One question that almost never gets asked in the midst of big deals like the tug-of-war among Time Inc., Paramount Communications and Warner Communications is why media companies sell at prices that even the world's biggest and finest companies don't command.
It's true. Time is offering $70 a share for Warner, a price that is 17 times Warner's cash flow--a professional investor's way of evaluating a business.
But by that measure, Warner is more valuable than IBM or AT&T or Apple Computer or even the airline companies, which sell these days at takeover-inflated prices. And Paramount wants to buy Time at $175 a share, or 19 times cash flow, which makes the magazine and cable company more valuable still.
The point is, such prices don't add up according to standard investment thinking. When an investment is made at 17 or 19 times cash flow, it is the equivalent of investing money for a 6% return. At a time U.S. government bonds pay more than 8% annually, the media companies look to be severely overpriced.
Yet, some of the world's smartest investors make big money in media companies. Herbert J. Siegel, for example, chairman and president of Chris-Craft Industries, bought into Warner Communications in 1984, and Chris-Craft could rake in $1.5 billion in the Time buyout. Both the company and Siegel stand to earn a very handsome profit on a five-year holding.
But Siegel's bonanza is a lesser case. The long-term gains in network television offer clearer lessons for investors. You'll recall that several years ago renowned business people bought into the three television networks--Warren Buffett buying a big stake in Capital Cities/ABC, Laurence Tisch moving into CBS and Chairman John F. Welch's General Electric Corp. taking over RCA and thus the NBC network.
The intervening years have not been happy for network TV, with cable and VCRs and other distractions taking away their audience. Some on Wall Street have even suggested that the smart money was mistaken.
Time, Not Money
Some mistake. CBS, which Tisch bought in 1986 at $127 a share, closed Tuesday at more than $198 a share--and the network is still last in the ratings. GE doesn't break out figures, but ratings champ NBC almost certainly has increased profits. And most spectacularly, Warren Buffett, chairman of the Omaha-based investment company Berkshire Hathaway Inc., has earned just about $1 billion, counting dividends, in Cap Cities/ABC, a stock he bought at $172.50 a share in 1986. The stock closed Tuesday at $480 a share.
The point is not the money, it's the time. Buffett is a permanent investor. To prove it, he has given voting control of his stock to Cap Cities/ABC Chairman Thomas Murphy, so company managers don't have to worry about his selling out for a quick profit. (He's rumored to have been turned down when he offered a similar deal to Time.) "We feel the long-term economic prospects for these businesses--and thus for ourselves as owners--are enhanced by these arrangements," Buffett has said. He bought into Washington Post Co. in 1973 and hopes never to sell. His investment there of less than $10 million is now worth close to $500 million.
The moral is that you don't need millions to invest, just patience.
Yes but, why media? Because media companies can frequently have a dramatic increase in earning power, Buffett has written. The networks, for instance, may well increase earning power in the next two years as restrictions are relaxed on their ownership of programming and they negotiate more favorable terms in their deals with local stations.
Even now, says analyst Jeffrey Logsdon of Crowell Weedon, a Los Angeles investment company, the networks' ability to attract huge audiences is being appreciated once again. That's why ad sales for the 1989-90 season are very strong and network stocks are on the rise--never having fallen that far. In other words, says a Hollywood wit, when the business is good, it's exquisite, and when it's not so good, it's not so bad.
Which brings us to the real point about the Time-Warner-Paramount battle: The outcome really doesn't matter. If a Delaware Court decides July 11 that Time must honor the Paramount offer, the result will be a new bidding contest, driving up the stocks of Time and Warner. If the court upholds Time's right to buy Warner, then the merged company will be the world's largest media outfit, presenting investors with all sorts of possibilities.
And surprises. "Wait till Friday and Warner will look cheap," says a Hollywood veteran. Why? Because Warner's movie "Batman" opens Friday and the advance word is that it will gross $40 million the first weekend and set a record. Why do media companies command premium prices? Because there's no business like show business.