Brother Can You Spare a TV Network?
By Aaron L. Task
Senior Writer
9/7/99 9:04 PM ET
Thank you, Mel and Sumner.
Today's CBS (CBS:NYSE)-Viacom (VIA.B:NYSE) deal provided reporters something to write (home) about on an otherwise soporific post-holiday session.
CBS rose 3.6% and Viacom added 5.8% on word of the combination, which totaled about $35 billion, but has an "enterprise value" of $80 billion, according to the companies. (Whatta you say we split the difference? Literally: $22.5 billion for me and $22.5 billion for my readers. With that kinda cake, I won't even begrudge my critics' their share.)
For insight on the deal, I turned to Barry Hyman, senior market analyst at Ehrenkrantz King Nussbaum, who also serves as the firm's media analyst. Hyman mentioned the possibility of a CBS-Viacom merger when we spoke last week, providing me with a (missed) opportunity cost write-off for this year's taxes.
Anyway, CBS-Viacom is the first "major deal" since the Federal Communications Commission liberalized its rulings about station ownership in early August, said Hyman, whose firm has no underwriting relationship with either company. (The change allows one company to own two TV stations in the same market. The FCC also eased regulations governing ownership of both radio and TV stations in the same market.)
"The FCC ruling change has opened up a new game in terms of ownership," the analyst said. "Radio ownership has become looser over time and that may occur in TV, as well, in terms of station ownership. It may eventually reach the network level but that's way off in the future."
As for now, Hyman recommends investors hold onto their Viacom shares. He lauded the deal for providing CBS with Viacom's "global distribution assets," such as MTV and Nickelodeon, as well as Paramount Studios. "At the same time, Viacom gets an instant Internet strategy which it did not have and is key to any media stock going forward," he said. Production cost savings and other "synergies" through the integration of stations is further evidence this is a "very strategic, smart" deal, creating a "duopoly that's going to be the standard soon," he said.
The lone "surprise" of the deal was Viacom's Sumner Redstone being named chairman and CEO, while current CBS Chief Executive Mel Karmazin takes the posts of president and COO. Sumner's control of Viacom's "A" shares may have pushed Karmazin to take the No. 2 slot in order to get the deal done, Hyman mused. But the analyst does not think Karmazin, 56, is going anywhere.
"I don't think you're looking at Mel retiring," Hyman said. "He sees the next stage of the company and is willing to forego the chairmanship with the understanding he'll eventually be running this show in the future."
As for the investment possibilities, the analyst foresees more M&A activity on the "TV side," involving smaller companies such as Young Broadcasting (YBTVA:Nasdaq) and Granite Broadcasting (GBTVK:Nasdaq).
(Hyman's firm, Ehrenkrantz King Nussbaum, has long recommended Young Broadcasting but has done no underwriting for the company, nor Granite.)
"I think [today's announcement] is going to create a situation where a potential deal is much more likely," he said. "These are not huge companies" that will fight to remain independent if a better deal comes along.
"You're going to see relationships formed, if they haven't already," he continued, noting reports of talks between General Electric (GE:NYSE) unit NBC and Paxson Communications (PAX:AMEX). Finally, USA Networks (USAI:Nasdaq) "could be a major acquirer or they could be acquired," he added.
Then again, nobody ever said USA Networks' Barry Diller was dumb -- or easy to figure out.
M&A Mania
Obscured by the excitement over CBS-Viacom was one of the bolder pieces of market commentary we've seen in a coon's age (however long that is).
In "Tech Targets," PaineWebber's investment policy team listed 25 tech companies it views as potential takeover targets. The piece was published yesterday -- when I was young but off from work, like just about everyone else.
The report listed several factors generating potential buyouts, including: the Internet; consolidation in reaction to regulatory and technological changes; the desire to use "highly valued shares" as currency; foreign firms eager to acquire U.S. "expertise"; and prospects for FASB to disallow pooling of accounting as of Jan. 1, 2001 (when the "Y2K + 1" problem hits).
The piece noted that 84 tech names involved in deals of over $1 billion from 1989 to 1999 outperformed the S&P 500 by 44% in the period beginning a month before a deal was announced (because of rumors thereof) and running through completion of the transaction.
We said the report was "bold" because it perhaps will add to the rumor fervor -- although few of the stocks had outsized gains today and many of those that did were upgraded by Lehman Brothers. Moreover, the report contains none of the standard "investors should not invest based solely on takeover prospects" disclaimers that accompany most M&A discussions. PaineWebber didn't come right out and say "buy these stocks because of their takeover potential." But not saying otherwise provides the kind of non-denial denial worthy of Presidential merit.
Ed Kerschner, head of PaineWebber's investment policy department, was unavailable for comment today.
OK, so you're clamoring for the names. Here be they:
PaineWebber Picks Techs Ripe for Pickin'
Industry Group "Tech Targets" PaineWebber Recommendation
Telecommunications Intermedia Communications (ICIX:Nasdaq), GST Telecommunications (GSTX:Nasdaq), ICG Communications (ICGX:Nasdaq); Concentric Network (CNCX:Nasdaq); Williams' (WMB:NYSE) communications unit; Sprint (FON:NYSE); Sprint PCS (PCS:NYSE) ICIX: buy or attractive
GSTX: buy or attractive
ICGX: buy or attractive
CNCX: n.a.
WMB: n.a.
FON: buy or attractive
PCS: buy or attractive
Wireless Nextel Communication (NXTL:Nasdaq); VoiceStream Wireless (VSTR:Nasdaq); Powertel (PTEL:Nasdaq) NXTL: buy or attractive
VSTR: buy or attractive
PTEL: n.a.
Cable Washington Post Co.'s (WPO:NYSE) cable assets; Pegasus Communications (PGTV:Nasdaq) WPO: n.a.
PGTV: buy or attractive*
Computer Hardware Micron Electronics (MUEI:Nasdaq); Storage Technology (STK:NYSE) MUEI: buy or attractive
STK: buy or attractive
Semiconductors Actel (ACTL:Nasdaq); Burr Brown (BBRC:Nasdaq); Micrel (MCRL:Nasdaq) ACTL: n.a.
BBRC: n.a.
MCRL: n.a.
Internet RealNetworks (RNWK:Nasdaq); Juno Online (JWEB:Nasdaq); SportsLine USA (SPLN:Nasdaq); MarketWatch.com (MKTW:Nasdaq) RNWK: n.a.
JWEB: buy or attractive*
SPLN: buy or attractive*
MKTW: n.a.
Information Tech Services Cambridge Technology Partners (CATP:Nasdaq); BrightStar Information Technology (BTSR:Nasdaq); Cotelligent (CGZ:NYSE); IMRglobal (IMRS:Nasdaq) CATP: n.a.
BTSR: n.a.
CGZ: n.a.
IMRS: n.a.
*Investment banking relationship. Source: PaineWebber.
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Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at taskmaster@thestreet.com .
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