By: George Garneau
$19 billion deal to acquire Capital Cities/ABC gives the
Hollywood entertainment giant network TV news, newspapers sp.
WARREN BUFFET HAS done it again: brought together two media giants in a breathtaking deal to create a more vast global information octopus with tentacles in several media.
The marriage, linking Walt Disney Co. and Capital Cities/ABC Inc., will form the nation’s biggest media company, a sprawling, $17-billion-a-year behemoth that is being hailed as a new paradigm for information businesses in an age of consolidating media.
Buffet ? at the outset the owner of 13% of Capital Cities/ABC stock worth $2 billion ? played the matchmaker for Walt Disney’s $19 billion acquisition of Cap Cities. The deal is expected to close early next year.
Not coincidentally, the transaction also enriches Buffet’s already vast fortune, estimated at nearly $12.8 billion, but still leaves the Omaha investor No. 2 on the nation’s rich list, behind Microsoft chairman Bill Gates and his $13.4 billion fortune.
The Disney deal dwarfs the merger in which Buffet helped finance Capital Cities Communications’ $3.5 billion acquisition of ABC in 1986. Two years after that deal, the three million shares Buffet received for putting up $517 million for the purchase had more than doubled in value to over $1 billion.
“I do not have blanket enthusiasm for all mergers,” Buffett said when the Disney agreement was announced on July 31.
“This deal makes more sense than any other I have seen except for the Cap Cities-ABC deal. It’s a merger of the No. 1 content company with the No. 1 distribution company,” he said, referring to Disney and Cap Cities, respectively.
While contemplated in general terms for years, the deal ? the nation’s second largest merger after Kolberg, Kravis, Roberts’ $25 billion acquisition of RJR Nabisco in 1988 ? came together in eight days after Buffett happened onto Disney chairman Michael Eisner at a media conference in Sun Valley, Idaho, and arranged a meeting with Cap Cities chairman Thomas Murphy.
News of the agreement, approved by both boards, sent Cap Cities stock price soaring more than $20 higher to $116 a share, and Disney stock up more than $1, to nearly $59 a share, by day’s end.
For Buffett, whose Omaha-based Berkshire Hathaway Inc. owns 20 million Cap Cities shares, the day increased his holdings by some $400 million.
The offer calls for Disney to pay $65 in cash and one share of Disney stock for every share of Cap Cities, with limited flexibility for Cap Cities shareholders to adjust the cash mix.
For Berkshire Hathaway, that translates into $1.3 billion in cash, plus Disney shares worth $1.2 billion.
Buffet said his only regret was having sold 10 million Cap Cities shares, at about $63 each, in a 1993 stock buyback, before the company’s 10-for-1 stock split later that year.
Disney, with annual revenues over $10 billion a year, is acquiring Cap Cities’ more than $6 billion in yearly revenue.
“I am totally optimistic that one and one will add up to four here,” Eisner said. Mainly Disney gets an outlet for its programming and a vehicle to promote its entertainment enterprises.
Besides picking up the nation’s top rated network, Disney gets 80% of the cable sports network ESPN, stakes in Arts & Entertainment and Lifetime channels, 20 radio stations, eight TV stations, a radio network, foreign TV investments, and publishing operations generating revenues over $1 billion a year ? about one-tenth of Cap Cities’ gross.
The publishing group includes seven dailies; 34 weeklies in four states; 37 shoppers and real estate publications; dozens of trade publications, among them the fashion trade newspaper Women’s Wear Daily and the financial newspaper Institutional Investor; plus the magazine W and the Chilton auto books.
With combined daily circulation of 750,000 daily, one million Sunday, the newspapers generate $530 million a year in revenues.
The dailies are led by the Kansas City Star, circulation 291,000 daily, 425,000 Sunday, which posted record revenues and operating income 16% higher last year.
Then there are the Fort Worth Star-Telegram, circulation 266,000 daily, 343,000 Sunday; Belleville (Ill.) News-Democrat, circulation 50,000 daily, 61,000 Sunday; Oakland Press of Pontiac, Mich., circulation 72,000 daily, 81,000 Sunday; 22,000-circulation Albany (Ore.) Democrat-Herald; 6,000-circulation Ashland, Ore., Daily Tidings; Wilkes-Barre, Pa., Times Leader, circulation 47,000 daily, 77,000 Sunday.
The newspaper and shopper group lifted revenues 8% last year to over $600 million and operating income surged 18% to set record profit margins.
The specialized publications last year posted $487 million in revenues, with the shoppers adding $86 million more.
Eisner said Disney planned no significant changes at the companies being acquired, because the purchase was not designed to increase efficiencies but to create avenues for growth.
Star-Telegram publisher Richard Connor said, “I don’t have any idea what this means. In Fort Worth, we’re doing business as usual.”
Even though Disney has no experience in newspapers, Smith Barney media analyst Steven Barlow expected Disney to hold onto Cap Cities papers, at least for the time being, on the reasoning that the publishing segment is a relatively small component of the sale and Disney is focused on larger issues.
“The papers are doing well and there is no particular reason to sell them,” he said.
“That is not to say that if someone went in to make an offer they wouldn’t listen.”
Barlow downplayed fears that Disney might compromise the integrity of news operations in a rush to promote its entertainment empire.
“News bureaus are pretty independent and need to be for the health of the network,” he said.
“They just can’t do it. There is a lot of self policing.”
Two days after disclosure of the Disney agreement, Westinghouse Electric Corp. announced its $5.4 billion offer to buy CBS Inc.
The deals dwarfed one of the biggest acquisitions in the newspaper business in years, Gannett Co.’s agreement two weeks earlier to acquire Multimedia Inc., including 11 dailies, in a deal valued at $1.7 billion.
Analysts said the open season on media properties is the result of several factors, among them: anticipation of sweeping deregulation in Congress, relatively cheap financing, and the rush by growing media oligopolies to secure programming and outlets in expectation of new technology and changing media consumption habits.
“The change in regulation is creating a window of opportunity,” Barlow said.
?( Walt Disney Co. chairman Michael Eisner waves to photographers at a press conference held to announce his company’s acquisition of Capital Cities/ABC) [Photo & Caption]