Elliot Carver, the CEO of the fictitious Carver Media Group and the nemesis in the movie Tomorrow Never Dies, once said, “Welcome to the new world order, Mr. Bond. Churchill had his armies; Caesar had his legions; I have my divisions.”
And it’s easy to see why he was right: media and telecom is quite the expansive sector, encompassing both physical assets and intellectual property. The group is one of the more sought-after ones, and it sets you up perfectly for those coveted exit opportunities.
Today’s interviewee spent two years in a capital markets role before transitioning into a banking coverage role as a third year analyst. He was then promoted to associate before heading off into a buy-side fund.
The telecommunications and media group frequently covers companies such as Disney and Comcast; it is also home to some of the more challenging restructuring and distressed assignments on certain “not so new” forms of communication (print newspapers and radio stations).
Sometimes, Media & Telecom is bundled into the same category as technology investment banking coverage – but there are enough differences to make it worthwhile to cover separately.
Here’s what we’ll cover in today’s interview:
- How our interviewee got his foot in the bank and then into the buy-side
- The lay of the landscape: how the group is built from the ground up
- What moves the market in media and telecommunications
- The technical aspects of media + communications banking
Investment Banking: Rupert Murdoch Style?
Q: How did you get into the investment banking scene in the first place?
A: Prior to joining full-time as an investment banking analyst, I had interned with a small asset management shop.
There are a couple of full-time analysts here who spent their sophomore summers working in a non-investment banking capacity (ex: working in private wealth management).
But the majority of summer interns in my group actually accepted full-time offers following their internships here – I wasn’t in that pool, so I consider myself lucky.
Q: So you’re attributing your success to “luck?”
A: Similar to other stories, it was the whole “not waiting around for the opportunity to come to you, making the most of your experience, and taking the initiative to connect with others” type of strategy.
It’s the same way I got my third year offer, my associate promotion, and buy-side opportunity: I accomplished those less by working with the prestigious recruiting firms, and more so by working with people I actually know at the various buy-side shops who could put in a good word for me.
Q: That brings us to this article’s WORD… haha.
A: Yes, reciprocity is a matter of making your recommender look awesome so that he/she can vouch for you in other opportunities.
You need to do that all along, or you won’t advance too far in the industry or move to the buy-side no matter how much of a technical wizard you are.
At the same time, it’s a personality thing. I’ve seen people get laid off because they don’t fit in well with the rest of the group (lack of “cultural fit”).
I remember hearing that it’s called “the airplane test”: could I see myself sitting with this person for hours on end and NOT be annoyed with him/her?
To pass this test, you need to pick up an interest in whatever hobbies are relevant, play along, and always spend more time asking about the other person than you spend talking about yourself.
It helps that the people in my group are a lot more colorful and extroverted compared with the bankers in other groups.
Dealing with media companies provides investment banking professionals with an ear or eye to creative industries and, of course, these professionals have to deal with the “personalities” common in those industries (use your imagination).
The same goes for aerospace and defense: you’ll frequently see the former military types at the helms of companies. Just make sure you get your “comparables” right. ;-)
The Coverage Universe, Column by Column
Q: So what falls into the media and communications coverage group?
A: Broadly speaking, my coverage universe falls into two categories: media and telecom.
Most media firms that issue print publications earn subscription revenue or advertising revenue.
When it comes to subscription revenue, the drivers include the extent to which content aligns with what the readership wants to know, and the availability of substitutes. Some viewers see the various networks and publications as interchangeable, or even substitutable.
This is where advertising revenue comes into play. You’ve only got one pair of eyes, so if your eyes leave Fox News and go to Bloomberg, the attractiveness of one network from the perspective of advertisers will shift accordingly.
Often, the demand for advertising will be dictated by national economic health, the effectiveness of middlemen involved in selling ad space, and also the effectiveness of a company’s own internal sales team.
All these points above apply to traditional media – we haven’t even begun to look at social media yet.
In the traditional media landscape, you see (including some examples of current and past brands):
- Newspapers: WSJ, USA Today, NY Times, NY Daily News, and the Los Angeles Times
- Magazines: Time Warner, Advance, Hearst, and Meredith
- Publishers: Harper Collins, McGraw Hill, and Penguin – the market for publishing is largely dictated by the demands of universities, think tanks, and research institutions.
- Movies/TV Studios, Cable Companies, and related providers: AMC Entertainment and Viacom
- Diversified Organizations: Disney and News Corp – such companies, as you would expect, have a variety of disparate departments. And those such as Disney or Comcast own…
For theme parks, the internal drivers for increasing foot traffic consist of delivering novel ideas in a cross between solid technology application and interesting design (source: AECOM).
The top parks include: Disney, Merlin Entertainment, Universal Studios, Parques Reunidos, and Six Flags.
But this interview is not about theme parks, so let’s move onto the other divisions you see under “diversified media companies”:
Consumer Products: This category is quite broad and it’s sensitive to the same factors that influence the consumer retail sector.
This area encompasses toys, beauty products, home decor (blankets, plates, etc.), and clothing.
Media firms produce revenue by licensing characters to third parties – so you’ve got characters such as Mickey Mouse showing up in video games alongside Cloud Strife from Final Fantasy VII, or Iron Man facing off against Strider Hiryu.
On the beauty products side, don’t be surprised to see clothes featuring various characters. The growth trajectory for such items depends on seasonality, the timing and audience reception of cable programming, film releases, and the reception of theatrical performances (ex: Disney Princesses on Ice, or the various Broadway musicals) (source: Disney).
Technology: In this area, you’ve got video game development and applications for mobile devices.
The demand here, similar to that of razor blades, depends on the games that the platforms support.
The demand for video games and related products is similar to the demand for the broader consumer products market, in that they both depend on audience reception and seasonality.
For instance, the Goldeneye game for Nintendo 64 was well-received and became a classic; its remake received positive notes, but you see players more interested in titles such as Call of Duty or even Halo because the “window” for that movie is shut.
Q: Thanks for that great overview of the media landscape. What about on the telecom side?
A: On the communications side of things, you have:
Radio Stations: You may have noticed that these firms directly rely on advertisement revenue. In the case of National Public Radio, content licenses are sold to member stations and help to generate revenue. Donations from the listener base add to revenue as well.
The case for “pay-for-listen” type radio stations such as SiriusXM depends on the demand for the locations in which radio devices can be installed; most often that means “in cars.”
So you can expect to see the demand for satellite radio to move slightly in tune with the demand for automotive platforms compatible with the technology.
As I mentioned earlier, the attractiveness of satellite radio as a market can be linked to how many listeners “tune in,” so to speak.
If competing firms reduce the number of commercials, play longer sets, and play exclusive tracks, those elements may tip the scale towards free, commercial-supported radio (Source: SiriusXM).
Telephone and Cellphone Service Providers and Related Firms (ex: Yellowpages, Verizon, AT&T): These firms offer the familiar dial-tone connection, Internet, broadband, and sometimes wireless connection you probably use every day.
While wireless plans exist in both pre-paid and post-paid form, the majority of customers participate on a post-paid basis. The demand for connectivity is based on the intensity of data applications (games, video streaming, etc.).
Some of these companies are subject to extensive government regulation, so that also plays a role here depending on the country and type of firm – similar to what you see in healthcare.
Internet Signal Providers (ex: Clearwire, Ruckus, AOL): This sector mostly consists of mobile WiFi and coverage extension, and these firms play an interesting role in the demand for connectivity.
On one side, you have towers adding connectivity capacity for mobile users, and on the other side, you’ve got a company focused on aiding service providers when there’s too much demand and too little bandwidth.
Shalini Ramachandran wrote about this problem in the article “Why is Wi-Fi So Slow?” and described how providers are trying to find ways to satisfy customers without breaking their systems.
Commercial Satellite (ex: Satmex): These firms focus on relaying programming rather than assisting land defense vehicles communicate with one another, and are staffed via contracts with content providers.
Every now and then, you will also find sports franchises covered under the media department, but stadiums are usually covered by the public finance or infrastructure groups.
Q: What’s covered in one of your telecom or media market overviews?
A: In a telecom update, you might find charts showing wireless and wireline growth in a particular geography, market share for particular areas (ex: broadband), penetration, access lines, and, most importantly, subscribers.
Changing the Channel to Valuation Land
Q: Can you tell us how you value media and telecom companies? Do you see different multiples or approaches used?
A: You see more differences in terms of operating metrics; media and telecom companies are effectively fairly “standard” companies that sell normal products to customers, so the valuation methodologies and multiples are not wildly different.
- Subscriber Penetration (%): Basic, Digital, and Telephony
- Subscriber or Access Line Annual Growth or CAGR
- Average Revenue Per User (ARPU)
- EBITDA Cumulative Annual Growth Rate (CAGR): (Most Recent Figure / Oldest Figure)(1/No. time periods)-1
- EBITDA / Subscribers
- Traditional Metrics That Also Apply to Media and Telecom: Revenue Growth, EBITDA Margin, (EBITDA – CapEx) Margin, CapEx and D&A as dollar amounts and as percentages of Revenue
Trading Metrics and Multiples:
- Enterprise Value / Subscribers
- Equity Value / Levered Free Cash Flow (AKA Free Cash Flow to Equity)
- Net Debt / EBITDA (Many media and telecom companies are highly levered, so this one is important)
- Dividend Yield
- Traditional Metrics and Multiples That Also Apply to Media and Telecom: Premium Paid (for transactions), EV / EBITDA, and P / E
The standard valuation approaches apply: Public Comps, Precedent Transactions, and the DCF.
One difference, though, is that Sum of the Parts can be more important here because so many of these companies are diversified and have significantly different divisions.
You multiply the EBITDA of a department by an appropriate EV/EBITDA multiple (e.g. if you’re valuing the consumer products department of a media conglomerate, you’d pick the median multiple for a set of consumer products public comps) to determine the contribution to Enterprise Value from that division.
Then, you add up the contribution from each department, factor in corporate-level overhead, and work backwards from Enterprise Value to Equity Value to calculate the Implied Price per Share.
You guys should really create a “Valuation Multiples and Methodologies Across All Sectors” chart!
Q: That’s a great idea, maybe when we finish a few more of these industry group primers…
Speaking of that, do you have any materials or example presentations to share with our readers?
A: Of course, take a look at these items for your review:
- Level Three / Global Crossing: Company Presentation
- Dolan Family / Cox Communications: by Lehman Brothers and Citi
- America Movil / Telmex by Morgan Stanley
- Brasil Telecom by Credit Suisse
As you can see, the valuation approaches are not dramatically different – the main differences lie in the content of the sector pages and what items you emphasize.
There are also some regional differences such as the presence of the ON / PN share structure that you see with many Latin American companies.
Q: Let’s pause the tape, or pause whatever thing you use to record sound these days. What’s the difference between what a consultant does in covering the sector, and what you do?
Ignore the point about how you still can’t buy bottles with Starwood Points.
A: I know this isn’t the industrials article, but I think this analogy still holds: a banker would tell you that your car is broken, and a consultant would tell you how he would fix it.
A consultant would delve into topics such as: how can you control costs, or boost revenue? A banker would focus on projecting those two items instead.
On the subject of sector updates, a consultant’s sector update tends to be a lot broader and consider metrics that a banker wouldn’t pay too much attention to when it comes to valuation.
You see this in the divergence between sector projections for topics such as data usage, and company-specific projections on how data demand impacts top-line revenue, for example.
Get Promoted, and Get Out
Q: How did you go from third year analyst to first year associate?
A: My group liked my work, and I liked my group (laughs).
Actually it’s a little more nuanced than that.
I get along well with everyone, and people just like working with me in general.
When it comes time to grab a round of drinks, I’m on the invite list, and when it comes time to work on some interesting banking assignments, I’m on that list too.
Once I was told, “Everyone likes a hard worker. So make the most of the opportunity, put your head down, and work.”
There was another phrase floating around: “A good banking professional is similar to a good car, it gets used a lot and often.” That’s not to say your staffing level is indicative of your performance quality.
Q: How did you find your buy-side opportunity with so few years working in investment banking?
A: Recruiters definitely treat you differently if you worked in a traditional coverage group.
It’s no fault of anyone, just years and years of tradition locked into procedure.
Having earned my promotion, I reached out to specific funds, knowing that I could have an edge in the recruiting process if I applied a more tailored approach, rather than working with a buy-side recruiting agency with a thousand applicants vying for attention.
Q: Where do media/telecom banking professionals go once they’re done with their two years?
A: The group is a great springboard for buy-side opportunities.
The whole concept of working with distressed assets (radio towers anyone?) lends itself to working on credit investing.
Working with media firms also provides insights into other sector verticals such as consumer products and technology.
The key here is having a broad enough experience, along with a good depth of transaction experience.
Q: Who are the major players when it comes to covering the media and telecom spaces?
A: On the M&A side of things, Morgan Stanley, Goldman Sachs, JPMorgan and Citi are pretty solid.
When it comes to capital markets, JPMorgan, Deutsche Bank, Bank of America Merrill Lynch, Morgan Stanley, and Citi are the names on the league tables.
It should come as no surprise especially after you’ve read the article on corporate banking.
For boutiques, there’s a whole bunch floating around that do TMT coverage, but the only names with a particular strength in media/telecom that come to mind are Foros Group, Allen & Co., Guggenheim Partners, and The Raine Group.
Q: What would you recommend to our readers to take a look at if they’re interested in media / telecom?
A: Signals Research Group provides some interesting thought pieces.
My thinking on reading is that “less is more” – I’m sure you have plenty on your plate already, whether it’s school or work.
Q: Any last words for our readers?
A: Spread the word about this great website! These guys are doing a half-decent job of improving upon God’s work. :D