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September 11, 2006

A Deal Coming Between Telecom Italia and News Corp?

Today’s news that Telecom Italia plans to sell its mobile phone unit and focus on media investments reminds me that despite multiple compression and secular challenges, the media business is still viewed as sexy and seems to have an unblemished ability to draw wealthy investors. According to the Wall Street Journal Chairman Marco Tronchetti Provera has been “noting that media companies trade at significantly higher multiples than do telecom companies.” Having suffered through all the difficulties and poor performance for many media companies, I can only say that it is good to know it is worse elsewhere.

The Telecom Italia news also reminded me that my friend Cody Willard wrote on his Real Money blog last week that he was going long News Corporation (NWS, NWS.a). Rumors have been swirling for a few weeks that Telecom Italia and NWS were close to a media based deal although details are sketchy. News controls Sky Italia, the largest satellite TV company in Italy. I have been under the impression that Rupert may want to monetize Sky Italia so maybe the move to sell mobile will provide the liquidity to structure a deal.

I think Cody will be happy with his NWS long. I do not own the stock myself but I’d put it at the top of a list for potential media investments. Cody’s buy of NWS seems to be based largely on the MySpace acquisition. In addition to the growth boost, I think that he believes multiple expansion could come the way of NWS given its ownership of the very successful internet site.

I think some multiple expansion is possible but the real reason to own NWS is....

because its traditional media businesses are driving growth. Similar to Disney (DIS), NWS has most of its businesses hitting growth targets simultaneously as its TV stations, cable networks, movie studio, TV network, and international operations are all prospering at present. Media investors have shown a willingness to bid up companies that are driving growth in their core businesses. Consequently, I view MySpace as an incremental positive in the NWS story not the primary mover.

Lastly, with two teenage kids I am quite familiar with the MySpace phenomenon. And in the near-term, I have little doubt that NWS can keep the momentum rolling. However, I do share Cody’s caution when he states that NWS “will have to be careful not to alienate the millions of users who make up its base as the site becomes clearly more commercial.” Social networking is far different than dial-up internet but AOL was once viewed as the place to be for teens but the same teens that are driving MySpace could change their mind if MySpace loses its cool factor as more and more companies use the site for marketing and NWS Corp puts the almighty dollar at the center of its strategy.

Posted by Steve Birenberg at September 11, 2006 03:48 PM in NWS