MEDIA mogul Manuel V. Pangilinan, chairman of the telecommunications conglomerate PLDT/Smart/Sun, wants to acquire control of television network GMA 7.
A formal price offer still has to be worked out to bridge a P15-billion gap to swing the deal, but all major industry indicators—dropping profits, shifting consumer markets, rising costs, expensive new technology and cut-throat competition—are conspiring to make the buyout of GMA 7 inevitable, market analysts say.
“The major and controlling shareholders have not received a price that is acceptable to them,” GMA Network president Gilberto Duavit Jr. said in a statement responding to media reports. “That is not to say that GMA 7 will not be sold, but at the moment we are presently not pursuing serious negotiations with the PLDT group because they have not offered us a price that is acceptable to our shareholders,” Duavit said.
For weeks, the industry has been abuzz with reports that acquisition talks were under way. But price matters most, and one has to read the nuanced signals correctly.
Major indicators foreshadow a shakedown in the television industry.
Technology is changing to high-definition, requiring massive capital input. Industry profits are shrinking and the rules of the game are changing.
Two major players—ABS-CBN and GMA 7—are suffering double-digit percentage reductions in profits. Advertisers are cutting back on spending.
An aggressive new kid on the block, TV 5, is challenging industry rules and rewriting tried-and-tested formulas.
Channel 5 is on the prowl for an acquisition. And there is a company ready to sell for the right price.
Purported asking price
Last week, a source in Hong Kong-based First Pacific Co. Ltd., of which Pangilinan is CEO and Managing Director, said that the “asking price” for GMA 7 was between P45 billion and P51 billion—an amount the Pangilinan group was said to be willing to pay.
But latest reports said the three families controlling GMA 7 want P60 billion for the company.
The closing price of GMA 7 at the Philippine Stock Exchange on April 25 was P9.36. A 100-percent stake in GMA 7 would cost over P31 billion, but it is customary for buyers to pay a premium for acquisitions that give them control of their targeted companies.
At P45 billion, Pangilinan is willing to pay a premium of about 48 percent to GMA Network’s present market capitalization, but the controlling shareholders seek a premium of 94 percent.
The Pangilinan group has investments in several media companies and full ownership of television network TV 5. The PLDT Beneficial Trust Fund, through its subsidiary Media Quest Holdings, also has minority interests in print media: BusinessWorld, Philippine Star and the Philippine Daily Inquirer.
The right price
GMA-7 is controlled by the Duavit, Gozon and Jimenez families. The Gozon group, represented by GMA chairman Felipe L. Gozon, had admitted in the past that the company could be sold for “the right price.”
The sale of GMA-7 to the PLDT group nearly happened in 2001 with the signing of a memorandum of understanding. Duavit said agreements had been reached on the price for a majority stake of the firm, but the deal fell through because of issues encountered by the buyer that were not related to price.
But conditions could be right this time around.
GMA 7 recently announced that its 2011 net income plummeted 39 % to P1.72 billion from P2.82 billion in 2010, as advertisers cut back and operating costs went up.
“Our net income took a beating,” admitted Ronaldo P. Mastrili, GMA 7 vice president of finance. “We experienced the lowest net income level of the past 5 years in the 4th quarter of 2011.”
Advertising revenue dropped 9 percent to P13.08 billion, while operating costs junped 8 percent as GMA launched GMA News TV to blunt competitive inroads in news.
Duavit said competitive pressures drove costs up:
“The spending was driven by the desire to win in the national ratings last year.”
GMA 7 cited a 3.1-point lead in household audience share over rival ABS-CBN and an 18.6-point lead over newcomer TV 5, according to media ratings firm Nielsen TV Audience Measurement.
Duavit rejected suggestions to emulate TV 5 by pirating big talent to attract more advertisers. “The norm was that the stars created the program and the network was measured in terms of who its stars were,” he said.
“We prefer to see it the other way around—that it’s the programs that make the stars and the network that creates the programs and the opportunities,” he said.
GMA-7 plans to reduce programming costs and trim capital expenditure from nearly P896 million in 2011 to P650 million for 2012.
Two new stations are planned in the Ilocos and Bicol regions. The rest of the funds will be to upgrade towards high definition programming.
Despite posting lower profits, rival ABS-CBN has set a higher budget for expansion this year to diversify its revenue stream and ensure future growth.
Last week, company officials reported that profits fell nearly a quarter in 2011, from a net of P3 billion in 2010 to P2.4 billion in 2011, following an industry-wide drop in earnings from massive spending cuts by big advertisers.
A one-time gain from the sale of a stake in Sky Cable Corp., coupled with the company’s more diversified revenue stream helped save ABS-CBN from a worse decline, officials said.
The outlook for 2012, however, remains uncertain after an unusually erratic first three months of the year.
“In January ad minutes went down by double digits. In February we saw some signs of recovery, but last March we had an all-time high for that month,” ABS-CBN chief financial officer Ron Valdueza told reporters. “We hope to sustain this momentum the rest of the year.”
Valdueza said the company might benefit from the unofficial start of the midterm campaign season by the fourth quarter of this year, “but it probably wouldn’t be that much.”
He said the group’s capital expenditure would increase by at least 19 percent this year to P5 billion, with the bulk to be invested in the Internet and cable television business of its subsidiary, SkyCable.
To diversify its revenue stream, ABS-CBN last year launched a total of 16 films, six of which grossed more than P100 million each to reach “blockbuster” status by Philippine standards. “Praybeyt Benjamin” grossed P342 million, making it the country’s biggest-selling movie.
This year the government plans to order television industry players to start broadcasting on digital frequencies and replace the existing inefficient and unreliable analog technology.
The National Telecommunications Commission is choosing between Japan’s Integrated Services Digital Broadcasting and the second-generation Digital Video Broadcasting platform from Europe.
This seismic shift in the industry’s business methods will benefit the big players at the expense of the smaller ones. It looks prudent for GMA-7 to start preparing while the price is right.