European Entertainment Stocks Mostly Down in 2016, Mediaset and Entertainment One Rise

Bull and bear statues outside the Frankfurt stock exchange - Getty P 2016
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The shares of ITV, after years of gains, drop as do other big names such as Sky, Germany's ProSiebenSat.1 and France's Vivendi.

European entertainment industry stocks are on track to mostly finish lower in 2016 amid concerns about economic trends and advertising revenue momentum, as well as Britain's decision to leave the European Union and individual challenges.  

As of Thursday, London-listed Entertainment One was up sharply for the year, and Italian media firm Mediaset saw its stock slightly rise, while other European sector stocks were down, including big names and 2015 gainers such as U.K. broadcaster ITV, pan-European pay TV giant Sky and German TV powerhouse ProSiebenSat.1.

Sky, in its second full year after a deal with 21st Century Fox that created it in its current form, saw its shares fall 11 percent for 2016 as of Thursday at £9.89, or $12.10, compared with £11.12 at the end of 2015. Investors spent much of the year discussing the effects of competition from the likes of British telecom giant BT and cable firm Virgin Media, owned by John Malone's Liberty Global, as well as rising sports content costs that are weighing on the company's profitability. The company at a bullish investor day in October focused more on its upside in Germany and Italy, as well as its strong sports and movie portfolio and its growing number of original series.   

Liberum Capital analyst Ian Whittaker, who has a "sell" rating on the stock, wrote in a recent report: "While we accept Sky is managing its business well and efficiently and has a very refreshing view in dealing with structural challenges, we see it as, at its core, a model that is still reliant on a traditional subscriber growth with growing average revenue per user, which is coming under pressure, especially as cost inflation for key rights rises significantly."

Sky's stock got a boost in early December when Fox offered to buy full ownership of the company in a deal that values it at roughly $23.2 billion. Fox already owns a 39 percent stake in Sky, which operates pay TV platforms in the U.K., Ireland, Italy, Germany and Austria.

Also in London, ITV shares ended 2016 down 26 percent after years of strong gains. The stock closed Thursday at £2.04, or $2.50, after finishing 2015 at £2.766. ITV's stock was hurt by the negative advertising revenue impact from the June Brexit referendum, which it said caused uncertainty.

But Whittaker tells The Hollywood Reporter that ITV remains his favorite stock going into 2017. "I do think the U.K. consumer in particular will be better than what the ITV consensus thinks," he explains. "Broadcasters would still be our favored sub-sector. What we like are names that are structurally safe and growing, hence the broadcasters."

In a recent report, the analyst also wondered if, after Fox's bid for all of Sky, ITV could be the next bid target. "Post-this full bid for Sky, we expect attention to focus on other possible bid targets in the European media sector," he wrote. "ITV would, in our mind, fit much of the criteria for an acquirer — it has attractive content, a market leading position, is cheap from a valuation perspective … and its largest shareholder Liberty Global (which owns a 9.9 percent stake) has made the U.K. a prime focus for its European cable expansion and may feel the need to respond to the full takeover of Sky by one of its main rivals in the U.K."

Meanwhile, producer and distributor Entertainment One, whose stock is also listed in London, was a rare European industry gainer of 2016. As of Thursday's close, its shares were up 36 percent for the year at £2.27, or $2.78, compared with its 2015 closing price of £1.67. The stock was helped this summer by a $1.3 billion ITV takeover offer, which the company rejected and ITV later withdrew, but it continued to do well even when management said no sales process was in the works. 

The mixed performance of London-listed sector stocks in 2016 is in contrast with the blue-chip FTSE 100 U.K. stock index, which hit a new all-time closing high on Wednesday, and on Thursday remained more than 10 percent ahead of its 2015 close. Analysts cited such factors as confidence in the U.S. and the impact of the pound, which has been weaker since the June Brexit vote.

Elsewhere, Germany's ProSiebenSat.1 and German media powerhouse Bertelsmann's RTL Group, which both have been expanding their digital businesses, saw their stocks drop to different degrees in 2016. ProSieben shares were down 22 percent for the year as of Thursday evening at $38.49 (€36.73) after rising more than 30 percent in 2015 to €46.77. RTL's stock was down 11 percent at $71.77 (€68.50) after finishing 2015 at €77.

In France, Vivendi, the owner of pay TV firm Canal Plus, Universal Music Group and other businesses, was also down for the year after already finishing 2015 lower. As of Thursday, the stock was down 9 percent at $18.86 (€18.00), compared with its 2015 close of €19.86.

Italy's Mediaset, meanwhile, was in positive territory with one trading day to go. The company, founded by Silvio Berlusconi, as of Thursday was up 6 percent for the year at $4.26 (€4.07), compared with €3.83 at the end of 2015.

In April, Vivendi, led by chairman Vincent Bollore, and Mediaset agreed to a deal that would have seen them exchange 3.5 percent stakes in each other, with Vivendi also buying pay TV arm Mediaset Premium. But Vivendi abruptly pulled out of the deal in July.

The two companies then battled things out in public and in the press. Vivendi acquired close to a 30 percent stake in Mediaset just before the holidays.