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In Focus: Media
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December 18, 2000: 12:54 p.m. ET
Analyst Linda Bannister discusses the challenges facing media companies
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NEW YORK (CNNfn) - Linda Bannister, senior media analyst, Banc of America Capital Management, likes Time Warner* because "from a strategic standpoint the merger makes a lot of sense. It's combining strong content with a whole new means of distributing that content."
The growth rate for the combined company, says Bannister, "will be the higher than other mega entertainment companies, like Disney and Viacom."
Further commentary from Bannister follows.
In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.
CNNfn: Time Warner (TWX: Research, Estimates) is cutting its EBITDA (earnings before interest, taxes and depreciation) growth estimates for full-year 2000 to 11 percent from the 12 percent-to-13 percent seen previously. Did that surprise you?
Bannister: It didn't come as a major surprise. The film "Little Nicky" didn't do as well as expected and there were some issues with music sales, where comparisons were difficult because last year's fourth quarter was strong.
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If you look at Time Warner-AOL's valuation vs. other entertainment peers, it's more attractive because it's trading at a significant discount to growth rate on a cash flow basis.
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Linda Bannister
senior media analyst
Banc of America Capital Management |
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The fact that advertising was below expectations was not surprising -- advertising is slowing because the economy is slowing. Last year we had the inflow of dot.com money into advertising so again that made comparisons difficult in the 4th quarter.
CNNfn: The company says it is comfortable with expectations for annual growth in advertising revenue in the mid-teens. Do agree with that?
Bannister: It's difficult to say. People are more interested in looking out to 2001 and asking whether the Time Warner-AOL merger will work, what integration risks exist and if the company will be able to create the synergies they said they could create.
The company believes cash flow growth could be around 30 percent in the first year of the merger. We think that, long term, the company is going to grow cash flow in the 18 percent-to-20 percent range, but in the first year it will be higher depending on when the merger closes -- at this point it's still waiting for FCC approval.
If you look at Time Warner-AOL's valuation vs. other entertainment peers, it's more attractive because it's trading at a significant discount to growth rate on a cash flow basis.
CNNfn: What about other core businesses, like publishing and cable systems to continue? How are they doing?
Bannister: Cable is really what a lot of people are focused on. They're wondering what open access means. The "take" rates for broadband are higher -- that means people sign up for high-speed access over cable at a faster rate than with open access. The larger the number of high speed internet providers marketing to people, the better it is for penetration of high speed data over cable.
Time Warner is the only company that has mandated open access by the FTC. Other companies don't need to offer open access. What people will be watching is what happens to penetration rates with open access, and we believe it will be beneficial to Time Warner.
CNNfn: Time Warner is increasing its ownership of the Road Runner broadband Internet service, Road Runner's exclusivity agreement with Time Warner Cable was originally set to expire at the end of 2001. Explain the reasoning behind this.
Bannister: To approve the merger, the FTC mandated that Time Warner have open access, so they had to restructure the agreement with Road Runner for the merger to go through. Secondly, the move also satisfies regulatory requirements for AT&T (T: Research, Estimates), so it was something they had to do.
CNNfn: The restructuring will result in a charge of $20 million to $40 million in the fourth quarter -- is that the reason they cut their estimates?
Bannister: The charges will appear as extraordinary items. People will exclude that when looking at the company's performance.
CNNfn: TWX is down over four points today - what's your outlook for the stock?
Bannister: We like the company because from a strategic standpoint the merger makes a lot of sense. It's combining strong content with a whole new means of distributing that content. The growth rate for the combined company will be the higher than other mega entertainment companies, like Disney (DIS: Research, Estimates) and Viacom.
We think the valuation is compelling in terms of price to cash flow. The big risk is integration risk - can you take more of an entrepreneurial internet company and combine it with an "old school" entertainment company? How will the cultures combine with each other?
CNNfn: What's your outlook for the group?
Bannister: It seems that people are focused on the advertising market for next year. It's really more of an economic thing -- if we go into a recession, these stocks have more downside risk. At this point we're in the "soft landing" camp, and we're recommending companies like Viacom (VIA: Research, Estimates) and Time Warner.
*Time Warner is CNNfn's parent company
-- reported by Carmina Perez 
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