Fox, Discovery Best Positioned to Benefit From International Networks Growth, Says Analyst

Discovery Communications CEO David Zaslav

After $5 billion in acquisitions in the past two years, Sterne Agee analyst Vasily Karasyov also predicts that international acquisitions activity will moderate.

LONDON – 21st Century Fox and Discovery Communications are the best positioned entertainment companies to benefit from growth at international TV networks, Sterne Agee analyst Vasily Karasyov said Thursday.

He also argued that "the window of opportunity to enter the international pay TV market is now closed" as companies within his universe of covered stocks have spent $5 billion on acquisitions in the space over the last two years.

Among the deals have been Discovery's $1.7 billion acquisition of SBS in Scandinavia and its deal for a majority stake in Eurosport International.

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"We expect M&A activity to moderate and the focus to shift to execution," Karasyov wrote in a report. "We think that only the players with meaningful scale will benefit from overseas growth; those that don’t have material exposure at this point are unlikely to gain it."

He outlined Hollywood players' positioning as follows: "21st Century Fox and Discovery are the best ways to invest in international pay TV; we see Walt Disney, Scripps Networks Interactive nd AMC Networks as mainly U.S.-centric stories."

International networks are "a driver of value in our universe due to organic growth and M&A," Karasyov also explained.

He estimated that the entertainment industry's aggregate 2014 earnings before interest, taxes, depreciation and amortization from overseas channels will increase to $3.8 billion from $2.5 billion in 2011, with total 2014 revenue to hit around $13.5 billion.
This will mean that assuming a common valuation multiple of 13 times estimated earnings, "the sector’s aggregate exposure to international translates into enterprise value of $50 billion," the analyst said.

Karasyov said Fox and Discovery have a leg up on competitors in terms of international TV growth. "It’s the footprint that enables the two companies to grow, both organically and through acquisitions," he said. "Discovery owes its scale to being one of the earliest players in international pay TV. Fox has benefited from an accelerated pace of channel launches over several years, which was possible because of the company’s affiliation with many pay TV distributors in the world."

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Because it is difficult to replicate market leaders’ existing footprint, Karasyov wrote: "We don’t expect significant changes to the current landscape. We think Disney’s international strategy will be mainly focused on the Disney Channel after ESPN U.K.’s shutdown. We believe that Scripps Networks will continue to face challenges in getting distribution for its flagship U.S. channels."

Meanwhile, at Time Warner and Viacom, "international networks are healthy but the impact on consolidated results is relatively limited due to size of U.S. assets," the analyst highlighted.

What about AMC Networks, which recently acquired Liberty Global's networks arm Chellomedia? Karasyov predicted that this "will not transform AMC into an international growth story because of its relatively small weight in consolidated EBITDA, high exposure to slower growing European markets and competition in Latin America."

Twitter: @georgszalai