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CBS Corp. should acquire AMC Networks, the parent company of AMC and the home of The Walking Dead, Guggenheim analyst Michael Morris said in a research report on Tuesday.
“The Second-Quarter Media Meltdown Should Ultimately Be a Catalyst for Industry Change,” read the title of his report that explored last week’s sell-off in sector stocks.
Morris summarized three key assumptions that he said will underpin investors’ expectations of entertainment stocks in the future. First, “pressure will build on the assertion that the video bundle is truly a more efficient delivery mechanism for the consumer,” he said. Second, “the number of over-the-top video services available from existing traditional video media companies will increase.” And third, “The average value of original programming will decrease due to both oversupply and reduced demand.”
In light of these trends, Morris said that “CBS has significant risk in its advertising and content production exposure, but also has significant opportunity to advance its business given its established brand, low relative cannibalization risk and early establishment of an over-the-top service through All Access.”
His first recommendation: “CBS should take the steps necessary to secure its NFL content as part of its offering.” His second suggestion: “We believe that the company should acquire AMC Networks.”
All Access costs $6 monthly, while CBS currently earns less than $2 per month in subscription revenue related to its broadcast network (via retransmission consent and reverse compensation fees) and is on track to boost that to $2-$3 monthly, the analyst said. “AMC Networks currently generates about $0.75 monthly in affiliate fees across its five consolidated networks (AMC, WeTV, IFC, Sundance Channel and BBC America) on a fully distributed basis. By gaining control to AMC Networks content and including it on All Access, the company would be using content acquired at an implied $0.75 plus transaction premium price, to drive a $4 gain in its per subscriber subscription revenue for any incremental subscriber. This would be off a stable existing affiliate revenue base and therefore would have limited investment risk.”
Morris concluded: “With the early start CBS has achieved with All Access and the potential power of an OTT platform that would include the NFL and potentially The Walking Dead, we believe CBS could quickly utilize AMC’s programming to drive subscriber growth.”
In addition, Morris argued that “AMC’s international footprint is incrementally valuable to CBS’ asset base.” He added: “We believe that AMC’s local market operating assets could be valuable in launching a complementary OTT service in global markets, seizing what is likely a higher-growth trajectory of broadband homes outside the U.S. as compared to the growth in pay TV and overall TV homes.”
But the analyst also acknowledged “several key challenges to such a combination, most notably a duplication of talented leaders in key positions and uncertainty around which of AMC’s television rights would be available to a global over-the-top video service.”
Morris also signaled that other companies could benefit from buying AMC Networks. “We believe that the incremental value of AMC Networks could also be recognized by other potential network or technology partners given the company’s incredibly strong peak audiences with a younger demographic,” he said.
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