If the report in the New York Times of January 3 turns out to be true, Weather Channel's Web site has likely surpassed the value of the mothership and could be sold by Landmark Communications Inc. for more than $3 billion.
It's an historic inflection point. Although the value of many traditional media assets has eroded recently due to the credit crunch and the retreat of private equity players, the value of Web properties has not.
News Corp. chmn. Rupert Murdoch told investors in late 2006 that MySpace could be sold for $6 billion, more than 10x the $580 million News Corp. paid for it in 2005. Since then, there has been a scramble for the few top Web properties that have come on the market.
The latest was Facebook, in which Microsoft announced last October it would invest $240 million for a 1.6% stake, placing a $15 billion valuation on the company?about 120x revenues of $125 million, or almost $500 per unique user.
That valuation, we believe, was overstated as Microsoft was making a pre-emptive strike to shut out Google from handling Facebook ad sales. We think a big piece of the deal value came from Microsoft's quest for more solid positioning against Google. If Microsoft thought Facebook was a bargain at a $15 billion valuation, it likely would have taken a much bigger stake?it certainly had the financial wherewithal to do so.
The valuation, however, did support investors' faith in the Internet sector, and it likely pushed up the value of Murdoch's high-profile MySpace from $6 billion to about $10 billion.
Using this as a benchmark, we ran some numbers to see how Murdoch might appraise a purchase of The Weather Channel and weather.com. If News Corp. were to place a 30% discount on weather.com, that would place a value of $102/unique user on the property, or $3.2 billion.
Additionally, Landmark owns a company called WSI, which it purchased for $120 million back in 2000. WSI provides weather forecasting and other technology to local TV stations and other broadcasters?including, of course, The Weather Channel. WSI is projected to generate almost $40 million in revenue this year and could be worth nearly $200 million.
Adding in WSI plus the core Weather Channel at 14x cash flow ? historically a solid benchmark for cable networks, albeit not during this credit cruch, would add another $1.5 billion to the deal, bringing it to $5 billion.
Landmark also owns 50% of Canadian cable property The Weather Network, which could add to the final price tag if included in this bucket of assets.
It's ironic that Weather Channel's Web business, started in 1995, could have more value to a strategic buyer like News Corp. or Discovery Communications ? in our view, the two most logical buyers?than Weather Channel itself, which was started in 1982. That's a sign of the digital times.
According to Nielsen/NetRatings, weather.com currently ranks as the nation's 18th-largest media site by traffic, with more than 32 million unique users in November.
We estimate weather.com will post almost $130 million in revenues this year, more than 40% of what the core Weather cable channel generates. Any traditional media company would be frothing at the mouth to have its new media assets on track to bring in almost half what its old media properties generate.
There are a lot of caveats to the preceding analysis, however. First, the deal clearly would have to involve a strategic buyer, most likely News Corp. or Discovery.
Before investment bankers get too excited, they should recall it was less than a year ago that Oxygen executives were telling reporters they expected to get "BET-like money" for their channel, later picked up by NBC Universal Inc. for a song.
That referred to the 2000 sale of BET to Viacom for nearly $3 billion, or about $38/sub. The BET deal and the $3.7 billion purchase by Walt Disney Co. of Fox Family and Fox Kids from News Corp. (at $34/sub) in 2001 were widely viewed at the time as cardinal examples of why any cable network with nearly ubiquitous distribution could be valued at $30-$40/sub regardless of the cash flow.
This is similar to the "stick values" placed on broadcast properties, where beauty is assumed to be in the eye of the beholder and unrelated to the P&L.
In hindsight, however, the period when those deals occurred is now viewed as the top of the market for cable network valuations. It is well known that Crown Media's Hallmark Channel has been on and off the block; despite being one of the largest U.S. cable networks and among the top 10 in ratings, it has found little interest at a $2+ bil. valuation as it?s barely operating at breakeven. Hallmark is financially handicapped because it gave itself away for free to some operators and for pennies to others, and has had little leverage in trying to get a license fee on par with those of other highly rated networks.
Another disappointing valuation was placed on Gemstar-TV Guide International, owner of the TV Guide Network. The whole company was auctioned and the highest bid came from Macrovision. On announcement last December it was worth $2.4 billion; however, the all-stock, no-collar deal quickly plummeted to less than $2.0 billion. Of this, we allocated only $520 million to the two cable networks.
TV Guide Network has more than 83 million subs and its horseracing channel TVG has more than 28 million, implying a valuation of less than $5/sub for the two networks.
As the data in the attached spreadsheet shows, that's the tiniest per-sub valuation we?ve ever seen on a fully distributed network. On a cash-flow-multiple basis it was also disappointing, at just 8x EBITDA.
We think Macrovision is getting a bargain and may turn around and flip the network next year (it is mainly interested in the IPG business); however, that deal illustrates that buyers aren't exactly clamoring to pay high prices for fully distributed networks. Not at the moment.
Our tracking of all cable network transactions since the industry began for deals involving channels with more than 50 million subs shows the average value per sub has been $25 over time, the median $20. More recently, however, this has dipped to about $14, and as previously stated the Gemstar deal was at less than $5. Note that we excluded the recently announced deal between Discovery and Advance/Newhouse, which is essentially swapping 33% of a privately held Discovery for 33% of a publicly held one at market value.
The announcement of a sale at Landmark, however, comes as no surprise. Rather than selling itself whole, it's likely to auction off assets piece by piece.
It's the latest trend in the media: splitting the poorly performing assets from the high-growth one. The same kind of events are playing out at E.W. Scripps, which is also closing down properties with little hope, such as The Post in Cincinatti and its sister pub Kentucky Post 12/31 after 126 years in business.
The Landmark Communications sale will mark the end of one of the few privately held media conglomerates in the U.S. It's currently owned by the Batten family of Norfolk, Va., and has assets including numerous daily and community newspapers with more than 12,000 employees and revenue reportedly approaching $2 billion, according to Hoovers.
