VS&A Communications Transactions Report/Third Annual Edition/July 1998

The total value of publicly reported financial transactions in the media and communications industry exceeded $100 billion for the second straight year in 1997, according to the new Veronis, Suhler & Associates Communications Industry Transactions Report (CIT).

The CIT Report, produced annually by the investment banking firm Veronis, Suhler, is a widely followed scorecard of all reported financial transactions in the media industry, including mergers & acquisitions, public stock and debt offerings, and redemptions. Highlights of the latest CIT include the following:

The '97 total, while only the second annual total above $100 billion, was actually a marked decline from 1996, when a number of mega-mergers (ABC-Disney, US West-Continental Cablevision, Time-Warner-Turner), drove the transactional total to an unprecedented $139.2 billion.

Although 1997 saw only two transactions valued above $3 billion (see below), a record number of acquisitions were valued at $1 billion or higher -- 24 billion-dollar transactions in all, compared with 19 in 1996, 13 in 1995 and only 9 in 1993 and '94 combined. The 1997 total of billion-dollar transactions represented an eightfold increase over 1993 (see chart). Transactions of this size are now commonplace across the communications industry.

Newspaper publishing, radio broadcasting, cable system operators and cable networks each recorded transaction totals in excess of $10 billion in 1997.

The revenue multiple for media mergers & acquisitions averaged 4.5 in 1996-97, compared with 3.0 in 1993-95. The average operating cashflow multiple for M&A activity rose to 14.2 in 1996-97 from 11.8 in 1993-95. The upward trend in trading multiples is a strong vital sign for the industry's robust financial health.

Revenue multiples showed particularly strong growth in the electronic media, which have higher operating cash flow margins than print media. The average revenue multiple in television broadcasting rose from 2.4 in 1993 to 6.5 in 1997; in radio broadcasting, from 3.7 in 1993 to 5.3 in 1997; and in subscription video services, from 2.2 in 1993 to 4.3 in 1997.

Mergers and acquisitions comprised $77.7 billion, or 67%, of last year's transactions total; initial public offerings, joint ventures and redemptions made up the balance.

Although the two dozen billion-dollar-plus transactions accounted for 56% of all media merger & acquisition dollars in 1997, M&A activity was by no means limited to the largest players. Of the 456 publicly reporting media companies covered in Veronis, Suhler's most recent Communications Industry Report published last November, 215 were involved in at least one financial transaction in 1997 -- as were an average of 236 per year from 1993--1997.

Whereas television, film and cable transactions have led the field in the past several years, some of the largest transactions in 1997 involved specialty media, led by U.S. West Communication Group's purchase of US West Media Group's Yellow Pages operations for $4.75 billion.

Two other specialty media transactions surpassed $2 billion – Clear Channel Communications' acquisition of Universal Outdoor Holdings for $2.2 billion and VNU's purchase of the telephone directory division of ITT. It was the first time that any telephone directory properties -- let alone two of them -- or any outdoor properties, emerged among the transactional leaders, reflecting the increased value such specialized franchises have gained in recent years.

Radio broadcasting generated substantial transaction flow last year, supporting three of the top six deals. The largest was Westinghouse Corp's acquisition of American Radio Systems for $2.6 billion, followed by Chancellor Media's purchase of Evergreen Media for $2.6 billion. There was also the acquisition of SFX Broadcasting by the Dallas-based financial firm Hicks, Muse, Tate & Furst for $2.1 billion. The latter was one of a number of major acquisitions in 1997 by financial players , who have shown an increasing appetite for media properties. The sheer number of radio transactions rose to 181 (from 160 in 1996), while the aggregate value reached a record high of $17.8 billion, up from $15.0 billion in 1996 and only $2.1 billion in 1995.

Subscription video services -- principally cable -- was the other segment with the greatest transaction value in 1997. Largest was the acquisition of USA Network by Silver King (HSN) from Seagram for $4.1 billion (this following Seagram's purchase of 50% of the network from Viacom a month earlier for $1.7 billion), seconded by News Corp's takeover of International Family for $1.9 billion. Earlier in 1997 was Westinghouse Corp's acquisition of Gaylord Entertainment's TNN/CMT for $1.6 billion.

Although no cable network transaction last year equaled the $7.2 billion merger of Turner Broadcasting and Time Warner in 1996, the number of acquisitions reaching $1 billion or higher made 1997 a stronger year in overall value. Subscription video services was given an additional boost from direct broadcast satellite – the six transactions in this segment were valued at $1.3 billion in 1997 -- compared to $309 million in satellite deals for the prior four years combined.

Television broadcasting, which overwhelmed all segment activity in 1996 to reach a transaction total of $31.6 billion, generated only $7.3 billion in 1997, even though the number of transactions remained virtually unchanged from the prior two years.

Among the 24 industry transactions reaching $1 billion or higher, here is the breakdown by segment:

Book publishing, consumer magazines, professional and educational information, consumer Internet, business information services, entertainment, advertising agencies, and business-to-business communications firms represented under 5% of last year's financings, according to Veronis, Suhler.

The CIT report also tracks media industry transactional data over a five-year period. A few trends for the entire 1993-97 period include the following:

Over 88% of media industry transactions had a reported value. The CIT thus provides a substantially complete portrayal of transactions activity for the media industry as a whole.

The average dollar amount of transactions of known value was $127 million.

The aggregate value of publicly reported media mergers & acquisitions over the five-year period was $308.3 billion, two-thirds of the total value of all transactions industrywide.

The aggregate value of transactions for 1996-1997 alone was $254.8 billion, accounting for 56% of the five-year total of $451.9 billion from 1993-97.

What has driven the surge of media transactions over the last several years? John Suhler, President and Founding Partner of VS&A, cites a confluence of factors: "Healthy revenues in virtually all segments, improved earnings, continued growth in the economy, low interest rates, and a still-strong equities market all produced the optimal macroeconomic conditions for vigorous activity in 1996-97," he explained.

Mr. Suhler noted the conditions particularly favorable to media properties -- a strong advertising market, increased demand for information, and the widening acceptance and commercialization of the Internet. "We've especially noted the increase in both consumer and institutional spending on entertainment and information, which has yielded dividends for many media segments," Mr. Suhler said.

"It's not surprising that communications has grown faster than the economy as a whole --total spending across all industry segments increased at a compound annual rate of over 7% in the last five years -- supporting strong values across the industry, which in turn has attracted more financial investors than ever. As we ourselves report in the CIT, 'Purchasers were in a position to pay higher prices, prices were bid up and transactions multiples rose.'"

Mr. Suhler added that the industry continues to feel the effect of the 1996 Telecom Act, which has stimulated consolidation of radio and television stations, while also motivating cable system operators to cluster their holdings to improve operating efficiency.

One group of buyers that continues to step up to the table for media properties is financial players -- investment banks and buyout funds riding the consolidation wave by means of add-on acquisitions to a platform core operating company. Six of the most notable transactions in 1997 were made by financial firms, as opposed to media companies seeking strategic acquisitions.

Hicks, Muse, Tate & Furst was involved in two of the biggest – the aforementioned acquisition of SFX Broadcasting for $2.1 billion, as well as the purchase of LIN Television for $1.7 billion. CIN Ventures Managers (CINVEN) obtained IPC Magazines from Reed Elsevier for $1.4 billion; H&R Block sold the remaining 80 percent of CompuServe to Welsh, Carson, Anderson & Stowe for $1.2 billion; Apollo Partners bought Telemundo Group for $700 million; the Carlyle Group purchased a number of cable systems from SBC Communications for $637 million. Willis Stein & Partners acquired Interval International for $200 million.

Additionally,