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You Get What You Pay For - Broadcasting & Cable

You Get What You Pay For

With several cable networks in play, their value depends on who's kicking the tires
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At least three networks in the cable industry could change hands in the next few months: Hallmark Channel, Court TV and Fuse. And investors are speculating that AMC, IFC and WE may come onto the market as part of the planned leveraged buyout of Cablevision Systems.

If the deals get done, they raise the question for the rest of the industry: What's a cable network worth these days? The answer may not be obvious. All networks are not created equal.

As recently as 2002, channel slots on cable systems were valuable enough for some networks to get as much as $20 per subscriber just for the real estate on cable and DBS systems. But buyers are now paying much more attention to the quality of that real estate, favoring networks carried widely on basic tiers. Networks stuck on digital tiers that reach only 30%-40% of a system's total subscribers get discounted.

PROGRAMMING STRENGTH

Media players in many different sectors are suddenly interested in cable networks. Big programmers want to get bigger, figuring they can make money by leveraging strength in programming, distribution and ad sales. The best example: MTV parent Viacom's purchase of music-video–heavy BET a few years ago.

Small players want to get in the game, entranced by networks' ability to secure cheap programming, repeat it endlessly and still draw enough viewers to make money. That's why ex-Miramax CEO Harvey Weinstein is sniffing around for a network, namely Fuse, to add to his new company, Weinstein Bros.

The value is more than mere scarcity value. Broadcast networks are a far rarer beast. There are only 10 substantial broadcast operations (including Spanish-language channels and Pax TV). But when was the last time you heard of someone trying to start a new one? By contrast, B&C reporters probably twice a month encounter someone trying to start a cable network.

When strong properties come on the market, they tend to spark a bidding war. Vivendi Universal, which owned USA Network and Sci Fi Channel, attracted the likes of Liberty Media, Warner Music Group CEO Edgar Bronfman Jr. and eventual buyer NBC.

What a seller really wants is the proverbial “greater fool than I.” That's some player who is dazzled by the TV business and overpays—badly. The greater fool can be an entrepreneur like Paul Allen, who spent about $450 million since 2000 buying and running Tech TV and then sold it to Comcast for $300 million. Or it can be a big conglomerate, like Disney, whose CEO Michael Eisner overpaid so dramatically for ABC Family.

B&C reported recently that ABC Family is expected to generate just $37 million this year on revenue of more than $300 million. That leaves a profit margin of just 12%, awful for a cable network that has been in business as long as ABC Family, more than two decades. Other developed cable networks generate 30%-40% margins. In 2001, Disney paid $5.3 billion for what was then Fox Family Channel, roughly 66 times annual cash flow.

The biggest deal on the market right now is Hallmark Channel. Parent Crown Media is openly shopping it around. Built on the shell of religious network Odyssey, Hallmark Channel is one of the fastest-growing networks in cable. Controlling shareholder Hallmark Cards saw it as an integral piece of a worldwide TV empire, with the well established made-for-TV–movie unit feeding an array of international ventures and anchored by a U.S. network. The domestic network charges hard both in Nielsen ratings and in distribution; just two weeks ago, it broke the 70 million-subscriber mark.

But that's not what makes Hallmark worth looking at; the company's losses do. Securities filings show that the network and other domestic operations have run up $694.9 million in losses since 2000. (International operations lost another $700 million.)

One of Hallmark's problems is low, low license-fee revenue, averaging 2¢ per subscriber. Launch fees paid to cable and DBS aren't helping, averaging 4¢ per subscriber monthly. The terms of those contracts improve over the next few years.

Industry executives say Time Warner, Viacom, News Corp. and Comcast are all expected to kick Hallmark's tires. One dark horse: Walden Media, the family-friendly–media arm of billionaire Phillip Anschutz. One analyst believes Hallmark Channel might be worth as much as $1.6 billion.

RULING ON COURT TV

At Court TV, the partnership of Liberty Media and Time Warner will likely split up, with one of the parties buying out the other. Analysts believe the entire network is worth around $1.5 billion.

Fuse has drawn the interest of Harvey Weinstein, who has held talks with pal James Dolan, CEO of Cablevision Systems. Weinstein wants a cable platform on which to feed what he hopes will be a sizable movie library in a few years. But talks have slowed in recent weeks, in part because word of the deal leaked out.

Citigroup analyst Jason Bazinet values Fuse at just $140 million, or about $4 for each of its 38 million subscribers. That would be roughly the per-sub value of Newsworld International, the kernel of Al Gore cable channel Current, a public-affairs network aimed at young adults. NWI sold for $70 million.

It's never easy to tell what interested buyers would or should pay. In his latest attack on the competence of Time Warner executives, investor Carl Icahn cites the company's 2003 sale of its 50% stake in Comedy Central to Viacom for $1.2 billion as too low. I'm sure Time Warner CEO Dick Parsons disagrees (see related story, page 6).

The only clear thing is that a network is worth what you can persuade someone to pay for it. And the only way to find that out is to put it on the market.

E-mail comments to
jhiggins@reedbusiness.com

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