Cowen and Co’s Doug Creutz advises investors today to “call a ‘time out'” on Big Media stocks in a break with the prevailing view on Wall Street that an upcoming round of mergers could help companies, or at least not hurt them. He fears that Fox’s bid for Time Warner will lead to “a land grab for content assets.” And companies that need cash for acquisitions probably won’t continue to repurchase shares and pay big dividends — strategies that have helped to keep investors interested in traditional media. The analyst says he now takes a “more negative view” of Big Media, and downgraded Fox (to underperform from outperform), Viacom, and Time Warner (both to market perform from outperform). “Historically, this group has been uninvestable when M&A activity has been significant.”
Creutz observes that when Fox CEO Rupert Murdoch has had dealmaking on his mind “the shares of his company have underperformed the market.” And the analyst says he’s “not a believer that a combination with Time Warner would create significant value.”
It’s too risky to bet on traditional media, Creutz says, especially at a time when their stock prices are “near multi-year highs.” The advertising slow down in Q2 “feels like it was a little worse” than previous soft patches. It could become “a more significant negative” if the economy weakens. The pay TV cash cow could be threatened as “new over the top [Internet] distribution appears to be opening the door for insurgent content providers to potentially take market share.” And Creutz notes that the “dismal” 20.8% year-over-year drop in the domestic movie ticket sales so far this summer “provides another data point” to support his view that demand for Hollywood product is weakening. Indeed, the downward trend “may trickle into Western Europe and offset international growth in emerging markets.”
The analyst says he hopes that CBS, Viacom and Time Warner “fight the urge to engage in significant deal-making.” But he suspects the temptation to play “may prove overwhelming” with most of the big guys angling to buy, not sell. For smart, strategic reasons? Don’t be silly. There’s “the eternal mogul desire to simply be bigger than the other guys” — especially since “none of [the] incumbent CEOs are likely to want to give up their jobs involuntarily.”
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