buyer -- or even a seller, given Malone's storied unpredictability.

Just hours after Cablevision made its announcement, News Corp. Chairman Rupert Murdoch said he might be interested in taking a look at what the Dolans wanted for some of the cable channels they could put on the market. "It depends on what the price is," he said. During the same conference call, company president Peter Chernin said News Corp's cable channels, which include Fox News and FX, were seeing strong growth in ad sales.

Even Cable Ads Are Up The flow of new deals among Old Media companies has slowed to a crawl this year, but cable outlets are the exception. Rainbow paid nearly $500 million for Sundance. NBC Universal, in partnership with two private equity firms, plopped down $3.5 billion in July for Landmark Communications' The Weather Channel. While that was less than The Weather Channel's overly confident asking price of $5 billion, the bid still represented a hefty multiple of 13 times earnings, according to a source familiar with the deal. Most big public media companies trade these days at a multiple of about six times earnings. NBCU also spent $925 million last October for Oxygen Media.

Clearly, cable is benefiting from some changes in the media business. First, the flow of advertising revenue out of broadcast television and into cable channels continues to accelerate. Cable TV's ad revenues grew 8% this year through May to $7.7 billion, according to ad tracking service TNS Media Intelligence. During that time, ad spending on broadcast networks fell 2% to $10.8 billion.

At the same time, buyers can appreciate that cable has two revenue streams, particularly when a vulnerable economy is squeezing advertisers. The other half of revenues comes from the affiliate fees that cable and satellite companies pay programmers to air their channels. The surest way to boost your affiliate fees is to have scale when you are negotiating. Would it help Discovery if it also owned all of the Scripps properties the next time it sat down to strike new distribution deals? You bet.

Moreover, cable is all about niche. Specific programming targets specific audiences. Advertisers are increasingly wary of the buckshot approach of selling goods on broadcast TV because they're never certain who their message is reaching. And until traditional media companies can figure out how to make the profitable transition to the Internet, it may be that cable TV offers marketers their most heartening opportunity. Consider that one of the first big deals for Jeff Bewkes, Time Warner's new CEO, was to buy the European social networking site Bebo for $850 million in cash, an acquisition that his investors roundly criticized. Today, Time Warner is rumored to be among those most keenly interested in bringing Scripps into its cable fold.