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January 22, 2007

Tribune Auction Fails

My colleague at StreetInsight.com, Chris Atayan, made a really good point that the failed Tribune (TRB) auction shows that private equity isn't a cure for everything. I think another conclusion that can be drawn from the TRB auction is that private market value does not always noticeably exceed public market value. TRB shows that the public valuation of a business lacking growth potential and facing long-term secular challenges might just be an accurate valuation. No one will pay a premium if the supply (a poorly positioned company) is greater than the demand (the potential buyers of the company). Simple economics at work. In this case, there are not enough financial or strategic buyers to generated excess demand and the resulting price premium....

I think this a cautionary tale for the broader market and media stocks. Media stocks typically perform well when merger-and-acquisition activity is high. Many media businesses produce significant cash flow and they are sexy businesses that attract the big egos of CEOs, wealthy entrepreneurs, and private equity firms. In 2005 and much of 2006, media multiples compressed to significant discounts to historical public and private valuations. Over the past six months, investor psychology toward media has improved and multiples have risen (with the notable exceptions of newspapers, radio, and TV). While multiples today are below prior peak valuations, they are with a band of normality. Private multiples for assets like cable networks, cable systems, and movie and TV production are still above current public valuations, in some cases significantly. However, I think the TRB auction should make investors cautious of analyst valuation models that rely on private multiples.

Don't take that as too bearish. After all, the Cablevision (CVC) situation where the board correctly rejected a low ball bid by the Dolan family shows that well-positioned media assets will still find plenty of buyers and set up the requirement for a significant premium if public shareholders are to be bought out.

Posted by Steve Birenberg at January 22, 2007 11:51 AM in TRB