Why Cable Mergers Could Dominate 2014 (Analysis)
This story first appeared in the Jan. 3, 2014, issue of The Hollywood Reporter magazine.
Will cable television be the big deal frontier in 2014? After a 2012 decline in mergers and acquisitions in media and entertainment, there has been a 9 percent uptick through the first three quarters this year, and considering the volume of deal chatter in cable TV, 2014 could be another strong year.
Dominating the buzz is John Malone, whose Liberty Media acquired 27.3 percent of Charter Communications in March for $2.6 billion and is looking to combine Charter with Time Warner Cable. But Malone may be in for competition from Comcast or Cox Communications, both of which also are considering TWC deals.
Regulatory considerations could be a hurdle, as would the complexity of financing because, in essence, one or more smaller companies would take over a larger one. The only name in the mix of potential Charter acquirers with a larger market capitalization than TWC, after all, is Comcast, which insiders say is TWC's preferred merger partner.
Malone has been touting the benefits of scale that bigger cable companies could bring during carriage negotiations. CBS widely is perceived to have gotten the better of TWC in this summer's standoff that resulted in an extended blackout of CBS networks. Even Charlie Ergen, chairman of cable competitor Dish Network, advocates consolidation in the cable industry to even the playing field in carriage negotiations. For the same reason, Malone has urged Dish to merge with DirecTV, an idea to which Ergen has said he is receptive, though he also said in August that he expects cable mergers to come before satellite consolidation.
Settling on the value of the business will be difficult. On Dec. 13, Reuters said Charter was preparing an offer to acquire TWC for less than $135 a share, but TWC was seeking north of $150. The stock that day closed at $131.41. TWC CEO Rob Marcus was vague when asked at a UBS investor conference Dec. 9 about merger rumors. "Whether Time Warner Cable will participate in M&A is and always has been -- whether as a buyer or seller -- 100 percent driven by what's in the best interest of our shareholders," he said.
Naturally, all this merger talk has small and midsize cable network groups mulling acquisitions so that they, too, can increase leverage in carriage negotiations along the lines of CBS, Viacom, Disney and other giants.
"Given the negotiating leverage of broadcast networks and sports rights owners, we do think long-term consolidation of subscale content owners like Scripps Networks, Discovery Communications and AMC Networks makes sense," says MoffettNathanson analyst Michael Nathanson.
Indeed, Discovery reportedly is mulling a play for Scripps Networks (HGTV, Food Network and other channels), though any offer could spur a bidding war because Disney and others are rumored to also want the asset. "The suggestion that Scripps will be acquired seems to come up every year," says one banker. "The idea makes sense for the right buyer, but that doesn't mean it will necessarily happen now." Some analysts also see Madison Square Garden and Starz as being ripe for a takeover, the latter possibly by NBCUniversal.
Although deal chatter was thick at the UBS conference, top executives were cautious about making big M&A predictions for 2014. With the exception of Comcast's purchase of NBCU, splashy megadeals have been out of favor since the AOL Time Warner debacle more than a decade ago, and this year executives again suggested they favor smaller deals.
Time Warner CEO Jeff Bewkes told THR that pay TV consolidation wouldn't make him feel pressured to pursue deals of his own, and CBS Corp. chief executive Leslie Moonves told the UBS conference, "There is nothing out there we are dying to have."
Similarly, Disney CFO Jay Rasulo promised "acquisitions in the future" but emphasized that the conglomerate sees nothing on the scale of recent pickups Lucasfilm or Marvel that it wants. Viacom CEO Philippe Dauman said that "targeted acquisitions, largely internationally" would continue to be his focus, adding that he expects deals to be worth $200 million at most.
And while MGM has been eyeing an initial public offering, one banker suggested that Lionsgate Entertainment could make another run at the studio in 2014, as it did unsuccessfully in 2010.
Analysts say low interest rates and improving economic trends are key factors in increased M&A chatter. A recent EY survey found that 74 percent of media and entertainment executives predict M&A deal volume to rise over the next year, and 25 percent expect their own company to pursue buys.
"There's a lot of opportunity out there," says Bart Spiegel of PricewaterhouseCoopers. "You have very sophisticated deal teams out there that look for long-term opportunities."