Changing Channels: Television Programming Issues In Negotiating Acquisition Deals

M & A transactions in the television business can take many forms ' from a large-scale merger such as that recently proposed between Comcast and Disney to the acquisition of a cable TV channel or small local UHF broadcast station. In some cases, even the acquisition of a large and significant sports rights package can be viewed as rising to the level and complexity of an M&A transaction. What is seen on the screen is a function of the rights obtained by broadcasters. Not surprisingly, given the complexities of such transactions, unusual rights situations arise. Following are some that I have encountered in many years of doing deals in the TV business.

The Perpetual Time Block

Large vertically integrated Big Media Company A was acquiring fully-distributed general audience Cable Channel B. The transaction had many interesting corporate angles, but from a rights point of view, the owners of the channel had, only a few years earlier, entered into what they considered to be an “iron-clad” 20-year agreement with a not-for-profit organization. The 20-year agreement had an automatic 20-year renewal at the option of the organization. The agreement thus gave the organization the right to program a block of prime time with a show produced by the organization for 40 years, which in the TV world is eternity. The acquisition was completed as the cable channel was quite valuable to the buyer even with the perpetual time block.

Life went on, but I was bothered by the thought that Company A might have pulled its punches by accepting the validity of the agreement. It is not often in this business that one gets an opportunity to see an opinion tested by a subsequent transaction involving the same asset. In this case, several years after Company A bought the channel, it sold it to Even Bigger Media Company B. Company B could have taken a much harder line and perhaps come up with an argument that a 40-year term violated the rule against perpetuities or that two running 20-year terms violated it twice, or at least tried something to that effect. Company B did not, and the not-for-profit organization's show continues to run, “nesting” inside a network to whose other programming it bears little or no relationship.

The lesson: Long-term time slot agreements can approximate a sort of equity ownership in the fundamental asset of a channel, its airtime. But the longer the term, the more likely it may be that the agreement is challengeable.

The Song and Dance Number

Big Media Company A was purchasing a large satellite broadcasting platform in a certain part of the world. This was back in the early days of satellite broadcasting and the platform carried all of 5 channels. One was a music channel owned by Big Media Company C. The new owners realized that they would be building a brand for Company C in this part of the world by carrying the channel. This may have seemed reasonable to Company C, as Company A did not have its own music channel business. But it rankled the new owner to provide a stage on which Company C's channel could become more and more popular in the region. Company C continued to invest in its channel and operate it during the period leading up to the closing of Company A's acquisition. Company C may have felt that it didn't face much of a threat, as Company A was not in the music channel business.

During due diligence, Company A had noticed a clause that allowed for the cancellation of the channel's carriage on 90 days' notice, for no cause and with no penalty. Fairly soon after the closing, Company A gave notice to Company C, and the 90 days began to run. Though Company A didn't have any music channels of its own, it created and launched one in 90 days. Company C struggled for several years to regain an equivalent footprint in the region while Company A built itself a nice broadcasting brand and asset.

The lesson: An incumbent channel may think about insisting on a penalty for being dropped. If you can predict that your channel will be dropped, consider terminating the agreement early.

Bird on a Wire

A major satellite broadcaster was debating whether or not to purchase a large library of TV rights to films produced in the language of one of its major broadcast territories. Satellite and cable were relatively new to the territory, although cable had been established for some time before satellite. Satellite TV was at the time delivered to most homes by cable from a satellite head-end. Did this make it cable TV or satellite TV? Did it matter if it was all pay-TV?

It mattered in that the rights grants from the owners of the films had mostly been made during the relatively brief period after cable was established but before satellite was established. Most of the rights grants thus referred to the “cable television” rights to the films. During that early period, the films had been transmitted by being played on a videocassette machine hooked up to the cable system.

The satellite TV system owner could have argued that the transmission by satellite to a head-end which then transmitted the signal to a home cable was indeed “cable television.” If this were the satellite operator's only goal for its business, it might have been satisfied by the rights language. Unfortunately, the satellite operator was considering launching a DBS system, in which the films would be beamed directly into a small dish on a subscriber's home. Because the operator hoped to eventually use the films in this way, the rights grants were not satisfactory and the acquisition did not proceed.

Over 10 years later, regulatory problems continue to constrain the development of a DBS business in this particular territory. Films are still delivered to the home over cable, even if they are first delivered, encrypted, to a satellite head-end.

The library acquisition would have paid for itself in 5 years. It would also have been possible to go back and for each film purchase “satellite rights” as an add-on, although this would have taken some time and some additional expense as there were over 2000 films involved.

The lessons: Don't count on regulatory framework evolving in a logical or business like way, especially in countries with complex business and legal cultures. Consider buying rights even though the rights definition may not be perfect, if the additional rights you want can be added-on at a reasonable cost.

Format, My Format

A major media investor was contemplating a purchase of a broadcaster in another country along with its program library. The broadcaster was riding high, with some highly rated shows on the air. Part of the value attributed to the program library was the ability to extend the life of the hit shows by producing spin-offs, new versions, new episodes etc.

Upon examination, however, it appeared that many of the most successful shows were local versions of U.S. or U.K. formats. In this case, the format license, not just the license of the show to the broadcaster, had to be examined. The format license often does not allow the broadcaster to do very much with the format beyond broadcast the actual local version.

The lesson: U.S. and U.K. format licensing has become so ubiquitous that its success can actually reduce the value of a targeted broadcast or production company.

Keeping Your Eye off the Ball

Sports rights have become the holy grail of broadcasters. The extent of the frenzy is nowhere as great as in the major soccer-playing nations.

In one, a network that could not afford any key soccer rights was for sale.

This broadcaster was so convinced that it had to have some kind of soccer programming that it developed a soccer show in which the announcer watched a game that was being broadcast on another network. The TV that the announcers were watching was off-screen. The announcers then gave their own live commentary on the game.

Naturally, this was controversial, and quite possibly illegal. It was only marginally successful as a show. The potential network acquirer soured on the acquisition before it became necessary to determine whether or not this was a rights violation or merely a violation of good sportsmanship.

The lesson: There are gray areas that can be created through an overabundance of creative thinking. These should be tested carefully by an acquirer.

Thus TV programming can raise issues around the world as diverse as the shows appearing on the world's many TV screens. Generally these issues can be worked through. If they cannot, as in the case of the perpetual time block, they may have to be lived with.

M & A transactions in the television business can take many forms ' from a large-scale merger such as that recently proposed between Comcast and Disney to the acquisition of a cable TV channel or small local UHF broadcast station. In some cases, even the acquisition of a large and significant sports rights package can be viewed as rising to the level and complexity of an M&A transaction. What is seen on the screen is a function of the rights obtained by broadcasters. Not surprisingly, given the complexities of such transactions, unusual rights situations arise. Following are some that I have encountered in many years of doing deals in the TV business.

The Perpetual Time Block

Large vertically integrated Big Media Company A was acquiring fully-distributed general audience Cable Channel B. The transaction had many interesting corporate angles, but from a rights point of view, the owners of the channel had, only a few years earlier, entered into what they considered to be an “iron-clad” 20-year agreement with a not-for-profit organization. The 20-year agreement had an automatic 20-year renewal at the option of the organization. The agreement thus gave the organization the right to program a block of prime time with a show produced by the organization for 40 years, which in the TV world is eternity. The acquisition was completed as the cable channel was quite valuable to the buyer even with the perpetual time block.

Life went on, but I was bothered by the thought that Company A might have pulled its punches by accepting the validity of the agreement. It is not often in this business that one gets an opportunity to see an opinion tested by a subsequent transaction involving the same asset. In this case, several years after Company A bought the channel, it sold it to Even Bigger Media Company B. Company B could have taken a much harder line and perhaps come up with an argument that a 40-year term violated the rule against perpetuities or that two running 20-year terms violated it twice, or at least tried something to that effect. Company B did not, and the not-for-profit organization's show continues to run, “nesting” inside a network to whose other programming it bears little or no relationship.

The lesson: Long-term time slot agreements can approximate a sort of equity ownership in the fundamental asset of a channel, its airtime. But the longer the term, the more likely it may be that the agreement is challengeable.

The Song and Dance Number

Big Media Company A was purchasing a large satellite broadcasting platform in a certain part of the world. This was back in the early days of satellite broadcasting and the platform carried all of 5 channels. One was a music channel owned by Big Media Company C. The new owners realized that they would be building a brand for Company C in this part of the world by carrying the channel. This may have seemed reasonable to Company C, as Company A did not have its own music channel business. But it rankled the new owner to provide a stage on which Company C's channel could become more and more popular in the region. Company C continued to invest in its channel and operate it during the period leading up to the closing of Company A's acquisition. Company C may have felt that it didn't face much of a threat, as Company A was not in the music channel business.

During due diligence, Company A had noticed a clause that allowed for the cancellation of the channel's carriage on 90 days' notice, for no cause and with no penalty. Fairly soon after the closing, Company A gave notice to Company C, and the 90 days began to run. Though Company A didn't have any music channels of its own, it created and launched one in 90 days. Company C struggled for several years to regain an equivalent footprint in the region while Company A built itself a nice broadcasting brand and asset.

The lesson: An incumbent channel may think about insisting on a penalty for being dropped. If you can predict that your channel will be dropped, consider terminating the agreement early.

Bird on a Wire

A major satellite broadcaster was debating whether or not to purchase a large library of TV rights to films produced in the language of one of its major broadcast territories. Satellite and cable were relatively new to the territory, although cable had been established for some time before satellite. Satellite TV was at the time delivered to most homes by cable from a satellite head-end. Did this make it cable TV or satellite TV? Did it matter if it was all pay-TV?

It mattered in that the rights grants from the owners of the films had mostly been made during the relatively brief period after cable was established but before satellite was established. Most of the rights grants thus referred to the “cable television” rights to the films. During that early period, the films had been transmitted by being played on a videocassette machine hooked up to the cable system.

The satellite TV system owner could have argued that the transmission by satellite to a head-end which then transmitted the signal to a home cable was indeed “cable television.” If this were the satellite operator's only goal for its business, it might have been satisfied by the rights language. Unfortunately, the satellite operator was considering launching a DBS system, in which the films would be beamed directly into a small dish on a subscriber's home. Because the operator hoped to eventually use the films in this way, the rights grants were not satisfactory and the acquisition did not proceed.

Over 10 years later, regulatory problems continue to constrain the development of a DBS business in this particular territory. Films are still delivered to the home over cable, even if they are first delivered, encrypted, to a satellite head-end.

The library acquisition would have paid for itself in 5 years. It would also have been possible to go back and for each film purchase “satellite rights” as an add-on, although this would have taken some time and some additional expense as there were over 2000 films involved.

The lessons: Don't count on regulatory framework evolving in a logical or business like way, especially in countries with complex business and legal cultures. Consider buying rights even though the rights definition may not be perfect, if the additional rights you want can be added-on at a reasonable cost.

Format, My Format

A major media investor was contemplating a purchase of a broadcaster in another country along with its program library. The broadcaster was riding high, with some highly rated shows on the air. Part of the value attributed to the program library was the ability to extend the life of the hit shows by producing spin-offs, new versions, new episodes etc.

Upon examination, however, it appeared that many of the most successful shows were local versions of U.S. or U.K. formats. In this case, the format license, not just the license of the show to the broadcaster, had to be examined. The format license often does not allow the broadcaster to do very much with the format beyond broadcast the actual local version.

The lesson: U.S. and U.K. format licensing has become so ubiquitous that its success can actually reduce the value of a targeted broadcast or production company.

Keeping Your Eye off the Ball

Sports rights have become the holy grail of broadcasters. The extent of the frenzy is nowhere as great as in the major soccer-playing nations.

In one, a network that could not afford any key soccer rights was for sale.

This broadcaster was so convinced that it had to have some kind of soccer programming that it developed a soccer show in which the announcer watched a game that was being broadcast on another network. The TV that the announcers were watching was off-screen. The announcers then gave their own live commentary on the game.

Naturally, this was controversial, and quite possibly illegal. It was only marginally successful as a show. The potential network acquirer soured on the acquisition before it became necessary to determine whether or not this was a rights violation or merely a violation of good sportsmanship.

The lesson: There are gray areas that can be created through an overabundance of creative thinking. These should be tested carefully by an acquirer.

Thus TV programming can raise issues around the world as diverse as the shows appearing on the world's many TV screens. Generally these issues can be worked through. If they cannot, as in the case of the perpetual time block, they may have to be lived with.