Analyst says media companies have to give back cash

With media stocks performing poorly, but the big media companies still throwing off lots of free cash flow, analyst Douglas Shapiro at Banc of America Securities has been looking at the options and concludes that the companies have no choice put to start giving that cash back to their shareholders. Shapiro also concludes that the media giants would be better off today if they hadn't gone on their acquisition binges. For example, how would you like a $77 stock price for Viacom, instead of around $34?

In a recent report for clients, Shapiro dissected the past acquisitions of four media giants - - Time Warner, Viacom, Disney and Comcast. Time Warner is an easy target, of course, because of the disastrous AOL acquisition. But Shapiro concludes that the others didn't do their shareholders any favors either. He says the companies haven't done a good job of allocating capitol and that few of the major acquisitions have proved to be accretive. He notes that Viacom brags today that once Blockbuster is spun off, about half of its cash flow will come from its fast-growing cable networks - - but if Viacom had never acquired Paramount, Blockbuster, CBS, BET and Comedy Central, Shapiro calculates that 80% of its cash flow would come from cable networks and he estimates that the shares would be worth about $77 each, 121% higher than where Viacom trades now.

Surprisingly, Shapiro finds that Disney is the only one of the four whose current share price is higher than it would be if it hadn't acquired Capital Cities/ABC and Fox Family. That's almost entirely because of the strong growth at ABC's ESPN.

But if acquisitions haven't worked out - - and a backlash from government and the courts made new mega-mergers unlikely anyway - - what will the big media companies do with their free cash flow? Shapiro says most are now underleveraged, so it doesn't make sense to pay down debt. He concludes that they have no choice but to return the money to their shareholders in the form of either dividends or stock buybacks. The analyst prefers stock buybacks, since that doesn't force any immediate tax consequences on shareholders.

"Investors have taken an 'I'll believe it when I see it' attitude toward recent promises by media companies to return capital," Shapiro wrote. "We think they will see it because media companies have no choice."