In Reel Time

2010.48 Thoughts on the media industry

Last weekend I was asked twice about what will happen with the media industry long term. I get asked this question often (or the variant…what are your thoughts on the media industry).

The question is so big and broad I always inhale and think for a minute before saying a word (it’s like being asked if there is a God or how we’ll fix social security).

So the short answer is that I don’t know.

But the long answer revolves around the best way to figure out any evolving industry. Start with what you know. Evolution is an iterative process and the end result isn’t pre-determined; rather it takes shape as each individual step or change is implemented (and chosen by a related party). Good ideas often repeat.

So, what I do know (including some clichés that we all know):

1. Story telling goes back before written history; it won’t disappear. It isn’t disappearing.

2. Quality content can’t be free; otherwise artists can’t afford to create much of it (and, to date, newer content has more value than does older content, in general).

3. People are social creatures; blockbusters and the mass market will continue to exist as people want to have common discussion topics.

4. Technology will continue to disrupt media. It always has (the printing press…).

5. A friend’s point: technology is actually adding less value over the past ten years than it did in the years leading up to 2000 (think the PC or Internet over arguably the biggest tech breakthrough of the past ten years – the iPad).

6. Artists need to be more multidimensional. As radio killed the video star and talkies cratered the career of the silent greats the distribution platforms have gotten more demanding and diverse. Lady Gaga is a performer; not a singer.

7. But, I don’t believe that all content should reach its audience over all platforms all of the time. If your audience isn’t watching television don’t spend (money and employee time) to get on television. Note the original argument only works well if you take mainstream media onto the newer avenues of portable devices or the Web and not vice versa (no Farmville movie planned in my knowledge).

8. Digital content is much harder to monetize; no one has perfected the model but I’ve met with some companies that are successfully monetizing (and not just pennies). Look at online gaming!

9. Anecdotal evidence only but the tech world seems to be hiring more out of the studios or other mainstream media companies than vice versa (except in tech systems and support areas).

10. People really do like fragmented distribution. It’s fun and convenient.

11. My kids love games. Kids love games. Women, who make up a lot of the monetizable online traffic right now increasingly, love games.

12. The MacBook Air is great. I like the iPad less (no flash). My Blackberry and Kindle are dear to my heart. Books and Kindles can co-exist.

13. The studio model will continue to be under attack from many Silicon Valley types. The core question is whether it will adapt quickly enough to survive by migrating to a – highly different – form (“protected and feudal microcosm that was only able to stay artificially alive as long as it did because the artists were a part of this small community and helped protect it longer than was wise” was what I heard today from a friend).

14. Iteration broken by big break throughs is the pattern.

15. The old definitions no longer apply: “technology” and “media” are imprecise.

16. Cisco has a tough job. After hours on the line with tech support making my home network “work” I can attest that seamless home networks are not a plug and play concept yet.

17. Some people are open to new ideas and others will resist disruptive change and related solutions (one of my promised clichés). Our brains aren’t wired to accept or process ideas that are vastly different than what we’ve accepted to be true in the past. Having been windows based for so long I’ve had a harder time working my daughter’s Mac than she has (at 9). I keep looking for an X in the right hand upper corner.

18. I haven’t been as excited by so many companies in ten years or more.

Are we in the early stages of this change? No; most industries continue to evolve but the media industry gets more press (it’s more fun!). And the related innovations have accelerated (with the music industry leading the charge).

Coming from the tech world I’ve lived the fast pace of such cycles; and the Internet has clearly injected that speed into media, which had been protected from certain competitive forces by its strong dominant niche position. Consumers have more choice now and the ramifications have been felt throughout all forms of media and created new ones. Some won’t survive. This resolution is far from pre-determined and I’m enjoying meeting with and advising companies that are at the cutting edge of such changes or creatively meeting them head on.

So, in conclusion, what are my thoughts on the media industry? The business model is shifting from protected windows to a more tech style model of proactively focusing on the customer/audience. But, actually, there is no true conclusion for this blog posting. Rather, the debate will continue.

Guy Hands is a chump; or, M&A 101

In 2007, British private equity firm Terra Firma Capital Partners – controlled by one Guy Hands – bought legendary British music company EMI Group for £4 billion ($6.3 billion).  Citigroup played a dual role in the deal, acting both as sell-side advisor and as provider of acquisition financing for Terra Firma.

The deal has been a disaster.  EMI still owes £3 billion in debt to Citigroup.  The company is groaning under the weight of that debt and the continuing carnage in the music industry, declining sales of music CD’s, widespread piracy and growing but less lucrative sales of digital music.  Citigroup would have already foreclosed on the company if Terra Firma had not put over £100 million of additional cash into the company to make required debt payments.

So now Terra Firma is suing Citigroup, claiming that Citi defrauded Terra Firma when Citi’s banker told Guy Hands that Cerberus was also bidding for EMI and Terra Firma would have to top Cerberus’ bid to win the property.  The trial started Monday in New York.

To which I reply, Guy Hands is a chump.

I don’t know the facts.  Citi could have told Terra Firma anything under the sun as far as I am concerned.  But it doesn’t matter.  Guy Hands and the rest of Terra Firma’s management have a fiduciary duty to their investors.  Even without reviewing the EMI purchase agreement, I am quite confident that there are no seller’s representations or warranties that Cerberus wanted to buy EMI.  Cerberus may have bid, or they may not have; but it doesn’t change the fact that Terra Firma should have done its diligence and concluded that they wanted to buy EMI at the price they paid.

David, you breathlessly ask, does that mean you lie to buyers about what is going on in the sales that you are managing for your clients?  No, it doesn’t mean that.  I play hard for my clients but I play fair.  I would not be stupid enough to answer a buyer’s question unless answering it serves my client.  If a bidder asks me what it takes to win, I will answer as authorized by my client.  If that same bidder asks me where competing bidder XYZ is coming in, I will likely tell that bidder to bid like they may not get another chance to acquire the property, because they might not.

And if a master of the universe like Guy Hands thinks that the company I am representing is worth more because a third party wants it, then I probably won’t go out of my way to disabuse him of that party’s interest.  But I won’t lie to him.

Finally, when you read about this trial in the papers, keep in mind that Citigroup provided over $4 billion in debt financing for the transaction.  Yes, they made two fees on the 2007 transaction – both the sell-side advisory fee and the financing fee.  But the profitability of the transaction is at risk because Citi did not successfully syndicate that debt and so stands to lose serious money if EMI can’t pay them back.  That doesn’t sound like the behavior of a bank that thought they were selling Guy Hands a pig in a poke, does it?

I know business is hardball, and Guy Hands is probably suing Citi to pressure them for concessions on the debt financing.  Maybe it will work.  But it’s bullshit.  Man up, Guy, admit (at least to yourself) that you overpaid for EMI, and don’t go looking for someone to blame for your potentially career-wrecking mistake.

Comments, anyone?

The Wall Street Journal has covered this saga well recently, here, here and here.  Subscription required.

2010.41 My last week: ITExpo; Digital Music Forum West: Caltech/MIT Enterprise Forum

Last week I dabbled in a few conferences and then committed to a panel. What did I learn?

At ITExpo in downtown my big takeaway was speed. Evolution. Regulation. The cloud. Opportunities continue to develop at an increasing pace. And the battle of net neutrality continues. Indeed, Hank Hultquist gave a riveting speech on the major issues and regulation that comprise net neutrality issues…from AT&T’s viewpoint.

Panels at the Digital Music Forum West (Roosevelt Hotel) sometimes got confrontational, with the forces for change arguing against those with a vested interest in staying the same. A few later panels were too politically correct and mutually supportive (for my taste). But Rick Alden, SkullCandy’s CEO provided insight and emphasis on branding, which distinguishes how his company operates. Visionary and charismatic (with freebees to hand out) he garnered a lot of questions and a crowd outside the main hall. Best quote? “The best ideas won’t come from sitting behind a desk”.

Later panels on Brands & Music and Touring explored further specific instances of how acts and brands can customize and define themselves. The real message? Define clearly who you are and your audience. Then set yourself apart creatively in that context. And don’t tie your brand to an artist; develop your own broader, richer personality.

The conference highlighted innovation (and spots that lack innovation) within the music industry. As we all know, the music industry was ahead in getting hit with digital change, making mistakes in their response and now in coming up with new ideas to survive and prosper.

The Caltech/MIT Enterprise Forum – From Past Time to Prime Time (on Social Networking) – was where I committed. Kevin DeBre of Stubbs Alderton & Markiles introduced. Mark Suster of GRP and Jay Samit of SVnetwork spoke. You want to hear the message straight? They both deliver that. Mark told us to look outside of walled gardens (if you rely only on Facebook they own your audience – keep your website) as both closed and open systems work. Jay advised entrepreneurs to get between big trends and pick up the crumbs (great imagery).

The panel: Jay, Sean Moriarty (Mayfield Fund currently), Jonathan Strauss (awe.sm) and Andy Wilson (Momentum Ventures), with Mark Suster moderating. The panel offered so many insights; I only have room to list a few. The social capital that you bring to business is critical today. Traditional analytics don’t work in social media…the space is so fragmented; do you want pages views or transactions? Brands need to get where the customers are and realize that their “important” doesn’t matter as much as does their customers’. Individuals now communicate across channels. Local is (still) the great unsolved problem. Women are over-served in the major success stories of the past few years: daily deals, flash sites and social games (take the women away and…). Tigertext effectively erases the record of your digital communications.

My conclusion on the week? I’d prefer not to go to conferences/panels everyday (fun though they can be).

Next up, Digital Hollywood starting October 18. I myself am on a panel on Wednesday, October 20.

2010.38 Carl Icahn Sues Lions Gate and Rechesky over Debt to Equity Deal: Why Good Advisors Matter When Contemplating M&A

The ten-day truce between Carl Icahn and Lions Gate management is very clearly over.

Icahn has let it be known that he doesn’t support the merger discussions between Lions Gate and MGM.

On July 20, Icahn also launched a new takeover offer for Lions Gate common stock at $6.50 per share, lower than his previous $7.00 offer. The offer is contingent on management not entering into a major transaction outside the normal course of business. The tender offer will expire August 25; Icahn will then nominate a slate of directors to replace Lions Gate’s current board. The election will occur at the company’s annual board meeting; most likely in October.

Lions Gate, in an effort to reduce debt, issued common shares at $6.20 per share to retire $100 million in convertible debt, the stock price represented a 2.8% premium to Monday’s share price. Icahn’s holdings were reduced to about 33.5% from 37.9%. The move doesn’t only dilute Icahn; it dilutes all existing shareholders. The 16.2 million new shares went to Mark Rachesky (MHR Fund Management), who already held almost 20% of the company’s common shares; his percentage is now 29%. The debt, due in 2026 and 2027, was acquired from Kornitzer Capital. Kornitzer also owns a small number of Lions Gate shares which he hasn’t tendered to Icahn.

Icahn must now acquire almost another 17% of shares to accomplish his takeover goal – assuming that management doesn’t convert more debt to equity.

This morning Icahn filed a law suit in New York state court against Lions Gate and Mark Rachesky seeking damages, an injunction rescinding the debt-to-equity swap and the prohibition of the defendants from voting their shares in a vote to elect directors. Icahn also filed a petition to the Supreme Court of British Columbia – a hearing to be held on Wednesday – regarding whether to grant orders against Lions Gate and Rachesky. Both sides are engaging in some general public mud slinging; the specifics of their accusations won’t be covered herein.

The battle continues. Lions Gate stock closed at $6.90 today, July 26.

The fight over Lions Gate reflects the importance of good advisors. Both sides are now exploring creative transactions and strategies to ensure that the outcome of this M&A battle is in their favor. Clearly the bankers and lawyers involved are working hard on behalf of their respective clients.

2010.35 Different M&A bidder types; as demonstrated in recent content library-related announcements: Miramax, Lions Gate, MGM, EMI and the Weinstein Company.

A slew of recent media-related deals and announcements has me wondering. Blogs have reported that Colony Capital is teaming up with Ronald Tutor to buy Miramax. While Colony is known as a real estate private equity fund, it started out buying distressed assets during the S&L crash. Richard Nanula, a Colony partner, was Disney’s CFO years ago so he probably grasps studio economics as well as anyone. Also as covered here before, Carl Icahn – known as a corporate raider – is making a run at Lions Gate. Lions Gate is reported to be in talks with MGM about a possible merger. MGM’s debt holders, in turn, reportedly rejected a $1.5 billion bid from Time Warner. EMI’s owner, private equity firm Terra Firma, invested an additional £105 million into EMI to avoid a default on the music company’s debt; if the bankers hadn’t gotten paid they could have taken over EMI. The Weinstein Company recently negotiated a restructuring agreement in which its lenders are relieving it of $450 million in debt and providing new cash in exchange for a $115 million payment from Ambac and the rights to 200 Weinstein movies, including the $233 million in related accounts receivable (Once Goldman and Assured Guaranty recoup their money the film titles will revert to Weinstein).

What do all of these (possible) transactions have in common? All of the related companies have content libraries; their valuations are functions of both legacy assets and in some cases efforts to create new content. Lenders are also having an impact on deal negotiations. Lions Gate and Weinstein’s lenders have been working with them to give them time to address their business issues, while EMI’s lenders (led by Citigroup) have been more aggressive in their willingness to potentially take over the company. In all cases, investors and debt holders are assigning value to libraries of content (music in the case of EMI, film content otherwise).

What they also have in common is that a wide range of buyers is demonstrating interest in these content library-based businesses (potentially including existing debt holders).

So, the using these transactions to illustrate the types of buyers common in M&A transactions and depending on circumstances:

Strategic buyers: Strategic buyers are essentially other corporations, most typically in the same or a related business. MGM and Lions Gate – should one buy the other – are examples.

Financial buyers: most typically private equity firms. They buy businesses that have enough stable cash flow to support the addition of debt (added to leverage their investment and, hopefully, their return). Their goal is to run the company better than the prior management team and sell a few years down the road at a profit.

Distressed investor: comes in when they think an asset is (generally grossly) underpriced. Defaults on debt, market turmoil (and an overreaction with respect to valuations which plunge as the panicked or illiquid dump related assets), bankruptcies and predictions of gloom are all signals. Colony Capital made its name buying distress bank and commercial real estate holdings.

Corporate raider: targets a company whose publically traded equity he believes is undervalued. The raider then pressures management to make certain changes in an effort to raise the share price. Carl Icahn made his name as a corporate raider. The goal is typically to turn a quick profit.

White knight: What Lions Gate is likely looking for. A white knight is a bidder who comes in and usurps a corporate raider – typically by working with management to come up with a higher or more favorable bid. Example? None thus far in any of the transactions discussed herein.

In the above related transactions existing debt holders are also sometimes expressing interest in taking over the company – either to liquidate the assets of the business or assume operations.

An investment banker can and will tailor potential buyer lists in advance of any solicitation to maximize long term benefits from any transaction to shareholders, employees, management teams and even the company’s customers.