Content Stocks Slide Further, Ops Inch Up

Mergers a Cause for Optimism After an Alarming Quarter
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Content stocks continued to slide in the third quarter, albeit at a slower pace than earlier in the period, while distributors, riding a new wave of optimism fueled by merger opportunities and broadband superiority, managed to eke out a small gain.

Overall, content stocks slid about 13% in the third quarter, led by Viacom (down 33.2%), Scripps Networks Interactive (down 24.8%), Discovery Communications (down 21.7%) and Time Warner Inc. (down 21.3%).

Content stocks were battered in August when fears over cord-cutting and skinny bundles — smaller packages of programming offered at lower prices — drove the stocks down to record lows. The Walt Disney Co., parent of once-invincible ESPN, led the decline when it said during a quarterly conference call that smaller content packages had cost the sports network subscribers. It subsequently lowered its cash-flow growth guidance from high-single digit percentage growth through 2016 to midsingle digit growth.

The Disney news touched off a firestorm in the market for cable-network stocks, all of which were down at least 10% at one point between Aug. 5 and Aug. 6. The sector as a whole lost more than $60 billion in market capitalization.

The stocks have regained some of that ground but were still down in the quarter, a deficit that erased the sector’s 8.4% gain for second quarter of the year. For the nine-month period ended Sept. 30, the sector was down nearly 3% — not bad, considering the declines earlier in the third quarter.

Distribution was an entirely different story. Cord-cutting and over-the-top fears weighed on the sector as well in May — as a whole, the top four cable MSOs rose a collective 2.6% during that time — but rebounded as the months went on.

The distribution sector rose nearly 3% in the third quarter, boosted by European telecom giant Altice’s $17.7 billion bid for Cablevision Systems. The uptick was just below the 3.9% increase in the second quarter. For the full year, distributors are up nearly 12%.

Deal activity is the main driver of that growth. Besides Altice’s offer for Cablevision, which it hopes to complete by the first half of 2016, the Netherlands-based telecom giant also has a $9.1 billion deal to acquire midsized cable operator Suddenlink Communications. That deal is scheduled to close by the end of the year.

Couple that with Charter’s pending $78.7 billion purchase of Time Warner Cable — slated for a year-end close — and the cable deal plate appears quite full for the moment.

Altice recently completed the debt-financing portion of its Cablevision purchase, raising about $8.6 billion in bank and bond debt, but at higher prices than originally expected. Some have said the deal’s increased pricing could point to a growing skittishness in the debt markets for financing such deals.

He said he doesn’t expect much deal activity in the fourth quarter, but that’s mainly due to the number of deals currently in the pipeline, rather than a tightening of the finance markets.

Altice will likely spend the rest of the year moving its current targets through the regulatory process, he added, as will Charter. Comcast can’t expand in distribution “until we get a different FCC,” he said.

There have been recent deal rumblings on the content side — Starz was reportedly in advanced talks with movie studio Lions Gate Entertainment regarding a possible acquisition.

Starz, which has basically been in play from the day it split off from Liberty Media as a separate company in 2009, has been the subject of acquisition talks for years. Earlier this month reports claimed Starz was negotiating a possible merger with AMC Networks, but that speculation seemed to disappear.

Starz and Lions Gate reportedly discussed merger opportunities a year ago but couldn’t agree on price.

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