Q&A: Richard Greenfield

Pali Research analyst isn't afraid to call Hollywood like he sees it

Pali Research media and entertainment analyst Richard Greenfield has created heated debates on Wall Street and in Hollywood. This year, he called for a change in AOL's management team -- just before one was announced -- and predicted the need for massive layoffs at News Corp.'s MySpace. But he also admitted that his "sell" thesis on Disney has been "dead wrong" in the early going.

The Hollywood Reporter: Since March, media and entertainment stocks have run up with the rest of the market on hopes of a stabilizing economy. How do you feel about the sector at this stage?

Richard Greenfield: As we look at the next 12 months, we remain very cautious and concerned about the economic health globally and fear that recovery may not be occurring as fast as people expect. While I don't think you will see local TV revenue down 25% in 2010, you could see it down 5%-10%. And Disney's theme park business could continue to struggle as the consumer in this country struggles. Those are key drivers of our negative thesis on both Disney and News Corp. Relative to where the stocks are valued today, we think they are overvalued.

THR: How important is economic recovery to media stocks?

Greenfield: Most of the management teams in the media space have tied themselves to "the worst is over and it's getting better" theme. As far as we can tell, it doesn't look like advertising is getting better. We're still down year-over-year even as comparisons get easier, and it's increasingly concerning that we aren't seeing that recovery bounce. It's down less, but it certainly hasn't been recovering. That's going to be the real challenge for the whole sector from a stock standpoint during the next 3-6 months.

THR: What stock call this year have you been particularly happy with?

Greenfield: Getting positive on Time Warner in the $16 range after looking at the catalysts of management finally making the right decisions -- terminating the AOL management team, the windfall of being able to bring in an A-list hitter in Tim Armstrong (to run it) and then announcing a separation of AOL all in the span of a few months -- has been very exciting to watch, and it's been very nice to see it actually play out in the stock.

THR: Which other stock do you like?

Greenfield: Discovery is another name with true organic growth where management change has led to a really good multiyear story. You have a team led by David Zaslav with a group of assets that have been really under-utilized for a long period of time. Only two networks out of the group make any substantial money. They are taking Discovery Health, which really nobody cares or knows much about, and transforming it into the Oprah Winfrey Network. A lot of these companies don't always have as good of a global platform, but Discovery has a strong U.S. story and then combines that with the ability to leverage content globally.

THR: You've chastised News Corp. for expanding its newspaper holdings. What would you like to see conglomerates do with their print assets?

Greenfield: I don't know how you fix print. I think Time Warner will get rid of its magazine business after it spins off AOL. We wish News Corp. would dispose of its newspapers or separate them out. I don't think it's going to happen, but that's a transaction we'd love to see.

THR: Which parts of the media businesses look solid to you?

Greenfield: Cable networks. If you own your content and have the ability to exploit it across platforms and globally, that's going to put you in a superior position in the long-term -- even though most of the new platforms don't generate significant dollars today. You have multiple revenue streams, and it's hard to see a substantial shift in the traditional multichannel world.

THR: So, you expect to see a continued shift from broadcast to cable TV viewership?

Greenfield: Broadcast TV networks are spending less and less on programming. There's a clear shift to spending less between reality programming and Jay Leno coming on five nights a week. That plays very well into driving viewership over the next several years to cable. So I just think the overall cable network story, at least for the next few years, is going to get brighter.

THR: Any prediction for any major deal that could happen this year or early next year?

Greenfield: DirecTV is an asset that over the next 12 months could absolutely be acquired. I think it will be essentially up for sale after the Liberty Media transaction that consolidates DirecTV into one company. The obvious buyers are Verizon and AT&T, but given the strength of DirecTV's business and the strength of its cash flow, the net could be far wider. I'll leave the rest to you.
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