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AMC Networks Eyes International Push for Own Originals With Chellomedia Deal

The Walking Dead Season 3 Finale - H 2013
Courtesy of AMC
"The Walking Dead"

The networks operator, whose hit originals include “The Walking Dead,” will “increase the bias to own" shows and distribute them abroad, says CEO Josh Sapan.

AMC Networks' $1 billion deal to buy Liberty Global's Chellomedia, which operates digital and broadband channels across Europe and Latin America, will grow its international clout and allow the cable networks operator to distribute more of its own original shows abroad.

The Chellomedia deal, announced Monday, will see AMC pay $1.03 billion (€750 million) for Chellomedia's vast international network of specialty channels that reach nearly 400 million households across some 138 countries. It includes the group's operations Chello Multicanal, Chello Central Europe, ChelloZone, Chello Latin America and Chello DMC as well as Chellomedia’s stakes in joint ventures with CBS International, A+E Networks and Zon Optimus.

AMC expects the deal, which will be financed via a mix of cash on hand and new debt, to go through in the first quarter of next year.

Speaking on a conference call shortly after announcing the deal, AMC CEO Josh Sapan said the addition of Chellomedia would “significantly accelerate and add immediate scale” to AMC's global footprint. Up until now, AMC has mainly relied on more organic growth for its international AMC/Sundance Channel Global networks, adding new regional channels on a case-by-case bases. With Chellomedia, the company will have more global reach and show a significant increase in scale.

Sapan said that the deal would give AMC more options when it comes to distributing its original productions abroad. Currently, the biggest original shows on AMC U.S. networks (AMC, Sundance Channel, IFC and WE TV) – including The Walking Dead and Hell on Wheels – are distributed internationally by partners. The Walking Dead, for example, goes through Fox International Channels globally. Entertainment One handles Hell on Wheels. Sony handles rights to AMC's Breaking Bad, and Lionsgate controls Mad Men outside the U.S.

Earlier this year, AMC  signed a new, exclusive multi-year international output deal with eOne that will see eOne handle international distribution for all original scripted series from AMC and Sundance Channel.

But with the extended global footprint that the Chellomedia acquisition will bring, Sapan said the medium and long-term focus for AMC will be to “increase the bias to own...to put our content where we choose (internationally).” Sapan was quick to add that AMC was pleased with its current eOne and Fox deals and that the company would continue to license its shows internationally when it makes sense to do so.

“We will make decisions (whether to license or distribute) based on a particular show and our particular partners,” he told investors on a conference call Monday.

AMC has ramped up in-house production across its networks, and Sapan said the company saw leveraging those assets through international distribution as one of the best strategies for “building value for our shows and brands” over the long term. He noted that Chellomedia's regional assets match up well with those of Sundance Channel Global, meaning there will be little overlap. The majority of Chellomedia's channels are film and entertainment focused, though the group also operates several sports, documentary and kids-focused nets.

“Strategically the deal makes sense as AMC produces more original programming and wants to exploit its future successes internationally,” said Alan Gould, an analyst at Evercore Partners. But he warned that “the deal also "increases the operational risk as AMC previously hedged its risk (and return) on original programming by pre-selling the international rights.”

Ben Mogil of Stifel, Nicolaus said, longer-term, that the deal “will likely increase the cash spend for the company as their investment bias moves from cheaper license deals to more cash-heavy ownership deals reflecting their ability to monetize programming on a larger footprint.” He noted that because advertising as a percentage of total revenue is much lower on the Chellomedia channels (which get the bulk of their revenue from cable carriage fees) than for the legacy AMC channels, “programming investment is going to be the key to accelerated ad growth as the company follows a similar playbook as it has in enacted in the U.S..”

AMC is scheduled to report third-quarter earnings on Nov. 7 and is expected to please Wall Street on the back of the strong finish to Breaking Bad. The blockbuster launch of the new season of The Walking Dead has also gotten AMC's fourth quarter off to a good start, according to analysts.