What May Be in View for Media Business in ’02

For the media and entertainment business, 2002 could test the survival of the fittest. An advertising retrenchment squeezed margins and forced layoffs this year. Continued hardship could push some weakened companies onto the sales block next year.

And Washington’s promise of further deregulation of media ownership will only quicken the pace of consolidation, making for a frenzy of deal-making in which the strong become stronger and the weak disappear.

Likely targets? Perhaps the biggest surprise on analysts’ list of entertainment companies most likely to be sold in 2002 is Walt Disney Co.

Sound outrageous? Perhaps. But with the help of industry analysts and executives, we have predicted some of the biggest deals in the past and made numerous close calls.

Comcast Corp.’s purchase of AT&T; Corp.’s broadband unit was forecast in this column a year ago. A hostile takeover of Time Warner by America Online was our big bet the year before, just weeks before a merger was announced.

Of course, we’ve also made some bad bets. We incorrectly predicted last year that General Electric Co. would spin off its NBC network, Discovery Communications Inc. would be sold, AOL Time Warner Inc. would spin off its cable business and News Corp. would win DirecTV.

Some of those predictions could still come true. Several executives at DirecTV say they are less optimistic than they were several months ago that the company’s proposed merger with EchoStar Communications Corp. will be approved by federal regulators. News Corp. is lobbying hard to block it, hoping for another shot at acquiring the biggest U.S. satellite-TV service from its parent General Motors Corp.

And Discovery has come close to a merger agreement with NBC at least twice--with the most recent talks breaking off last summer.

Here are some even bolder predictions:

2 Viacom Execs to Split

Viacom Inc. Chairman Sumner Redstone has been telegraphing for months that Chief Operating Officer Mel Karmazin is not a shoo-in to succeed him. Though loved by Wall Street, Karmazin oversold investors on an advertising rebound this year. Viacom executives say his harsh management style is hurting morale at divisions such as MTV. It is also wearing on Redstone, according to people close to the 78-year-old mogul.

The two executives barely speak to each other, and sources say their conflicting management styles could force a divorce. Redstone opposed Karmazin’s recent decision to move UPN out from under Paramount Television execs who started the network. When Karmazin refused to use Viacom funds for a lavish Christmas party for top executives and their spouses, Redstone sprang for the $200,000 affair at Sotheby’s himself, eager to reward the troops after a tough year.

Executives close to Redstone, Viacom’s controlling shareholder, say if Karmazin begins to feel like a lame duck, he will agree to leave before his contract comes up for renewal in 2003. Some say he’ll take Viacom’s radio group as a payoff.

Comcast’s Target: Disney

Analysts agree that few companies are big enough to take on a behemoth such as Disney, the owner of ABC and ESPN broadcast networks, cartoon characters, theme parks and a movie studio. Even after a 27% plunge in its stock this year--a bigger fall than any rival media giant--Disney’s market value is about $43 billion.

But that could be within striking distance for a new AT&T; Comcast Corp., which, if the deal is approved, would be the nation’s largest cable operator.

Analysts are betting that federal rules that prevent one company from owning TV stations and cable systems in the same city will disappear, permitting AT&T; Comcast to acquire a major broadcaster such as Disney.

AT&T; and Comcast will spend much of the year in Washington, seeking approval for their $52-billion merger. And the new company has a series of complicated transactions to negotiate to reduce its debt, including a sale of AT&T;’s partnership with AOL Time Warner.

But investment bankers say that Comcast President Brian Roberts has his sights on programming interests and that Disney, with its mounting debt and plummeting cash flow, could be too weak to fight, especially if tourism and TV advertising, two key revenue generators for the firm, remain soft.

A DreamWorks Merger

Metro-Goldwyn-Mayer Inc. Chief Executive Alex Yemenidjian has been insisting for more than a year that his company will make a huge comeback by acquiring cable channels, broadcast networks and TV stations.

But the studio chief has softened his stance lately, acknowledging that MGM might be more valuable as part of a bigger entity as the media sector continues to consolidate.

Critics say Yemenidjian is having buyer’s remorse for spending $825 million in February for a stake in--but no path to gain ulti mate control of--Rainbow Media’s four national cable channels. Sources say Disney also made inquiries about buying MGM before the Sept. 11 terrorist attacks.

Though Disney and News Corp. both could use MGM’s film library to shore up their own weaknesses, some analysts prefer another combination. DreamWorks SKG could merge with MGM, giving the upstart studio a public stock to use for additional acquisitions and providing MGM owner Kirk Kerkorian the self-described “dream team” of Jeffrey Katzenberg, Steven Spielberg and David Geffen.

The deal would make DreamWorks a serious entertainment contender, enabling it to make a run at ailing music giant EMI.

Sony Loses Ground

When News Corp. lost the bidding for DirecTV this fall, one big question inside the company was what quarry Chairman Rupert Murdoch would target next. One favorite among insiders was Sony Corp.’s entertainment group, which includes a world-class music operation, something News Corp. lacks.

But after coming up empty in the yearlong negotiations with General Motors, Murdoch has been reluctant to enter into discussions with Sony, which has proven to be a reluctant seller in talks with several suitors, including NBC.

Yet Sony is suffering a severe downturn in its core electronics business, which has strained its expansion into entertainment.

Looking for liquidity, Sony has sold off a number of promising assets in the last year, including its fast-growing stake in Spanish-language broadcaster Telemundo and an interest in Game Show Network. It shuttered the bulk of its TV operation shortly after hiring a new management team to run the group.

Analysts say Sony acts like a seller rather than a buyer. Yet management in Tokyo seems intent on hanging on. As a result, the bet is that Sony’s entertainment assets will continue to deteriorate as the company loses ground amid the sector’s ongoing consolidation.