Contrary to popular belief, there’s more to private equity than leverage and cost cutting… at least that’s what the panelists on the private equity panel at the Media and Money Conference tried to emphasize. While those things are admittedly part of the equation, private equity can play a role in bringing about needed change at target firms.
– Advantages to being private: James Atwood, managing director, The Carlyle Group: “If a company needs to undergo fundamental change, being private is helpful.” Empirically, it’s hard to change without something major. “We’re not visionaries, but there are certain things we do very well. We’re very good at catalyzing change. There’s as much investment in platforms as there is in cutting costs.” He added that governance is superior at private firms, as decisions can be made much quicker. Julie Richardson of Providence Equity Partners cited Edgar Bronfman’s actions at Warner Music Group (NYSE: WMG) as an example of what can be done more easily when private.
– Newspapers: Jonathan Doherty of KPMG: “Newspapers are high margin businesses … but the margins are in decline. … The question for the private equity people is what would private equity do to transform the business model.” Will private equity take newspapers into riskier areas, like newspapers? Atwood, whose firm considered a bid for Tribune, noted that “price solves a lot in our industry.” At a cheaper price, Tribune might have made a good buy, since newspaper companies will survive, perhaps looking very different than they now. Doherty: Newspapers are particularly susceptible to user-gen content… It’s almost comparable to piracy in other media. “Unlike other media, newspapers don’t have a big back catalog of easily monetizable content.”
– What’s next: Herbert Granath, CEO, Media & Entertainment Holdings (a publicly traded blank-check company focusing on media): “I would have loved to have had a private equity backer in the early days of cable. As long as we were small, it was okay, but as soon as it got bigger it became a problem.” Feels like he might be talking about Sirius (NSDQ: SIRI) or XM, (NSDQ: XMSR) but then he turns: “Now I’m going in the other direction.” Firm is now looking for private companies that would benefit by being public; “There are still a number of content companies out there, mostly in Europe, that are family-owned business.” We are not investors, we are operators.” Richardson: “One of the things that’s worked well for us is traditional media in emerging economies.” Examples include a pay TV deal in Turkey and an Indian wireless firm. Firm also invested in Univision, which is a demographic play on the growing Hispanic market. Granath agreed that traditional media is a good investment in emerging economies. Still, he acknowledged that traditional media is traditional media, even in Ukraine, so the firm is also readying for the internet in these markets.
– Credit crunch: Atwood “It’s hard to do LBOs without the ‘L’, but it will come back.” His prediction is first-half of 2008. When it comes back, deals will have lower valuations. “Fundamentally, media is a wonderful area for PE, since the cash flows are so strong”. Granath noted that the current market actually gives his public firm an advantage, since they’re not always going to be outbid by firms with access to plenty of debt. Richardson then pointed out that these last few years weren’t ‘normal’ for the industry. When things return, there won’t be a blockbuster deal reported every Monday in the Wall Street Journal. An audience member asked whether predictions for a return in ’08 is based on anything more than hope. Richardson admitted that that was part of it. Once current inventory clears, there’s plenty of committed capital that has to go somewhere.