Deal Talk Set to Take Spotlight During Hollywood Earnings Week

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UPDATED: On Wednesday alone, Time Warner and its former suitor 21st Century Fox, as well as Viacom, are reporting earnings, with Wall Street looking for more clarity on possible M&A plans.

As Hollywood conglomerates' quarterly earnings season kicks into high gear Tuesday afternoon with the Walt Disney Co.'s latest financials, deal talk is set to be in the spotlight. 

After 21st Century Fox's recent $80 billion for Time Warner, which rejected the offer, leading Fox to withdraw its bid on Tuesday, the outlook for consolidation has been a big topic on Wall Street, and the topic is expected to be in focus this week as sector giants report their latest results.

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The topic already came up last week on Discovery Communications' earnings conference call when CEO David Zaslav was asked about his appetite for further acquisitions after recent deals in Europe and amid the broader consolidation chatter. "The organic growth story is very appealing for us," he said, but added that the company was always looking for deal opportunities that come at a good price. He vowed that the company would stay financially disciplined in any deals.

And NBCUniversal CEO Steve Burke had late last month said that the company doesn't need to bulk up amid industry deal talk.

Wall Street analysts expect earnings conference calls with the CEOs of the big content-centric conglomerates to feature more discussion in that vein.

On Wednesday, Time Warner will report its results in the morning followed by a management call, while Fox will do the same after the market close. The two calls are expected to see the management teams outline their visions and strategies following the Fox play for TW.

Sanford C. Bernstein analyst Todd Juenger made reference to that in the title of his quarterly entertainment earnings season preview, "What's the Deal?" Morgan Stanley's Benjamin Swinburne also used a deal pun following the recent annual Allen & Co. gathering of media and technology moguls in Sun Valley, Idaho, which is known as a place where deal opportunities are often discussed. "Sun Valley to Last All Summer Long," he said in the title of his earnings season preview.

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"Heading into second-quarter results for major media companies, we have already trimmed our second-quarter advertising growth expectations," Swinburne wrote. "For the year, we have lowered our U.S. ad growth outlook to 4.3 percent … Fortunately for shares, consolidation potential is likely to keep a floor on valuations for the time being despite soft second-quarter results and perhaps long enough to bridge the market to the point 2016 comes into focus where earnings growth likely accelerates across large-cap media."

The ad weakness has come into focus after this year's upfront ad sales results, which saw lower deal volume and which the analyst said "cast some doubt on [the] second-half outlook" of 2014.

Juenger explained the ad trends this way: "In addition to ad cycle slowing, we believe soft upfront volume is mostly due to more dollars held back for scatter, not cannibalization from online video."

In his earnings season preview, he also analyzed TV ratings, saying the big winner in the quarter was Disney with a 10 percent gain, while Time Warner saw a 13 percent drop and Fox's broadcast business recorded a 24 percent decline; and box-office results, where he noted Fox as a key winner. "But all focus is on M&A," Juenger concluded.

Here is a quick look at what to expect from the big Hollywood conglomerates this earnings season.

Walt Disney:
The company, led by CEO Bob Iger, will report its latest financials after the market close on Tuesday.

"Disney's unique strengths should again be on display, with the World Cup driving ESPN ratings, Frozen driving international box office and consumer products, and continued parks momentum," said Guggenheim Securities analyst Michael Morris.

The home of MTV, Nickelodeon, Comedy Central and Paramount Pictures will report results early on Wednesday.

"Viacom shares have underperformed peers recently as total-day ratings have softened across networks," said Morris. "We anticipate an update on the company's £450 million acquisition of U.K.-based Channel 5, which management expects will be accretive to operating income in year one."

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Some analysts have been reducing their quarterly earnings forecasts amid weaker advertising trends across companies. "We no longer expect U.S. advertising revenue growth to accelerate in the quarter," Sterne Agee analyst Vasily Karasyov said Tuesday. "We are lowering our estimate to +2 percent from +5 percent. As a result our media networks adjusted operating income forecast now stands at $1.11 billion, $12 million less than before."

In Viacom's film unit, Transformers: Age of Extinction launched late in the quarter, but most of its revenue benefits are believed to have followed in the weeks and months after.

Viacom's stock originally spiked when the Fox bid for TW was confirmed, but it has since settled down in a possible sign that investors see Viacom more as a buyer, if at all, than a seller. CEO Philippe Dauman could well face a question about his latest thinking on consolidation.

Time Warner:
Time Warner will report its second-quarter earnings early Wednesday and hold a conference call with CEO Jeff Bewkes at 10:30 a.m. ET.

"The potential for an additional bid from 21st Century Fox has been the primary share-price driver, though we expect management to be solely focused on operating trends," said Morris. Wall Street observers also expect management to outline future growth opportunities for the company without the need for any deals.

Morris forecasts 1 percent ad growth at the Turner cable networks in the latest quarter and HBO benefiting from $100 million in content revenue from Amazon.

21st Century Fox:
After Wednesday's market close, Rupert Murdoch's Fox will report its full fiscal year results, and management is expected to get questions on the company's decision to drop its bid for Time Warner and whether it may now look for other targets.

Analysts have also debated what Murdoch's long-term plans for Fox's 39 percent in U.K. pay-TV giant BSkyB are. The company recently agreed to sell its Sky Italia and Sky Deutschland businesses to BSkyB. Some have suggested Fox could sell its stake to raise further money for a sweetened TW bid, while others say Murdoch could look to buy full control of BSkyB down the line.

CBS Corp.:
CBS Corp. will round out this earnings season with its report on Thursday.

"We estimate that ad growth has slowed given lower ratings and a soft scatter environment, but we expect the combination of additional NFL inventory and political spending to bolster forward-looking comments," Morris said.

Analysts expect that CEO Leslie Moonves will have a take on the recent deal chatter across the industry, as well as comments on soft recent ad trends at many companies.