Fox’s Play for Content Buoys AMC, Scripps: Real M&A
Stay tuned, because the channels are about to change.
Time Warner Inc. (TWX), the owner of HBO and TNT, confirmed yesterday that it received a more than $75 billion offer from Rupert Murdoch’s Twenty-First Century Fox Inc. (FOXA) Shares of content providers such as AMC Networks Inc. (AMCX), Scripps Networks Interactive Inc. (SNI) and Discovery Communications Inc. rallied because they may be the next to seek tie-ups. Media stocks representing about $90 billion of shareholder value are now speculated to be in play, without even including Time Warner.
A driving force for media consolidation is Comcast Corp.’s pending purchase of Time Warner Cable Inc. If cleared by antitrust regulators, that deal will combine the two largest U.S. cable companies, leaving suppliers of content to find ways to bolster their own scale and strengthen their power to negotiate with distributors.
“It’s open game,” Vijay Jayant, a New York-based analyst at International Strategy & Investment Group LLC, said in a phone interview. “You’ve got this behemoth transaction for Time Warner, which fortifies the concept that the smaller companies have to get bigger or get out.”
Significant consolidation among content providers could also put pressure on Netflix (NFLX) Inc., giving the online-streaming service a reason to consider striking a deal with a company such as CBS (CBS) Corp. or Walt Disney Co. (DIS), said Morningstar Inc. CBS is also a logical counterbidder for Time Warner, and even technology giants such as Google Inc. could be spurred to enter the fray, said Wunderlich Securities Inc.
Fox’s proposal, which Time Warner rejected, included 1.531 Fox non-voting shares and $32.42 in cash, Time Warner said yesterday in a statement. The transaction would be risky for regulatory and operational reasons, and Time Warner’s assets will increase in value if the company continues on its own, the $73 billion company said. Fox is willing to raise its offer higher than $85 a share if Time Warner engages in talks and opens its books to Fox, according to a person with knowledge of the matter.
Shares of AMC, Scripps and Lions Gate Entertainment Corp. rallied more than 4 percent yesterday, while Discovery jumped more than 6 percent for its biggest increase in almost three years. Viacom Inc. gained more than 3 percent and Starz rose 1.6 percent.
Today, shares of the media companies rose for a second day.
“Everyone is excited about the deal so everything in the media space is up,” David Miller, a Los Angeles-based managing director at Topeka Capital Markets Inc., said in a phone interview. “The market is going wild.”
While content providers such as Scripps and AMC have been considered takeover targets for years, they still haven’t been bought. Their valuations may have been too rich for any interested suitors to strike just yet, said Martin Pyykkonen, a Denver-based analyst at Rosenblatt Securities Inc.
“Discovery, Scripps and AMC in particular have traded at a premium multiple that just hasn’t been something any of the big guys have wanted to swallow,” Pyykkonen said in a phone interview. Still, “they all make sense as targets. I could see one or two or all three getting taken out by larger conglomerates.”
Another obstacle is that many of these companies are controlled by founding families, so it’s up to them if they want to sell, said ISI’s Jayant. The heirs to Edward W. Scripps have a special class of stock in the eponymous company, which owns HGTV and part of the Food Network. The Dolan family still controls the voting rights at AMC, whose chairman is billionaire Charles Dolan, the founder of Cablevision Systems Corp., from which AMC was spun off in 2011.
AMC is the “most natural” target because it’s purely a cable-networks company and has a “bite size” market value at $4.6 billion, according to Vasily Karasyov, a New York-based analyst at Sterne Agee & Leach Inc. In addition to its popular shows “The Walking Dead,” “Breaking Bad” and “Mad Men,” AMC also owns IFC and SundanceTV.
Discovery’s board already discussed a potential bid for Scripps last year as part of a routine quarterly survey of potential acquisitions for the $28 billion company, people with knowledge of the situation said in December.
A representative for Lions Gate had no immediate comment on possible deals, while representatives for Starz didn’t respond to a request for comment. Representatives for AMC, Scripps, CBS, Disney, Discovery and Viacom declined to comment.
Almost $200 billion of media acquisitions have been announced this year, including Comcast’s purchase of Time Warner Cable and AT&T Inc.’s takeover of DirecTV, both valued at more than $65 billion including debt.
“The scale of consolidation on the content side has not been anything close to what has happened on the distribution side,” Tuna Amobi, a New York-based equity analyst at S&P Capital IQ, said in a phone interview. A sale of Time Warner “would be a major transformational deal that could set off another wave of major consolidation among content providers.”
Bulking up will also give content providers more negotiating power with streaming services such as Netflix. Faced with the prospect of higher fees for redistributing movies and TV shows, it could make sense for Netflix to combine with a company such as CBS or Disney that may want more of a digital footprint, according to Peter Wahlstrom, a Chicago-based analyst at Morningstar.
As far as Time Warner, this may be only the beginning of the bidding process, said Pyykkonen of Rosenblatt.
“Everything is for sale at a certain price,” he said. “The number Murdoch and Fox have thrown out, that’s a starting point. You never come out with your best offer initially.”
Time Warner isn’t interested in exploring a sale while potential suitors Comcast and AT&T are busy with other deals and unable to bid for the media company, according to a person with knowledge of the matter. If Fox’s offer puts the company in play, other suitors may emerge anyway, said Matthew Harrigan, a Denver-based analyst at Wunderlich. Google is among companies that might be more inclined to consider a bid, he said.
A representative for Google declined to comment.
“Maybe these companies wouldn’t have liked to do anything right away,” Harrigan said in a phone interview. But if “people see the asset being moved from the market for eternity, it creates a different dynamic than it otherwise would.”
Fox’s bid probably also got CBS’s attention, according to S&P’s Amobi.
“It’s hard to imagine that CBS doesn’t take a look at Time Warner,” he said. “There’s obviously a case to be made as well as to why both companies could be very good merger partners.”
The same wasn’t true for Time Warner and AOL Inc. The two merged in 2001 in a deal valued at more than $100 billion that triggered record losses, driving the shares down 68 percent. AOL was spun back out in 2009 and Time Warner’s stock has almost tripled since then.
Rather than Time Warner combining with Fox next, Topeka Capital’s Miller said he thought the cable consolidation would have started with smaller content providers such as AMC.
With all the deals among distributors, there “has to be some kind of appropriate response on the network side,” he said. AMC, “we thought that someone acquiring those guys would be kind of the first response. Instead the first response has been potentially Fox buying Time Warner. I think it’s taken a lot of folks in the media community by surprise.”
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