News

AOL TW Looks to Deal Court, Comedy Stakes

9/15/2002 8:00 PM Eastern

Comedy Central and Court TV are stepchildren with a common parent: AOL Time Warner Inc. And the prospect of the media giant trying to sell its 50 percent stakes in both networks now looms larger than ever.

AOL Time Warner has said it may unload some nonstrategic, unspecified assets in order to clean up its balance sheet. As part of that effort, AOL Time Warner is in very preliminary talks with Viacom Inc. about selling its half of Comedy Central to Mel Karmazin's media kingdom, a Wall Street source said last week.

AOL Time Warner and Viacom are 50-50 partners in Comedy Central, which has 80.1 million subscribers.

In a similar 50-50 venture, AOL Time Warner and Liberty Media Corp. jointly own Court TV, which is in 73 million homes. So if AOL Time Warner is looking to sell its stake in Court TV, Liberty would be the most logical potential buyer.

Valuations vary widely for Comedy Central and Court TV, so the thorny issue of price — and of getting AOL Time Warner and potential buyers to agree on a number — could easily derail any sale.

Merrill Lynch analyst Jessica Reif Cohen values Comedy Central at $2.05 billion, with AOL's half at $1.025 billion. She pegs Court TV's worth at $1.95 billion, with AOL Time Warner's stake at $975 million.

But another Wall Street analyst, citing depressed prices for media properties, had lower estimates. He valued Comedy Central at roughly $1.4 billion, which would put AOL Time Warner's stake at $700 million; and Court TV's valuation in the $900 million to $1 billion range, with AOL Time Warner's half then worth $450 million to $500 million.

Reif Cohen said her valuations of Court TV and Comedy were based on a price of roughly $25 per subscriber — far below what were considered the "excessive" multiples paid on networks sold during the past few years.

Viacom paid $35 a subscriber in its $3 billion acquisition of Black Entertainment Television, while The Walt Disney Co. shelled out $65 a subscriber in its $5.2 billion purchase of Fox Family Channel, according to Reif Cohen.

She expects that AOL Time Warner will sell its stakes in Comedy Central and Court TV, she said, because as things stand now, the media conglomerate "doesn't get a lot of credit" for them — their value isn't reflected in the stock price — and because the sales would generate cash.

Getting those sales accomplished could be easier said than done, though.

According to one investment banker who asked not to be named, the sale of Court TV and Comedy has been the subject of off-and-on discussions with various parties over the years. In past negotiations, the main obstacle has been has been the big gap between what AOL Time Warner thought the networks were worth and what potential buyers were willing to pay.

"There has always been a pretty wide 'bid-ask,' which is why a deal never got done," the investment banker said.

According to one fund manager who asked not to be named, it might be in AOL Time Warner's best interest to remove Liberty from the Court TV negotiations by buying out its piece before it solidifies a deal for the networks.

"What AOL should do is deal with Liberty to get their 50 percent of Court in exchange for an asset, and then turn around and sell 100 percent of Court in a package," the source said. "Viacom would buy Court TV if they could get 100 percent of it."

What asset might AOL Time Warner swap for the other 50 percent of Court TV? The media giant is not in a position to part with a large amount of cash: It has already committed to writing a $2 billion check to AT&T Comcast Corp. as part of its restructuring of the Time Warner Entertainment L.P. partnership. And it has been loathe to dilute its interests in its more-established networks.

COMEDIC FIT

In terms of demographics, programming and spunky attitude, Comedy Central would be a perfect fit for Viacom's cable stable: MTV Networks, a portfolio that includes MTV: Music Television, Nickelodeon, VH1, TV Land, TNN: The National Network and CMT: Country Music Television.

Under Viacom, Comedy Central would also benefit from being sold and packaged by MTVN's mighty affiliate-sales and ad-sales departments.

"There's a lot of upside for Comedy for Viacom," one cable-network official said. "Viacom is such a powerhouse, Comedy would be fully distributed in a few years. Viacom would build it up to a great brand."

Comedy Central — which made its name with the white-hot hit South Park
— currently
has its own affiliate-sales and ad-sales forces. In fact, in an unusual deal, the Comedy affiliate-sales team is also handling distribution for The Tennis Channel, a start-up set to debut later this year.

An AOL Time Warner spokeswoman said that while CEO Richard Parsons has indicated his intention "to deleverage the company," there is nothing planned at this point.

Comedy Central had no official comment last week, and Viacom declined to comment. But in the past, Viacom president Karmazin has said his company is interested in strategic cable acquisitions — at the right price.

Now, Viacom is reportedly interested in kicking the tires of not just Comedy Central, but Court TV as well.

NBC, which once owned a piece of Court TV, was also cited as a potential buyer of half of the criminal-justice channel. NBC Cable officials couldn't be reached for comment, and Liberty declined to comment last week.

Court TV CEO Henry Schleiff issued a prepared statement: "Any discussion of Court TV's sale or other disposition would be held by the network's owners, AOL Time Warner and Liberty Media. Both owners' strategic and financial resources have contributed significantly to Court TV's success. Indeed, AOL Time Warner and Liberty Media are well aware of Court TV's enormous growth in value over the last few years and, certainly, of the network's extraordinary future potential."

In its annual report last year, Liberty said that Court TV's revenue grew by more than 25 percent in 2001, while not specifying how much revenue it generated.

"We expect the network to achieve better than 20 percent revenue growth in 2002 while delivering positive operating cash flow — a tremendous improvement over the past three years," according to the Liberty report.

INDEPENDENCE FACTOR

Comedy Central and Court TV, even though they are owned by programming giants in partnerships, have essentially operated as independent services. Like Comedy, Court TV has its own in-house affiliate-sales and ad-sales departments.

As a virtual standalone service, Comedy Central hasn't had the benefit of being packaged with MTVN's cable networks.

If Viacom assumed 100 percent ownership of Comedy Central, that would change. That concerns American Cable Association president Matt Polka, whose group represents small and midsized cable operators. By packaging networks, big programmers can drive up license fees and essentially force a system to carry a channel, according to Polka.

"As more of the independent programmers come under the aegis of these huge content providers, there goes the providers of independence," he said. "Comedy Central would be folded into another huge, bundled product."

Comedy's monthly, per-subscriber license fees range from 10 to 16 cents depending on the operator's size, according to sources. Court TV, which has shelled out up-front launch fees in the $3 to $5 range, has a rate card of around 13 cents, the source said.

Court TV and Comedy Central both declined to discuss their license fees.

In terms of viewership, Court TV has been on a roll. This summer, it posted a 0.8 primetime rating, up 14 percent from a year ago, according to Nielsen Media Research.

Comedy Central, which has seen some cutbacks in its programming budget, has been registering stagnant household ratings. It generated a 0.6 primetime rating this summer, down 14 percent, but more money is being freed up for new programming, a source said.

South Park
is still Comedy Central's highest-rated show, averaging a 2.0.

September