Private equity investors in German media


The association of the German state media authorities (DLM) in March convened a group of experts and policy makers in Berlin to debate whether and how the intention of yielding profit from television channels might compromise the quality of programme content and the public value required from the media.

In my article of 19 March 2008, I discussed why foreign investors regard the German market as a worthwhile target, and why some of these investors seem to underrate the obstacles associated with that.

Now I will examine what was talked about regarding the behaviour of financial investors and other European countries’ efforts to safeguard public value in broadcasting.

Christoph Kaserer from Munich’s Technical University and Jochen W. Schmidt of Sal. Oppenheim Bank explained the rationales of financial investors in general and in the media sector in particular. Basically, they said, everyone who has a savings account or owns bonds or stocks is a financial investor. The motivation is to make money. You do not, for instance, need to know anything about chemistry to buy shares of a chemical company, or anything about the financial market to earn a modest interest. You just put down the money and hope that the professional managers of the company or the bank do a good job. That is normally neither unusual nor unethical. What makes private equity funds a different breed, however, are three facts:

  • Private equity investors are not passive like a typical savings account holder. They rather actively control and manipulate the companies they own in order to maximise short-term profit. This can, for instance, mean that financially healthy businesses are forced to behave in a way that is not conducive to long-term sustainability. For example, they may liquidate reserves or put all blockbuster movies on the air over a short time period to create an audience ratings bubble. This would unnaturally increase advertising income but could cause a later slump in viewership.
  • Private equity investors engage in “financial engineering”. One example of this practice is so-called “leveraged buyouts”, in which a financially stable company is bought and subsequently forced to take on a high mortgage. The mortgage is then used to pay its new owners an extraordinary dividend that covers or even exceeds the price for which the company was acquired. This has, among others, happened to all major cable companies in Germany. Subsequently, the company has to pay back the debt, go deep into the red figures and even may fold under the pressure.
  • Private equity managers receive a very high commission for all profits they make above the normal threshold of the capital markets. Therefore, serving the interests of the investor also very much increases their personal gain, irrespective of whether hundreds or even thousands of jobs are lost in the process, if a healthy company goes broke, or an entire sector of the economy is adversely affected.

Amazingly enough, Schmidt pointed out, the current crisis of the credit and financial markets might help change that. The shortage of cheap loan money will probably cause even private equity funds to refocus on the inherent value and productivity of the companies they own, instead of just squeezing them for what they are worth and juggling them around.

Christoph Kaserer showed some examples of how profitability of private-equity-owned media companies in Germany have been developing at EBITDA level (reminder: that is before debt service and depreciations). Not surprisingly, the profitability rate increased everywhere (mostly by way of job cuts and other streamlining efforts), and at telecaster ProSiebenSAT.1, even the investments into programmes remained stable over the years.

However, looking like this at the impact of private equity on media companies would turn a blind eye on the effects for the general economy and for society. A company that pays corporate income taxes, that creates jobs and that is not overwhelmed with debt is much more of a public asset than a business that goes to great lengths to make an operative profit which is, in fact, consumed by debt service.

And, as television schedulers and programme buyers know, programme investments as such are not necessarily a sign that a TV channel is in good shape. What matters is how successful the programmes are with audience and the advertisers. If they are – fine. If they are not, you have to write them off without much of a chance to ever earn your money back. And, coincidentally, the channels ProSieben and SAT.1 had quite a few failures on their schedules over the last few years. Therefore, determining whether the company is actually doing well or simply being dressed up requires much closer scrutiny than looking at key figures of the annual balance sheets.

This Berlin conference also included a look at public value provisions in the broadcasting systems of Switzerland and the UK. Martin Dumermuth of the Swiss federal media authority BAKOM pointed out that his country simply differentiates between broadcasters who have privileged access to distribution (air spectrum and must-carry status in cable) and in turn are required to deliver a certain amount of public service. Non-privileged broadcasters who do not have to comply with any special rules.

Damian Tambini from the London School of Economics then reported on the situation in Great Britain, which is quite similar. As a rule, British commercial broadcasters are subject to a (limited) public service remit in exchange for preferred access to the airwaves. However, as terrestrial distribution in Europe’s digitalisation model country is turning ever more obsolete, it has started to become lucrative for broadcasters to just return their licenses and thus be liberated from the costly obligation to produce minority-oriented public service programmes. This is yet another example of how media regulation is losing its leverage by sticking to outdated technological premises.

But UK supporters of public value in the media are already discussing the next step. The regulation board OFCOM has come up with the notion of a generic public service publishing that does not stick to a specific media category. Instead, Britain might soon support and encourage any kind of content that is for the public good, irrespective of whether it appears on the Internet, in broadcasting, papers or magazines, or whether it is text, video, pictures, or a game. This approach might conclusively solve issues with public service broadcasters expanding into the online realm.

In the third and final article of this series, I will comment on the general correlation between public value and commercial media.