Netflix and Lionsgate? Sony and Starz? Fox and Viacom? These are just a few of the deal ideas that execs, bankers and analysts continue to bat around — even after Fox aborted its $80B bid for Time Warner last week. The smart money still bets that content companies will begin to consolidate, probably soon. There’s too much cheap money as well as high-flying stocks to fuel deals. And it’s an article of faith that programmers will need scale, a strategic partner, or both in order to thrive as the market becomes more global and digital. Some also fear that they’ll become too weak to negotiate big price increases, or other concessions, from pay TV providers if federal regulators approve Comcast’s acquisition of Time Warner Cable, and AT&T’s with DirecTV.
You could spend hours weighing all of the possible deals. But here’s how things look for some of the companies (from biggest to smallest in market value) that could easily be in the center of the action:
Disney: You can’t rule CEO Bob Iger’s company out, although investors would be stunned if he made a mega-deal after consolidating Pixar, Marvel, and Lucasfilm, and investing a ton to build and upgrade Disney’s theme parks. “We’ve said that we’re not targeting any acquisitions,” Iger told analysts this month. “We’ve got a great hand as a company and we’re spending a fair amount of time and capital investing in the assets that we currently have.” Yet he left some wiggle room, adding that he wouldn’t “speculate on whether that could change or not.” So round up the usual suspects: Scripps Networks channels including HGTV and Food Network would help Disney appeal to women. Discovery’s channels also would fit, with its recent acquisition of Eurosport making it especially attractive to combine with ESPN.
Fox: COO Chase Carey says that he and CEO Rupert Murdoch have “no plans to pursue any other third-party content company” after receiving such a chilly response from the owner of Warner Bros, Turner and HBO — and Fox shareholders. But plans can change, and investors are fickle. So what deals might make sense for Fox? Viacom has a lot of complementary assets if Chairman Sumner Redstone ever decided to sell: MTV Networks would reinforce Fox’ appeal to teens and young adults. Discovery and Scripps Networks are less natural fits, but would give Fox more muscle in negotiations with pay TV distributors. Murdoch might like premium network owner Starz for the same reasons he liked Time Warner’s HBO. And for those who love Machiavellian games, there’s a school of thought that Murdoch is playing possum with Time Warner: He may be betting that its stock price will stagnate, and that angry shareholders eventually will insist that CEO Jeff Bewkes invite Fox back for a more cordial conversation about a deal.
Time Warner: Murdoch may have a long wait, if Bewkes has his way. “We’re not lacking something that we need,” he told analysts last week after Fox left Time Warner’s coop. The CEO who jettisoned AOL, cable systems, and Time Inc in the wake of the AOL Time Warner debacle added that mega mergers usually interfere with business plans and invite regulatory scrutiny. Those worries might fade if Bewkes feels vulnerable to a hostile takeover effort: Time Warner is one of the few Big Media companies without a controlling shareholder. A tech company such as Google could serve as a white knight simply by acquiring a large, but not controlling, stake. Meanwhile, Time Warner considers all options. The company had at least a passing interest in Univision. Some analysts believe that Warner Bros and CNN would benefit from having a tie to a major broadcast network. CBS makes the most sense. And now that Time Warner is simply a TV and movie content company, it might find fans on Wall Street for deals with Viacom, Lionsgate — or, you never know, Fox.
Viacom: If the ad market continues to weaken, and programming costs continue to rise, then there’d be a powerful rationale for the owner of MTV Networks to make a deal. Viacom might need more scale to force cable and satellite companies to increase their programming outlays. “Larger entities – especially those with sports rights and broadcast channels – have a better chance to secure these fees,” Janney Capital Markets’ Tony Wible says. That could justify a combination with companies such as Fox, Time Warner, or CBS — yes, the company Viacom split from in 2006. Redstone’s National Amusements controls both entities, including about 79% of Viacom’s’ voting shares. Federal regulators might lump Viacom and CBS together anyway when looking at the antitrust implications of any deal either might want to make. (If so, then forget any combination with Fox. No way the feds would allow one company to control two major networks and TV station groups.) But some bankers and analysts say Redstone, 91, has no interest in deciding whether Viacom’s Philippe Dauman or CBS’ Les Moonves would lead a combined entity.
CBS: It has a healthy balance sheet, and Moonves would like to be less dependent on domestic ad sales. So you can almost throw a dart at a list of media and tech companies and come up with a rationale for a deal with CBS. AMC Networks, Discovery, Lionsgate, Scripps Networks, Sony Entertainment, Starz, Time Warner, and Univision have all come up in some way, shape or form. The most logical one, though, still might be Viacom. “We obviously look at every opportunity that arises within our industry,” Moonves said last week adding that CBS will “continue to be very disciplined in our approach to M&A.” He assured investors that he sees nothing that might change CBS’ plan to repurchase $6B of its stock this year and raise its dividend by 25% to 15 cents per share.
Netflix: A buyer would have to be brave or reckless to go after Netflix, which trades for an insanely high 136 times its earnings. But could Netflix use its high-priced stock to buy something else? CEO Reed Hastings and other execs don’t rule it out. They say the streaming company wouldn’t have to fear if two frenemies such as Fox and Time Warner merged. Still, Netflix believes “there are probably some advantages” to owning a production infrastructure instead of renting, Chief Content Officer Ted Sarandos told analysts last month. “It really depends on the volume of production you’re planning to ramp up.” With a market cap of $27.2B, Netflix probably couldn’t afford any of the industry giants. But it might make a good partner for some of the smaller companies including AMC Networks, Lionsgate, Scripps Networks, or Starz.
Discovery: With his acquisitions of Eurosport and the SBS Nordic TV assets, CEO David Zaslav has shown that he wants to expand overseas. And he said last month that he’s “still looking at” possible domestic deals to complement his channels including Discovery, ID, Animal Planet, TLC, and half of OWN. Scripps Networks would be a natural. But Zaslav may not be able to buy anything big for now — some debt owners fear that, following its recent deals, Discovery might bite off more than it can chew. That’s why many financial types believe that, if Discovery’s involved in a mega-deal, it likely would be as a seller. The company’s stock trades at about 13 times earnings, on the low side for a major media company. Discovery’s assets would fit nicely with several industry powers including CBS, Disney, Fox, or Time Warner. But Zaslav shouldn’t worry about someone making a hostile run at his company. Liberty Media’s John Malone, one of his biggest fans, controls nearly 30% of the voting shares.
Sony Pictures: The Japanese electronics giant made it clear last year that it doesn’t want to sell, even a minority stake. But if it’s in for the long run, then many believe it has to buy something. Sony would have to stay away from U.S. broadcasting: Federal rules bar foreigners from owning TV stations. That leaves options such as AMC Networks or Starz to provide outlets for Sony’s movies and TV programming; last year Sony renewed its premium pay TV distribution deal with Starz through 2021. Lionsgate’s another option if the company wants more content in its pipeline. All of the above also could complement Sony’s announced plan to launch a streaming service.
Scripps Networks: The company that owns lifestyle services led by HGTV, Food Network, and Travel Channel says it doesn’t need a deal. “Our targeted brands are really must-have channels that deliver an upscale audience. That really bodes well for the future of our content on all platforms,” CEO Kenneth Lowe said last week. The company “is going to play very well just as we are currently comprised.” Still, as a pure play content owner with a market cap of $11.2B, some analysts consider it a ripe target for companies such as CBS, Discovery, Disney, Fox, Netflix, and Time Warner. They also don’t rule out the possibility of Scripps buying AMC Networks, Starz, or Crown Media (Hallmark Channel). For now, “the on-again/off-again ‘M&A [stock] trade’ seems to be in ‘off-again’ status” after Fox scuttled its Time Warner offer, Bernstein Research’s Todd Juenger says.
Lionsgate: It’s hard to think of media or tech company that wouldn’t be interested in a pure-play movie and TV studio, with a market cap of $4.4B, and a library that includes hits such as The Hunger Games and Mad Men. CBS, Fox, Netflix, Viacom, Sony…use your imagination. In addition to the obvious business synergies, a buyer also might be able to take advantage of the low taxes Lionsgate pays as a Canadian multinational. “We don’t expect to pay U.S. federal taxes before we’re well into fiscal ’17,” CFO James Barge told investors last week. Corporate overhead accounts for about half of Lionsgate’s cash flow; FBR and Co’s Barton Crockett says that could be halved in a merger. What’s more, a buyer could unload assets to help pay for a deal. For example, one could sell Lionsgate’s 50% stake in TVGN (TV Guide Network) to partner CBS, or its 31% stake in EPIX to Viacom.
AMC Networks: With a market value of $4.3B, lots of buyers would find it relatively easy to pick up the pure play content company famous for its cult dramas including Walking Dead, Mad Men, Breaking Bad — and possibly next year’s Breaking Bad spin off, Better Call Saul. CBS and Sony often come up in conversations about who might be most interested in picking up the owner of AMC, Sundancetv, WE tv, and IFC — as well as IFC Films. AMC also has a substantial overseas presence from its recent acquisition of Liberty Global’s Chellomedia. But any deal involving AMC would have to be approved by the families of Cablevision’s Charles and Jim Dolan, who control about 66% of the voting shares. They’ve given no indication that they want to sell. Meanwhile, many Wall Streeters applaud CEO Josh Sapan’s efforts to boost ad and affiliate revenues and greenlight smart shows that don’t break the bank.