Slide threatens Euro deals

Media firms, analysts mull effects

Could the falloff 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 telecom 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 falloff 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," said Anthony Fry, chairman of Lehman Bros.' 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?" he said. "And what happens to the deals that are already under way? What happens to the sale of Endemol?"

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

"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 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 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," Frankfurt trader Mirko Pillep said. "This is the correction everyone said was coming, but now no one wants it."

The slump is unlikely to spur a new round of dealmaking in Germany, if only because most of target properties already have 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 (HR 3/1).

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 ($9.16) a share. On Monday, they were down 1 euro cent at €6.86 ($8.98).

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 ($5.23) apiece.

That looked like a good deal just last week, when EM.TV was trading for more than €4.60 ($6.02) a share. Since then, the Munich-based kids' video unit has followed the market south. On Monday, EM.TV stock lost a further 3.4% to €3.96 ($5.18).

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 ($7.44) 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, though 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 programmer off 2.8% at €21 ($27.49), while its own shares were down €0.22 at €15.55 ($20.36).

Much depends on whether the share slide proves to be a temporary adjustment or a permanent decline, Fry said.

"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," he said.

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