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During the first private equity discussion of the day, panelists were patting themselves on the back, talking up the transformative powers of PE firms, while predicting a quick turnaround in credit conditions. By contrast, during his keynote interview at the Media and Money Conference, media industry veteran turned private equity player Norman Pearlstine expressed far more concern about the industry and the overall economy. Perhaps reflecting the skepticism of a longtime journalist, The Carlyle Group senior advisor zeroed in on the real challenges facing traditional media and those investing in it:
Business cycle: “Within Carlyle there’s a sentiment that the covenant-lite deals were unsustainable.” Terms will get more sensible and realistic. So far, there’s been no real decline in prices. “I have to ask myself whether there isn’t an earnings bubble in certain industries. … Will the subprime losses start to spread beyond the financial sector?… My own guess is that we could be facing that.” Eventually, all of these foreclosures will start effecting other businesses, which is likely to bring deal prices down. Strategics do have an advantage in this market, but it’s still challenging: “If you look at what Barry Diller did, I don’t know if that creates opportunities for anyone… besides John Malone.”
Media deals: Carlyle is a disciplined company. “We looked at ClearChannel (NYSE: CCU) and Univision” but the prices didn’t make sense. Got outbid on Thomson (NYSE: TOC) Learnings. “My own sense is that some of the opportunities may be greater overseas. On Tribune, we did put in a bid for the TV assets.” Would his former firm Time Inc. make an attractive PE asset? “I think whether you’re a strategic buyer or a financial buyer, whenever an asset comes on the market that has predictable cash flow and good market share, you would want to take a look at it… (but) I have no reason to think that Time Inc. is on the market. I can’t see why there’s any great pressure for him (Bewkes) to sell it.”
Time Warner (NYSE: TWX) going forward: Bewkes and Parsons have been working together, so there haven’t been many moves that he hasn’t been involved with. “The decision to go with Jeff was a decision to go with continuity.” Still, every CEO has a different style.
Newspapers vs. magazines: Pearlstine is more bearish on newspapers than magazines. “Essentially, a newspaper is designed to deliver timely news and be supported by classified ads.” There’s no way newspapers can compete with the internet on timeliness or in the delivery of classifieds, thus the margins will have to come down. Magazines are better in this regard, but don’t have the same ability to migrate to the internet. Their staffs aren’t made for turning around fast content. Magazines can’t use commodity content (wire stories), and it’s harder for a magazine to translate its ads onto the internet.
Attracting young people: You have to look at how people are using the internet. The success of TMZ.com has been a real wakeup call for Time Warner. Need to look at Facebook. Even the website of Major League Baseball is more interesting than most newspapers’ sites.