Euro stock dip may hamper media deals

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LONDON -- Could the fall-off in European media stocks last week have put the brakes on the sector's already sluggish deal market?

With a number of deals and sell-offs on the horizon -- Spanish telecoms operator Telefonica is trying to divest Dutch reality producer Endemol while a number of private equity-owned media assets mull a return to the equity markets -- a fall-off in European share-prices could be the last thing that dealmakers need.

"Last year it was incredibly difficult to get deals done because it was too difficult to get the numbers to work, says Anthony Fry, chairman of Lehman Brothers' media group.

"The interesting question is that if there is a decline in equity values will buyers try to pay lower prices and will sellers then walk away? And what happens to the deals that are already underway? What happens to the sale of Endemol?"

The downturn will also have an impact on the private equity sector, Fry believes.

"For those private equity companies that own media assets the question becomes what will happen to their plans to come back to the market and IPO off businesses? That might become more difficult in this market."

As European investors woke up to a still-jittery market on Monday the news was not good.

Equity markets continued to slump after last week's slide and by midday Monday the FTSE Eurofirst 300 was down 1.9%to 1,435.59, Frankfurt's Xetra Dax shed 2% to 6,472.46, the CAC 40 in Paris lost 1.7% to 5,332.64 and London's FTSE 100 slid a further 1.5% to 6,022.5.

Europe's top 600 stocks have fallen 7.7% since the rout began and last week had its worst performance since March 2003.

"It's a pretty extreme reaction," said Frankfurt trader Mirko Pillep. "This is the correction everyone said was coming but now no one wants it."

The slump is unlikely to spur a new round of deal-making in Germany, if only because most of target properties have already been sold.

KKR and Permira's $4 billion deal to buy ProSiebenSat.1 was inked late last year and Permira subsidy All3Media submitted its $100 million bid to by Berlin production house MME Moviement just before the market crashed (HR3/1).

If anything, predatory interest in German listed companies has helped keep their stocks afloat. MME shares have barely moved since the downturn, holding close to Permira's buyout offer of €7 a share. On Monday they were down 1 Euro cent at €6.86.

One deal that could be affected is German media venture Highlight's plan to stock up on EM.TV shares. The Swiss rights company has an option to buy 5.7 million EM.TV shares at €4 apiece.

That looked like a good deal just last week, when EM.TV was trading for more than €4.6 a share. Since then, the Munich-based kidvidder has followed the market south. On Monday EM.TV stock lost a further 3.4% to €3.96.

Highlight, which also controls Germany's Constantin Film, has until Oct.9 to exercise the buy option. But the Swiss group hasn't escaped the bears either. Highlight shares have fallen from €7 last week to €6.68 on Monday.

In Italy media stocks moved in pace with the sliding market which lost 5.4% last week. Silvio Berlusconi's Mediaset --still riding high on the collapse of the Prodi administration -- remained an exception and still looks a strong bet to take a punt on Endemol -- through it will face competition from local player De Agostini as well as private equity firms including Cinven, Apax, Permira, Providence Equity and KKR.

"The media sector as a whole has moved in step with the market, with the exception of Mediaset," said Javier Noriega, chief analyst at Milan-based investment bankers Hildebrandt and Ferrar.

Telefonica had "no comment" with respect to whether the drop in television production house Endemol's share price would affect its desire to sell the asset but saw shares in the Dutch program off 2.8% at 21 Euros while its own shares were down 0.22 Euros at 15.55.

Much depends on whether the share slide proves to be a temporary adjustment or a permanent decline, says Lehman Bros.' Fry.

"It does show that markets are quite fragile -- this correction out of China shows nervousness -- if there was to be major geo-political turbulence, that could throw the markets completely askew."

Scott Roxborough in Cologne, Germany, Eric Lyman in Rome and Pamela Rolfe in Madrid contributed to this report.
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