Bloomberg News

Time Warner Balks at Europe Media Prices as Deal Flow Slows

September 28, 2011

(Updates with share prices in 18th paragraph.)

Sept. 28 (Bloomberg) -- Time Warner Inc. and Sony Corp. both bid for All3Media Holdings Ltd., lured by surging earnings of the British TV producer. The sale was pulled this month after the bids failed to meet the seller’s target.

Permira Advisers Ltd., owner of London-based All3Media, was seeking about 750 million pounds ($1.2 billion), or 12 times operating earnings, said two people with knowledge of the negotiations who declined to be named as the talks were private.

The aborted sale is symptomatic of the mismatch this year between global media companies seeking expansion in Europe and sellers unwilling to cash out as prices drop. The number of announced or completed deals involving the region’s media companies declined 27 percent in the first half, Bloomberg data show. The worsening debt crisis and slump in equity markets have distorted valuations, said David Kershaw, chief executive officer of advertising firm M&C Saatchi.

“The expectations of the sellers haven’t caught up with where multiples of potential acquirers have fallen to,” Kershaw said in an interview. “That’s where people start taking things off the table.”

Price-to-earnings ratios among U.S. media companies on average fell 19 percent on a market-capitalization weighted basis in the last three months, according to Bloomberg data. The ratio for European media companies rose 2.2 percent in the same period, meaning investors need to pay more.

‘Skins’

The Bloomberg European Media 500 Index fell 1.8 percent to 64.73 at 4:15 p.m. in London. The media-company index declined 16 percent in past the 12 months.

Spokesmen at All3Media, which produced the “Skins” TV series for Viacom Inc.’s MTV channel and the “Are You Smarter Than A Fifth Grader” game show for News Corp.’s Fox network, and at Time Warner declined to comment on the talks. Sony didn’t return calls and e-mails seeking comment.

Permira may look at selling All3Media again once the economy improves, said one of the people with knowledge of the situation. While there isn’t a timeframe for approaching buyers, the company may reconsider a sale next year, the person said.

The sale of EMI Group Ltd., the London-based music label taken over by Citigroup Inc. this year after failing to meet its debt requirements, is dragging out. Bids for the company, which also owns recordings from the Beatles and Queen, were initially expected to wrap up this month and have now been pushed to October, said two people with knowledge of the matter.

Odeon Sale

Sony, Bertelsmann’s BMG Rights Management GmbH, billionaire Len Blavatnik, Universal Music Group and private-equity investor Alec Gores are interested in the record label of Katy Perry and Coldplay, two people with knowledge of the situation said in July. EMI declined to comment.

Investor Guy Hands’s Terra Firma Capital Partners Ltd. firm cancelled a sale of U.K. cinema chain Odeon & UCI Cinemas Group Ltd. last quarter after getting offers from theater companies and private-equity firms below the asking price, said two people with knowledge of the bids. They declined to be identified because the matter is not public. Terra Firma and Odeon declined to comment.

There were 60 acquisitions for media companies announced or completed in the Eastern and Western European markets in the first six months, according to Bloomberg data. That compares with 82 deals in the same period a year earlier.

Earlier this year, Discovery Communications Inc. was among suitors of ProSiebenSat.1 Media AG’s Nordic assets, which the German broadcaster decided to keep at the end. The owner of cable television’s Animal Planet and Discovery Channel is looking for purchases, especially in Eastern Europe, but hasn’t found very much that is for sale, CEO David Zaslav said.

Hoarding Cash

“We’re a little surprised given that the economy has been soft,” Zaslav said in an interview last week. “We haven’t been able to find the right assets at the right price.”

Discovery has about $1.1 billion in cash and cash equivalents. That’s up from $466 million at the end of last year and $623 million in 2009.

Especially U.S. companies “have cash and they want to invest,” said Barry Maloney, a partner at venture capital firm Balderton Capital. “But if they can’t meet the expectations, the deals aren’t going to be done.”

Corporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, taxes, depreciation and amortization ratio is down to 2.6 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This year’s earnings will increase 18 percent to a record $99.36 a share and break $100 next year, according to the data.

Time Warner fell 1.1 percent to $31.37 at 11:30 a.m. in New York Stock Exchange composite trading. The shares declined 1.4 percent this year before today. Discovery dropped 1.6 percent to $41.13 in Nasdaq Stock Market trading.

Social Media

About $3.5 trillion had been erased from global equity values last week, driving the MSCI All-Country World Index into a bear market and price-earnings ratios down to the lowest levels since March 2009.

While most fast-growing digital Internet companies such as Google Inc. and Facebook Inc. are based in the U.S., Europe still makes up a large portion of the world’s largest media companies. According to a Forbes ranking from 2010, media firms from Europe, including Germany’s Bertelsmann AG and Italy’s Mediaset SpA, made up eight of the top 20 media companies, making the region second only to the U.S.

Spotify

There also some bright spots in the European digital space that will draw interest from potential acquirers such as London- based music-streaming service Spotify Ltd., which is privately held and expanded into the U.S. market this year, said Balderton Capital’s Maloney, who helps manage the fund’s $1.9 billion in committed venture capital, including funding for German social games developer Wooga GmbH and U.K. online loan-provider Wonga.

While international media companies are interested in expanding in Europe to get access to the local know-how and the world’s region with the highest gross domestic product in 2010, the lack of suitable acquisition targets may prompt investors to spend their money elsewhere.

The U.K. and other European markets “remain very attractive for lots of reasons, albeit economic growth isn’t one of them,” said Stuart Sparkes, director of the media corporate finance advisory at Deloitte LLP in London. “If you want access to growth, you inevitably end up going to the developing world in terms of India and China and most excitingly of all, Brazil.”

--With assistance from Anne-Sylvaine Chassany in London and Whitney Kisling in New York. Editors: Simon Thiel, Kenneth Wong.

To contact the reporter on this story: Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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