By Amol Sharma and Keach Hagey
Distributors of pay-television services have been pairing up in
megaSHYmergers. Now, the companies that make the shows may not be
far behind.
After years of pursuing a cautious strategy that emphasized
returning capital to shareholders over making splashy acquisitions,
U.S. media companies are priming themselves for what many industry
executives believe will be a major round of consolidation.
One possible trigger: Their biggest customers, the cable and
satellite-TV providers that pay to license their TV channels, are
gaining scale through their own deals. Cable giant Comcast Corp. is
seeking government clearance to buy Time Warner Cable Inc. while
DirecTV is joining up with AT&T Inc.
The behemoths that result from those two deals, which combined
will have more than half of all pay-TV subscribers, could have
increased leverage when negotiating for programming and threaten
the subscription revenue U.S. media companies depend on.
Most susceptible to being squeezed, analysts and executives say,
are smaller TV channel owners such as AMC Networks, home of "The
Walking Dead," and Food Network owner Scripps Networks Interactive.
Selling to bigger competitors could help these companies beat back
the threat.
Another potential acquisition target: Spanish-language
broadcaster Univision Communications, which has sharply criticized
the Comcast merger, saying it would give the cable giant
"staggering influence over Hispanic consumers." Univision's owners,
mostly private-equity firms along with billionaire Haim Saban, have
had preliminary discussions with big media companies including CBS
Corp. and Time Warner Inc., The Wall Street Journal reported on
Thursday night.
The most likely acquirers include big media conglomerates like
21st Century Fox Inc. and Walt Disney Co., whose size and control
of popular sports, news and broadcast programming give them extra
leverage over pay-TV providers. Midsize companies, including Viacom
Inc. and Discovery Communications Inc., could be buyers of
companies such as Scripps or AMC, or sellers to bigger companies,
depending on the scenario.
Despite its size, Time Warner, a media giant with a $60 billion
market capitalization, is viewed as a possible target, after having
spun off or sold a series of businesses over the past decade: the
music division, AOL, cable distribution and, most recently, the
Time Inc. publishing division.
A wild card is whether streaming giant Netflix Inc. could jump
into any bidding, seeking to boost its production capabilities.
Netflix has never made an acquisition and isn't actively in the
hunt for one, a person familiar with the matter said.
Running cable channels remains a lucrative business. But pay-TV
subscriptions have plateaued at roughly 100 million households. The
market has actually shrunk in several quarters in the past few
years, according to MoffettNathanson Research, and there are fears
in the industry that more consumers will "cut the cord" in favor of
online streaming services or never sign up in the first place. That
means media companies will rely more on raising the per-subscriber
prices they charge for TV-channel carriage to power growth.
At the same time, growth in TV advertising has slowed. Overall
spending on TV shrank last year by 0.1%, according to Kantar
Media.
As TV is increasingly distributed on demand and through apps,
some content and channels will prove more valuable than others.
Already, there are some signs that Netflix and Amazon aren't
willing to pay as much for unscripted, nonfiction fare as other
types of programming like scripted and serialized dramas.
"Consolidation might not seem to have much positive impact in
the short term, but could really benefit content and channels
companies over time by providing negotiating scale and diversity of
product," said Michael Morris, a media analyst at Guggenheim
Securities.
Size isn't the only factor likely to drive deal-making. Some
companies may be looking for more exposure to the areas of the
business that are growing fastest, including TV production and
licensing of programming to subscription video sites and
international pay-TV channels. Among studios Lions Gate
Entertainment, maker of "Mad Men" and "The Hunger Games" movie
franchise, is seen as a potential target. Sony Corp.'s studio is
also viewed as a possible target.
In the same vein, Univision could be attractive, given that
Spanish-language TV advertising has continued growing despite a
slowdown in the overall sector, Kantar data shows.
Wall Street's investment bankers, who would stand to make big
commissions if large deals come to pass, are already pitching top
media executives on all sorts of scenarios, laying out reasons why
it makes sense for one concern to pair up with another.
There are also forces working against deal-making, including the
continuing investor demand for buybacks that increase per-share
earnings and tend to boost stock prices. And there are also
differences over valuation: Discovery and Scripps held preliminary
talks about a merger at the end of last year that would have
created a powerhouse of nonfiction cable programming, but the
potential deal fell apart over price, according to people familiar
with the matter. While Scripps would have given Discovery more
scale, it had little to offer in terms of international growth or
content-licensing revenue, according to people familiar with the
matter.
RBC Capital Markets analyst David Bank said smaller
cable-channel owners have the most reason to combine if
decelerating growth in the U.S. pay-TV market takes hold. "It could
be only temporary," he said. "If it's not, if it's more secular in
nature, it would be logical to try to get more scale through
consolidation."
The market's dynamics are shifting at a time when some industry
giants are well-endowed. Rupert Murdoch-controlled 21st Century
Fox, for example, has $5.5 billion in cash at its disposal, and
could haul in $9 billion to $10 billion more, after taxes, should
it complete a plan it is pursuing to sell its satellite-TV holdings
in Europe. That transaction, however, is held up while Fox tries to
acquire valuable Italian soccer rights. (21st Century Fox and Wall
Street Journal owner News Corp were part of the same company until
last year.)
Some analysts believe 21st Century Fox could pump the cash from
the satellite deal into stock buybacks, but acquisitions are
another possibility. One possible mammoth deal, some executives and
analysts say: an acquisition of Time Warner.
"However improbable it may seem, one cannot overlook this
megadeal given its immense financial benefits that dovetail with a
number of strategic benefits," said Janney Capital Markets analyst
Tony Wible. The companies each own powerful cable channels and
production studios, and control valuable rights to sporting events
including the World Series, NCAA Final Four and the NBA Finals.
A deal could also attract significant regulatory scrutiny.
Another possible issue would be having the competing news channels
CNN and Fox News under one roof. One media executive said that
could be solved if CNN were split off and acquired by a company
like CBS.
Time Warner is currently discussing various possible deals with
Vice Media, the most likely of which would combine its HLN news
channel with Vice in a new venture, people familiar with the matter
say.
CBS's balance sheet is also especially strong, thanks in part to
a split-off of its outdoor-advertising unit. CBS has said it would
continue to pursue stock buybacks while looking for targeted
acquisitions where appropriate. RBC's Mr. Bank said a CBS-Time
Warner tie-up would be "the dream deal," bringing synergies between
CNN and the CBS news division, while joining two of the industry's
best TV studios.
Viacom, owner of MTV and Comedy Central, is viewed as an
eventual target. At age 91, Viacom Executive Chairman and
controlling shareholder Sumner Redstone has been taking a reduced
role at the company.
Shalini Ramachandran contributed to this article.
Write to Amol Sharma at amol.sharma@wsj.com and Keach Hagey at
keach.hagey@wsj.com
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