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What Consolidation?

July 2003


What Consolidation?

Brett Pulley, 07.07.03

The FCC rule change was supposed to create a wave of media consolidation. That might not happen.

The convulsions at the New York Times Co. (nyse: NYT - news people ) cost the two top editors their jobs. A notable survivor in the shake-up was the fellow running the corporation, publisher Arthur Ochs Sulzberger Jr. He's pretty well protected by his family's close control of the corporation: It has 70% of the board seats despite having only 17% of the equity. 

Family dominance of media companies is anything but rare. Such outfits as Viacom (nyse: VIA.B - news people ), News Corp(nyse: NWS - news people ). and Dow Jones (nyse: DJ - news people ) are in varying degrees insulated from hostile takeovers, just as the New York Times Co. is. That wall of insulation could mean that the media industry won't see the kind of rapid consolidation widely expected from the recent federal liberalization of ownership rules. 

Last month the Federal Communications Commission voted to let broadcasters own more local TV stations across the country and watered down rules limiting cross-ownership of both newspapers and TV stations in one market. It also did not reinstate a rule that prohibits cable companies from owning TV stations. 

Wall Street responded by bidding up some media stocks. But the merger-and-acquisition brokers are likely to be disappointed with the level of activity. There is, besides the presence of insiders who don't want to sell out, another source of friction on the road to consolidation: The most likely buyers are already heavily leveraged. AOL Time Warner (nyse: AOL - news people ), for example, generates barely enough operating income to pay interest on its $30 billion in debt, (see table)Comcast (nasdaq: CMCSA - news -people ), which could now buy TV stations, also has barely enough income to cover debt interest. 

Among those who reign over big media: Sumner Redstone, who holds just 11% of Viacom's total equity but 69% of its voting control; Brian Roberts, whose family has 1% of Comcast's equity but 33% of the votes; the Sulzbergers at the New York Times Co.; and the Bancrofts, with 35% of equity and 67% of the vote at Dow Jones & Co., publisher of the Wall Street Journal"There are quite a number of media companies that have managed to have their cake and eat it, too," says investment banker Ken Marlin of Marlin & Associates. "It does allow people to behave with a certain degree of impunity." 

The practice dates back a couple of decades to when media firms, self-styled custodians of a sacred public trust, sold shareholders on the notion that they had to protect themselves against hostile suitors who might interfere with their independence. The FCC ruling will spur a few deals here and there for local TV outlets or newspapers, letting companies knit together more assets in a given region. But big media families, controlling both programming and distribution, will remain as powerful as ever. If the Times ever fires Sulzberger there's a good chance he will be replaced with a relative.

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