Finance

Finding Synergy in Content, Again

Analysts: Vertical integration may be poised for a comeback 5/09/2016 8:00 AM Eastern
Scripps Networks Interactive's lifestyle programming, like HGTV's "Property Brothers" and its spinoffs starring siblings Jonathan (l.) and Drew Scott, makes it a viable candidate for consolidation with a distributor.
TakeAway

Many converging factors could lead distributors to consider deal-making in the programming space.

If you can’t beat ’em, buy ’em.

 

With the two major distribution mergers of the past year — Charter Communications-Time Warner Cable and Cablevision Systems-Altice N.V. — heading for the finish line, some analysts wonder if content could be the next beehive of activity on the deal front.

 

Greasing the speculation wheels: Comcast’s $3.8 billion pact to buy DreamWorks Animation, which some believe could encourage other TV distributors to take a harder look at the programming space.

 

The DreamWorks Animation deal could shed new light on programming targets, BTIG media analyst Brandon Ross said in a blog post, especially as distributors look for new ways to differentiate themselves from the growing list of over-the-top providers. DreamWorks was just the first in what could be a series of content deals, Ross said.

 

SUITORS FOR PARAMOUNT STAKE

Viacom has said it has more than a dozen potential suitors for the planned sale of a minority interest in movie studio Paramount. And talk heated up in April that mixed martial arts content provider Ultimate Fighting Championship was for sale. Reports in the MMA industry press said UFC could be worth as much as $6 billion.

 

Ross said the potential jewel in the content heap could be World Wrestling Entertainment, the scripted sports entertainment juggernaut headed by Vince McMahon. While neither WWE nor McMahon has even hinted at being interested in a sale, Ross said the time could be right to give some serious thought to it.

 

WWE makes sense for a strategic buyer on several fronts. Its content is popular with young viewers (Monday Night Raw is a consistent ratings draw for USA Network), it has a strong digital presence with the over-the-top WWE Network and, at a total valuation of about $1.3 billion, it’s digestible for larger players.

 

Comcast’s willingness to pay a premium for DreamWorks Animation — about 20 times cash flow — to basically take out controlling shareholder and CEO Jeffrey Katzenberg indicates it might be willing to act similarly with McMahon.

 

Keeping Vince McMahon around would be critical to any deal with WWE, Ross said. A strategic investment might be the best way to make a deal happen.

 

FBN Securities cable, satellite and entertainment managing director Robert Routh thinks the chances the McMahons would sell are slim. Besides, he said, content-hungry distributors have several other potential targets.

 

Routh does not think the Comcast-DreamWorks deal will necessarily lead to more content acquisitions by Comcast: federal regulators would probably prevent that. And with NBCUniversal already in the fold, Comcast probably doesn’t need more content.

 

Pairing content and distribution used to be more commonplace. For example, Time Warner Inc. owned both Time Warner Cable and Turner Broadcasting Systems and Tele-Communications Inc. was paired with Liberty Media. Those companies and their successors eventually split programming and distribution assets after synergies became less apparent.

 

“It’s kind of like Back to the Future,” Routh said. “Distributors are starting to say that owning content with distribution, under the right conditions, can make a ton of sense, especially if it’s highly focused content.”

 

CHART: Back to the Future

Pay TV operators, once keen on divesting programming assets from their distribution business, may be looking at adding content to the mix as they seek to further differentiate themselves from OTT competitors. Here are a few possible candidates for consolidation.

 

Company                       Market Cap                                                   Top Content

Starz . . . . . . . . . . . . . . .$2.67 billion . . . . . . . . . . . . . . . . . . . . . . . . . . . Starz, Encore

Scripps Networks . . . . . $7.87 billion . . . . . . . . . . . . . . . . . . . . . HGTV, Food Network

Viacom . . . . . . . . . . . . . $16.5 billion . . . . . . . . . MTV, Comedy Central, Nickelodeon

AMC Networks . . . . . . . $4.6 billion . . . . . . . . AMC, IFC, WE tv, BBCA, SundanceTV

MGM . . . . . . . . . . . . . . . $3.5 billion . . . . . . . . . . . . . . . . . . . . . . . . . . . . thisTV, EPIX

WWE . . . . . . . . . . . . . . . $1.27 billion . . . . . . . . . . . . . . . . . . . . . . . . . . WWE Network

Lionsgate . . . . . . . . . . . $3.26 billion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EPIX

DHX Media . . . . . . . . . $762.6 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . SuperWhy!

RLJ Entertainment . . .  $8.06 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Acorn TV

SOURCES: FDM Securities, Dow Jones, Multichannel News estimates

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