Mad Men Make AMC Priciest Media Takeover Since 2006: Real M&A

Mad Men
Actors John Slattery and Jon Hamm on the set of "Mad Men." Photographer: AMC/Scripps Howard Photo Service/Newscom

Don Draper and zombies may be enough to entice News Corp. and Walt Disney Co. to chase the most expensive American media takeover in five years.

AMC Networks Inc., the cable-television channel owner spun off last week from Cablevision Systems Corp., may lure buyers from News Corp. to Disney and Time Warner Inc., according to Gamco Investors Inc. If an acquisition fetches $42 a share as Collins Stewart LLC estimates, AMC would be valued at 25 times this year’s projected earnings, making it the most expensive U.S. media takeover greater than $500 million since 2006, according to data compiled by Bloomberg.

The TV shows “Mad Men,” “The Walking Dead” and “Breaking Bad” have helped propel AMC from a movie channel to a bastion of original programming that could be integrated with a larger network to boost advertising rates and fees from cable operators. While AMC commands a higher valuation relative to profit than 88 percent of U.S. broadcast and entertainment companies, its $2.8 billion market capitalization makes it a smaller target than standalone cable channel owners Scripps Networks Interactive Inc. and Discovery Communications Inc.

“AMC would be a very attractive asset for a number of larger media companies,” said Chris Marangi, a fund manager at Rye, New York-based Gamco, which oversees $35 billion and about 4 million AMC shares. “AMC is a hot network, and there are a lot of companies looking for more cable network exposure because they like the predictable, recurring dual-revenue streams of advertising and subscription fees.”

Georgia Juvelis, a spokeswoman for New York-based AMC, said it is company policy not to comment on rumors or speculation.

‘Mad Men’

Teri Everett, a spokeswoman for News Corp., declined to comment. Zenia Mucha, a spokeswoman for Disney, didn’t respond to a request for comment. Keith Cocozza, a spokesman for Time Warner, declined to comment.

AMC, the owner of cable networks AMC, IFC, WE tv and Sundance Channel, began trading as a separate public company July 1 after Cablevision completed a tax-free spinoff of the division, formerly known as Rainbow Media Holdings. AMC, formed in 1980, also owns independent movie distributor IFC Films, an international programming business and a TV-programming distribution unit.

The channel AMC was started in 1984 as American Movie Classics. Its show “Mad Men,” which follows creative director Don Draper in the 1960s New York advertising industry, won the Emmy for best drama for three straight years. The start of the fifth season was pushed back until early 2012 amid a standoff with creator Matthew Weiner, which AMC and producer Lions Gate Entertainment Corp. resolved in March.

Zombie Epidemic

“The Walking Dead,” a post-apocalyptic show about a zombie epidemic, premiered on AMC in October.

“There’s an attractiveness about these highly targeted cable channels,” said Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina. “Content companies like Disney, News Corp. and others need to find compelling and unique content that’s going to set them apart.”

Based on a 25 percent premium to where peers including Scripps Networks trade relative to earnings before interest, taxes, depreciation and amortization, AMC may fetch about $42 a share in a sale, said Tom Eagan, an analyst at Collins Stewart in New York. The $3 billion price tag would value AMC at about 25 times its projected 2011 net income of $120 million, according to analysts’ estimates compiled by Bloomberg.

Most Expensive Takeover

That would be the most expensive U.S. media takeover greater than $500 million since Univision Communications Inc. was taken private for 57 times net income, data compiled by Bloomberg show. The $13.7 billion deal, including debt, was announced in June 2006 and completed in March 2007.

“There’s a very good chance that AMC does get acquired in the future,” said Richard Greenfield, a New York-based analyst with BTIG LLC. “I think it’s the reason for doing the spin.”

Greenfield estimates AMC is worth at least $50 a share. AMC rose 1.9 percent to $39.52 today in New York.

Cablevision may be liable for taxes from the spinoff if AMC is acquired within two years in what is deemed to be part of a prior plan between the buyer and Cablevision, according to a regulatory filing.

As long as the acquirer didn’t have discussions prior to the spinoff with Cablevision or its controlling shareholders about buying AMC, then a deal would likely avoid triggering the tax issue, said Jason Factor, a tax partner at law firm Cleary Gottlieb Steen & Hamilton LLP in New York.

Dolan Family

Potential acquirers will likely wait at least six months before making an offer, according to Gamco’s Marangi and BTIG’s Greenfield. Cablevision implied at analyst meetings that it didn’t have substantive discussions to sell AMC, Marangi said.

A deal would have to be approved by the Dolan family who through Class B shares control the majority of shareholder voting power.

The $2.4 billion of debt that AMC took on in the spinoff may deter a potential buyer, said Rich Tullo, an analyst with Albert Fried & Co. in New York.

The stock is also expensive, he said. AMC traded yesterday at 24 times projected 2011 adjusted earnings of $1.58 a share, based on five analysts’ estimated compiled by Bloomberg. That’s more expensive than all but two U.S. broadcast and entertainment companies with a market value of at least $1 billion, data compiled by Bloomberg show.

Rising Sales

“AMC is attractive, but it’s not a must-have,” said Matthew Harrigan, an analyst at Wunderlich Securities Inc. in Denver. “People in this environment are somewhat price sensitive.”

Revenue at AMC has climbed for four straight years to $1.1 billion in 2010, and the company posted an $80 million profit last year, according to regulatory filings. Since exchanges permitted trading in the stock starting June 17, AMC shares had risen 9.3 percent through yesterday. AMC closed at $38.78 yesterday, giving the company a market value of almost $2.8 billion.

Scripps Networks, the owner of the Travel Channel and HGTV, and Discovery Communications, which runs the Discovery Channel and Animal Planet, are like AMC in focusing predominantly on cable channel assets. Cincinnati-based Scripps Networks is valued at $8.3 billion, while Discovery Communications of Silver Spring, Maryland, has a market capitalization of almost $17 billion -- or about six times the size of AMC.

“AMC has a market cap that’s nearly three times less than Scripps,” Collins Stewart’s Eagan said. “Its cable networks can be exploited by a larger media company. A larger ad sales force could probably take advantage of it.”

‘More Muscle’

While a company like New York-based Time Warner might be “gun-shy” to spend $10 billion or more on an acquisition, AMC may be “a bit of a different story,” he said.

Time Warner and News Corp. both have robust advertising sales groups that could take advantage of AMC, said John Tinker, an analyst at Maxim Group LLC in New York. Its popular scripted dramas fit with network assets they already own, he said.

“If you have an existing sales force, you give them more muscle,” Tinker said.

Time Warner owns the HBO, TBS and TNT cable channels as well as Warner Bros. Television, which produces “Two and a Half Men” and “Fringe.” New York-based News Corp. is the parent company of the Fox broadcast network and cable’s FX, known for shows such as “American Idol” and “It’s Always Sunny in Philadelphia,” respectively.

Finding a partner with established international sales may help AMC leverage its hit shows globally, Marangi said. A company like Burbank, California-based Disney, which owns ABC and ESPN, already has a global advertising ad sales infrastructure, making it easy to “slot” in AMC, he said.

AMC “would be potentially an attractive acquisition target,” Greenwood Capital’s Todd said. “All those companies are looking for unique and difficult-to-replicate content.”

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