Forbes Articles

I Still Love Media
Date: 10.29.2001

Look past the ad drought to a wave of communications takeovers next year, says Mario Gabelli. Buy the targets now.

Media is going to be good, only because it's so bad now," says Mario J. Gabelli, the irrepressible money manager.

Would you expect any different verdict from this man? He built his fame and fortune on the media and telecom sectors--newspaper, cable, broadcasting and telephone stocks--and isn't going to desert them now. But he has credibility. His oldest mutual fund, Gabelli Asset, has averaged a 14.6% annualized return over the past 15 years, comfortably beating the S&P's 13.4%.

Media profits are suffering. The advertising exodus that has been going on for months only got worse after the terrorist attacks, especially for television companies that chucked ads for 100% news coverage. Gabelli, presiding over publicly traded Gabelli Asset Management (nyse: GBL - news - people), oversees a $25 billion media-heavy portfolio that has taken its lumps lately.

But Gabelli, 59, has weathered bad spells before and he spots opportunity as he navigates through this one. The opportunity comes from an expected loosening of Federal Communications Commission restrictions on who can own what. His faith rests with FCC Chairman Michael Powell, a Republican who has a solid free-market majority on the five-member body. Gabelli's scenario: The FCC will soon lessen the restrictions, leading to a merger frenzy in 2002. By next year's second half the economy will be back and ads with it, justifying the corporate couplings. "If Procter & Gamble and Coca-Cola do well, at some point they come back and advertise," he says.

The fast-talking Gabelli, whose ego is as large as his expectations for media, likes to picture himself as the brave contrarian. As a schoolboy growing up in 1950s Queens, N.Y., he remembers how the teachers had students put their heads under the desk during air raid drills. Gabelli raised his head because no one was bombing. v Gabelli's possible acquisition targets are way off their 52-week highs, not to mention below their intrinsic values--his firm's calculation of what a company would bring in a takeover. (Key factor in the analysis: a company's operating income, in the sense of net before depreciation, interest and taxes.) Cablevision Systems, now going for $42.30, is down from $77.60. Gabelli reckons that it would fetch $92 in a merger.

Here are the FCC rules on Powell's hit list and some possible deals on Gabelli's:

Cross ownership. The cross ownership rule forbids the ownership by one company of a TV station and a cable operator in the same market. It also limits local newspaper-TV combos. There are grandfathered exceptions and a handful of special dispensations.) Other rules make difficult for a TV station operator to own a second TV station, even in a small market that won't support two full-fledged teams of ad sales reps and news gatherers. With repeal, the media industry could consolidate some operations and wring out costs.

One probable winner from the consolidation movement: AOL Time Warner (nyse: AOL - news - people). AOL owns the WB network but has no local affiliates to provide the abundant bounty that the Big Three networks enjoy from their directly owned stations. Among possible love interests are Acme Communications (nasdaq: ACME - news - people), 9 of whose 10 stations are WB outlets. Gabelli speculates that Tribune, owner of 12 newspapers and 22 TV stations (15 of them WB), might buy Acme, then be swallowed by AOL.

Or take Young Broadcasting (nasdaq: YBTVA - news - people), whose 12 TV stations could be appealing to Hearst Argyle (nyse: HTV - news - people), which has wanted to add a second outlet in San Francisco. Young bought San Fran's KRON last year. If Disney's ABC bought Young, it would pick up extra stations in Los Angeles and San Francisco plus six ABC affiliates.

The rules also have hindered mergers among newspaper chains that own TV stations. "Pulitzer is the easy yummy here," says Gabelli, whose funds happen to own 29% of Pulitzer's stock. The Pulitzer family could be swayed to sell to the likes of Gannett or Belo. They both have TV stations in St. Louis and would love to own Pulitzer's flagship paper, the St. Louis Post-Dispatch.

The 30% cap. Currently the FCC says any one company can have no more than 30% of the nation's cable subscribers or 35% of its television audience. "I think that goes to 50% or to no [limit]," Gabelli predicts.

That would let AOL act on its interest in AT&T Broadband, which AT&T is spinning off. (To get in on this, buy AT&T now.) As the U.S.'s largest cable and Internet provider, AOL would face huge regulatory hurdles with such a deal under today's rules. Another likely target for AOL is Cablevision Systems, which surrounds AOL's Manhattan cable franchise with its suburban territory. Would Cablevision's scrappy founder, Charles Dolan, sell his beloved empire? Says Gabelli: "Bring a bouquet of flowers and find out."

Vertical programming limits. Under current FCC rules, a cable operator is forbidden to fill more than 40% of its channels with affiliated programming. The government's paternalistic thinking here was that an evil system operator would force-feed consumers content they didn't want. Powell's thinking:People know their own tastes better than the government and they now have plenty of channel choices.

Yanking this rule would make a few programming companies more attractive. Two come to Gabelli's mind. There's Rainbow Media Group, parent of American Movie Classics and Bravo. The other is the venerable movie studio Metro-Goldwyn-Mayer with its library of 4,100 films. Gabelli notes that financier Kirk Kerkorian, who controls MGM, has sold it before. At the right price, everything is for sale.

Set Them Free
Unfettered by stifling regs, Gabelli says, these will be good acquisition fare. Their bargain stock can be bought today with hopes of nice buyout premiums up ahead.