Vivendi-Seagram Deal Sees Value in the Real Show Business Tinsel

The glitter of hard cash, not mere show business glamour, is luring Vivendi of France to offer $34 billion for Seagram Corp., the world’s largest music company and owner of Universal Studios.

Seagram may look anemic in reported profit--its 1999 results show a net loss on $15 billion in revenue. But the loss reflects debt taken on to acquire the music company Polygram. Seagram actually had cash flow of $1.5 billion by the reckoning of professional investors. And its film, music and theme park assets make it the kind of entertainment conglomerate investors like.

Most entertainment giants, including News Corp., Viacom and Time Warner, have outperformed the average stock in the last year. Walt Disney Co. lagged, but has been gaining lately on favorable comments from analysts.

Several factors are impressing investors: heavy merger action, strong cash flow and a favorable outlook.

A lot of merger and takeover action can lift stock prices without notice. In the last year alone, Viacom agreed to merge with CBS, and Time Warner agreed to merge with America Online. News Corp. has just announced that it will spin off its satellite operations in a new firm called Sky Global Networks, giving shareholders an additional stock for market action.

Smart investors recognize that entertainment companies have more cash flow than is reflected in reported profits. The figures they look at are called EBITA, or earnings before interest, taxes and amortization of premiums paid in acquisitions.

Thanks to complex accounting conventions, EBITA figures mean that companies have more money than is readily apparent. Sometimes much more. At Disney there’s a $4-billion difference between EBITA and net income; at Time Warner there’s a $5-billion difference.

The cash is used to invest in new movies, television shows and music videos--and that can be expensive. It costs $100 million to $200 million to make some of today’s blockbusters, such as “Mission: Impossible 2,” “Gladiator” and “Dinosaur.”

Yet the money such features bring in is enormous, too, thanks to a worldwide appetite for entertainment and numerous channels of distribution. “Gladiator,” a movie on which DreamWorks and Universal Studios are sharing costs, is projected to take in $170 million in U.S. theatrical release. And that will be only 20% of the film’s total revenue.

Foreign theater showings bring in as much as U.S. box office these days, and home video rentals bring in more than box office. Broadcast, cable and direct satellite television bring in additional revenue.

Thanks to mergers, entertainment giants today control many distribution channels as well as production, taking in cash from several outlets for the same product. And to keep product scarce and valuable, the studios are making fewer films--104 this year compared with 127 last year and 175 in 1998.

Also, “the studios can look forward to years and decades of revenue from a film because they continue to own the rights,” notes Arthur Rockwell, a Los Angeles-based independent industry analyst.

Future trends look favorable. Economic development and the growth of leisure time around the world are creating more demand for entertainment.

And technology is changing--to digital production of movies, music and TV shows, and Internet distribution. The shift is both promising and unpredictable for the big companies.

The Internet has already disturbed the recording industry, which has sued Napster, MP3.com and other companies for facilitating free computer downloading of music. The online upstarts are negotiating copyright settlements with the record producers.

“It’s an obvious copyright issue and will be settled legally,” says Morris Mark of Mark Partners, a New York investor of institutional and family funds.

But it remains to be seen whether Internet distribution will produce the high profits of compact discs. Also, Internet distribution will be hard to control--and control of channels was a main reason for entertainment mega-mergers, particularly the proposed AOL-Time Warner union, which was approved by shareholders last week.

The AOL vision is of people everywhere getting access to entertainment and information through a single Internet portal. But the vision may be an illusion.

“The Internet is not television,” says Jacob Riskin, cofounder of Static Online Inc., a start-up company in Los Angeles that makes software to enable game playing on the Internet.

Static is creating an information-sharing network in which individual home computers combine to expand their own Internet capacity, or bandwidth.

Riskin’s vision and that of his cofounder and partner, Brian Morrison, is of an interactive system creating its own linkages, not an easily controlled, passive distribution channel.

Static, which has 33 employees, is attracting venture capital--and investments from Riskin’s grandmother, Fay Wray, the actress who nestled in King Kong’s arm and made 81 other films.

Truth is, the Internet and digital production are going to transform the business. A glimpse of the future can be seen at the Los Angeles Film School, a 1-year-old institution set up to train directors, cinematographers and other behind-the-camera personnel. The school is using high-definition digital cameras.

The economies begin with $80 of tape, compared with $400 worth of film to make a motion picture, school director Carolyn Pfeiffer says.

Digital images also are easier to work with in the post-production fashioning of the picture. And unlike film, digital content can be beamed directly to theaters. The movie “Titan A.E.” was beamed from Los Angeles to Atlanta recently in an experiment. (The experiment worked but the movie flopped at the box office.)

Still, it will take time for new technology to displace the infrastructure of today’s movie business. For one thing, digital projectors cost $100,000 apiece and theater owners don’t want to pay for them.

So today’s entertainment giants have a favored position for at least the next five years. Entertainment analyst Jeffrey Logsdon, of the W.R. Hambrecht investment firm in San Francisco, sees growth in international markets benefiting Viacom, owner of MTV, and Disney, which is opening theme parks overseas as well as locally.

Vivendi already has extensive television channels in many countries of Europe. And now it is buying not only a studio to make new films and TV shows but Universal’s library of 3,000 films, including such blockbusters as “Jurassic Park.”

Louis B. Mayer, a onetime scrap metal dealer, noted when he formed MGM in the 1920s: “I’ve found a product that never wears out.” And the money never stops coming.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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Follow the Money

To really evaluate entertainment companies, look at their EBITA, an acronym for earnings before interest, taxes and amortization of intangible items, such as the premiums they have paid for acquisitions. Those figures are higher and more revealing of the state of the business than relatively low net income statistics. Statistics show revenue, net and EBITA for five leading firms, in billions:

Disney

‘99 EBITA: $5.6 billion

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News Corp.

‘99 EBITA: $1.9 billion

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Seagram

‘99 EBITA: $1.5 billion

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Time Warner

‘99 EBITA: $7.3 billion

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Viacom

‘99 EBITA: $2.1 billion

Sources: Company reports