Like telecommunications and information technology, media stocks have never fully recovered from the correction after the dot-com boom. Once pretenders to the throne of premium stocks, they no longer enjoy a privileged position. Last year turned out to be their worst and will likely be surpassed by 2002.
ABN Amro's global media index fell by 16%, though this still outperformed the global market by about three percentage points. The poor performance of the underlying assets in media companies is dealing them an even bigger blow. Gone are the projections of huge subscriptions which were to come from finding more ways to distribute and "cross-leverage content". The "content is king" mantra that led to crazy multiples for media companies is no more. These days the questions are simply about how they are going to retain audiences, never mind increase them, and find ways of extracting more revenue per user.
Locally and globally, the economic downturn took a big chunk out of the unsteady media companies. Advertising budgets were and continue to be slashed and media companies, as the third link along that media adspend value chain, are hurting most. ABN Amro says last year was the worst for advertising in 50 years .
Consumption spending on entertainment has been severely depressed. The result is that revenue is down or stagnant across almost all media types. AOL-Time Warner, which for a while defied the trend, has also taken huge knocks recently. Its share price has been hit for the group's obstinate refusal to accept that it would inevitably also lose sales.
Formal-sector employment in SA continued to fall, putting more pressure on household income and in turn consumption spending. Spending on nondurable goods grew less than 1% last year. Consumption of media and entertainment was affected too.
Advertising revenue grew just over 3%, after estimates of more than 10%. That means negative real growth .
The JSE
If you had your money on the JSE Media index in the past year, you're probably thinking you would have been no worse off investing in Argentinian bonds. Apparently not chastised by the dot-com experience , some media groups are suggesting valuations based on cash flow multiples.
There were no exceptional performers, only a few consistent ones. Kagiso Media, Caxton CTP and Johnnic Communications were the only media groups whose returns beat inflation.
Kagiso Media
Kagiso Trust failed to sell its media subsidiary Kagiso Media to Saki Macozoma's New Africa Investments Ltd. The deal was blocked by Independent Communications Authority of SA chairman Mandla Langa under media concentration rules.
Blessed with fantastic radio assets that are healthy cash generators, and with no real debt to speak of, Kagiso is a great company, or ought to be. The group managed a return on average equity of 29,1% for the year under review. The R51m pre-tax profit from turnover of R215m shows attractive margins of almost 24%. But it lacks liquidity and has a low rating, with a market price of less than R300m.
A big problem is management's conservatism. Kagiso has chosen to return more to investors in special dividends because there have been no investment opportunities. It has blamed restrictive media regulations for this. But the group seems interested only in mature businesses with proven earnings and cash flow. It is understandable that it may not want to take on too much risk, but its much vaunted management skills could arguably be put to use in innovative ways. Buying a minority stake in a younger station with good growth prospects and negotiating a management contract as part of the sale might pay off .
Like too many SA businesses, Kagiso places too much emphasis on restrictions to business instead of innovative solutions for creating shareholder wealth.
Caxton CTP
Caxton's modest increase in turnover reflects the depressed market conditions. The group's specialist products were less prone to budget revisions than major national and metropolitan newspapers. Yet Caxton showed just a 5% increase in turnover for the full year to June 2001, before the additional impact of September 11. The first half-year results showed a similar pattern. Still, the group improved efficiency of operations and maximised cash flow. Margins of above 10% were maintained and return on equity was still in double digits.
Like Kagiso, though, Caxton appears to have no place or no intention to reinvest its cash. The much talked about merger with Johnnic Communications, which would create a media business of a little under R5bn in market cap, is all but dead.
Primedia
After two years of what seemed like sequels dubbed Nightmare on Diagonal Street and Bigger Nightmare on Gwen Lane, the second half of 2001 must have felt like the night before a honeymoon for Primedia. The first half had been horrible.
Pre-tax income for the full year was down 50% on 1,8% higher turnover of R1,7bn. Return on equity was a mere 2,8%. The group was stuck with an offshore cinema business it claimed was a noncore asset and yet it could find no way of lessening cinema's impact on the group's performance. The frustration led to the radical suggestion of a separate listing for the cinema business, which was abandoned because of market conditions.
But towards year-end the group started tidying up . Gearing and debt were brought under control, except for commitments to funding capital expenditure for offshore cinema chains.
CE William Kirsh set about a rigorous capital management exercise and put COO Ferdi Gazendam on a programme of slashing overhead costs at cinemas. The group started converting the group debentures to equity . But return on investments is still negative in nominal terms and the group has few resources to help it navigate a vicious economic sea.
Johnnic Communications
The main activity last year in media was the unbundling of cellular group M-Cell out of Johnnic Communications, leaving the latter as a pure media play. This eroded the Media index's total market capitalisation as Johncom's share price corrected from about R90 to R14. It is difficult to analyse the group's performance because part of last year's results include consolidated income statements with M-Cell.
The unbundled group managed to produce adequate results , largely because of the performance of the Sunday Times. For the half-year - which excluded M-Cell - publishing revenue rose an impressive 12% and operating income 22%. Johnnic Entertainment, which includes music business Gallo and cinema chain Nu Metro, showed modest results.
CEO Connie Molusi has insisted there is no pending deal with Caxton, for which the market has been begging . Though some in Johnnic management doubt the operating efficiency gains of such a merger, Caxton management says there would indeed be sizeable gains . One obstacle is the prickly political question of who is buying whom. Logically it should be Caxton - it has the cash. Yet there's a question of diluting Johncom's empowerment status.
Certainly Johnnic Publishing is interested in diversifying its media assets from print to include radio assets. If cross-media ownership regulations were amended that would not be out of the question, but a tie-up with Caxton would dent those ambitions.
For the year ahead - despite problems at BDFM, the group's financial publishing division, which is a 50-50 joint venture with UK-based Pearson and owns the FM, and notwithstanding the music sector's depression - Johnnic management believes it will grow turnover and profits.