What the Heck Is Going on With the Disney-Fox Talks and AT&T-Time Warner Deal?

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From left: Disney's Bob Iger, 21st Century Fox's Rupert Murdoch, AT&T's Randall Stephenson and Time Warner's Jeff Bewkes

The media mega-mergers — one discussed, one agreed — are causing a lot of head-scratching on Wall Street and Hollywood for very different reasons as dealmaking is back in focus.

Is the hookup between Time Warner and AT&T off, while a Walt Disney purchase of most of the assets of 21st Century Fox is on? Judging from Wall Street's reaction, everything is possible, and deal talk in the sector has reached its latest high.

And the ramifications of either deal happening, or not, could have a domino effect that would dramatically reshape the media and entertainment landscape. Even fanboys and -girls and theme-park aficionados are these days keeping tabs on Hollywood's corporate dramas that typically only capture the attention of Wall Street — along with employees who might feel their jobs are in jeopardy with rampant consolidation. 

Many expect that should the AT&T-Time Warner combination not materialize amid regulatory concerns, Time Warner will look for another deal. “If AT&T falls apart, look for Time Warner to combine HBO and Warner Bros. into a new company that does not include Turner,” predicts Ben Weiss, chief investment officer at 8th & Jackson Capital Management.

Indeed, that’s kind of along the lines of what the U.S. Justice Department is apparently advocating, since it said Wednesday that it may not bless the $85.4 billion merger unless AT&T either sells DirecTV or Time Warner's Turner, which consists of its cable TV channels, most notably CNN, and related digital businesses. Randall Stephenson, AT&T's chairman and chief executive, hasn’t commented on the prospect of shedding DirecTV in order to get his merger approved, but he did draw a line in the sand with CNN.

"Until now, we've never commented on our discussions with the DOJ," Stephenson said in an email to The Hollywood Reporter. "It’s important to set the record straight. Throughout this process, I have never offered to sell CNN and have no intention of doing so."

If Turner were jettisoned somehow, Weiss argues, then a scaled-down Time Warner consisting essentially of HBO and Warner Bros. could be a very attractive acquisition target for Apple, Disney, Comcast or Amazon.com, and AT&T could be left holding the bag.

After that, Weiss says, “Fox and Time Warner could combine their rich libraries and production assets into a new equity — which could then be sold to a range of buyers.”

Meanwhile, Disney is on the hunt for content to populate its upcoming streaming service that will compete with Netflix. Right now, it has Pixar- and Disney-branded movies and TV shows along with Star Wars and Marvel product. Weiss thinks the service needs more cartoons, and perhaps Ice Age, Looney Tunes and Happy Feet could fit the bill.

“The combination of Warner and Fox’s iconic animated intellectual property would be rocket fuel for Disney’s branded streaming app in 2019,” says Weiss.

Neither Disney or Fox have commented on numerous reports saying the former was interested in buying assets of the latter, but Fox’s stock has risen on the possibility (while Time Warner’s shares have fallen on the possibility that its deal with AT&T is in jeopardy).

Fox co-executive chairman Lachlan Murdoch said Wednesday during a conference call that he and other executives would “not be responding, at all, to recent press speculation,” so the few dozen Wall Street analysts on the call didn’t bother asking about Fox’s discussions with Disney.

"Neither company is going to comment, but investors can't stop talking about it, and the stocks have rallied," said RBC Capital Markets analyst Steven Cahall. "The news was unexpected as Fox has not been considered a seller. But, if the powers that be in big media are looking far ahead, we think there is scope for repositioning assets in a way that better aligns to the fast-changing media landscape and creates significant value for shareholders."

Indeed, investors see tons of upside for Disney if it could manage to persuade Rupert Murdoch and sons to sell a large chunk of Fox, including cable channels and the film studio, for an estimated $20 billion in a deal that would leave the Murdochs with a company narrowly focused on sports, news, its broadcast network and several local TV stations. Fox News, still a cash-cow despite a management and talent upheaval, would remain with the Murdochs.

Disney is building Pandora — The World of Avatar at its Animal Kingdom theme park in Florida, so it makes sense to take control of the four Avatar sequels that Fox is spending $1 billion to produce. Fox also owns movie rights to some Marvel characters and Disney would like those, as well, given it bought Marvel Entertainment in 2009. Also, Disney would like some of Fox’s movie franchises to beef up its content aimed at slightly older audiences. Could a Planet of the Apes-land or Aliens-land be in Disneyland’s distant future?

Beyond the AT&T-Time Warner and Disney-Fox sagas, what’s next for entertainment? If these powerhouses can merge, or be prevented from doing so, then look for others to also consider their deal options, say investors, bankers and analysts.

"Expect more M&A on the horizon," Jefferies analyst John Janedis wrote in a report following the news of the Disney-Fox discussions. "While we don't think this combination is a likely scenario, we do expect to hear more on the M&A front over the next several quarters, as media companies look to build scale in the face of ongoing secular pressures."

The "secular pressures" comment was a reference to various challenges that have been a drag on entertainment stocks, including cord cutting, TV ratings and box-office weakness, as well as increasing original-content spending by streaming video giants like Netflix.

Of the 50 media-entertainment stocks tracked by THR, most have not participated in a powerful yearlong rally on Wall Street, and investors want that to change. Pronto, before the likes of Facebook, Google and the rest of the digital powerhouses eat Hollywood’s lunch.

"Traditional media, we believe, needs to bulk up to gain scale to compete,” says B. Riley FBR analyst Barton Crockett.

Indeed, Discovery Communications is paying $12 billion to acquire Scripps Networks Interactive in a deal that will unite the Discovery Channel and Animal Planet with the Food Network and HGTV. Sinclair Broadcast Group, meanwhile, is trying to get approval for its $4 billion acquisition of Tribune Media and Charter Communications has already purchased Time Warner Cable.

MoffettNathanson's Michael Nathanson says that a key question for the broader industry following the Disney-Fox conversation "is whether another M&A is now inevitable,” adding, perhaps ominously: "The short answer is probably yes, although it is unclear if it would help."

Several observers emphasized that the Murdochs aren’t usually sellers, arguing that their change of view could be a sign of just how challenging the business has become.

 "We think Fox management has been long frustrated with their [stock] valuation relative to media and the broader market," Steven Cahall of RBC Capital Markets wrote in a report. He said a small rally in the sector based on news of the Disney talks was "perhaps highlighting this discrepancy."

But any rally could be short-lived if deals don’t happen quickly, especially if AT&T’s merger with Time Warner is delayed or scrapped amid regulatory objections that are supported by multiple consumer groups.

“I can now say that the timing of the closing of the deal is now uncertain,” AT&T CFO John Stephens acknowledged Wednesday at an investor conference.

With potentially every company in play, analysts are readying their wish lists.

"We do not believe [the] Discovery/Scripps combination fixes the underlying secular issues facing the combined cable network portfolio," Nathanson said. "However, we do believe some combinations continue to make sense, including CBS-Viacom."

That scenario, often rumored, is probably off the table in the near term, judging from frequent comments made by CBS CEO Les Moonves and Viacom CEO Bob Bakish, though if CNN becomes available Moonves said this summer he'd be interested in merging it with CBS.

AMC Networks is also mentioned often as an attractive takeover target.

“We're not saying anything is going to happen, but AMC Networks is the last of the pure-play cable nets without corporate governance baggage," Wells Fargo analyst Marci Ryvicker said in a recent report. She even put a price tag on AMC: $96 a share, a hefty premium to the $49.09 the stock closed at on Wednesday.

"Once the Time Warner-AT&T deal gets approved, we think vertical integration is more likely," Janedis added.

Europe isn't immune, either. Fox, of course, is trying mightily to get approval to buy the 41 percent of the Sky satellite TV service it doesn't already own.

European media analyst Ian Whittaker of Liberum Capital said in a report about the Disney-Fox talks: "One further point would be that the bid will raise questions as to whether the sector will see further bid action, which would seem logical given there are a number of secular questions swirling around the space and the biggest global market cap companies (Apple, Facebook, Google, Amazon, etc.) have expressed interest in moving more into the entertainment and media space."

Apple's market cap alone, $905 billion as of Wednesday, is bigger than that of Time Warner, Comcast, Disney, Viacom, Fox, Sony and CBS combined.

Whittaker cited the likes of U.K. TV giant ITV and Bertelsmann-owned European TV giant RTL, as well as Entertainment One, as being ripe for takeovers.

Time will tell. But Wall Street is itching for more activity. As Barrington Research analyst Jim Goss wrote in a recent report, “AT&T's quest for Time Warner indicates no media target is too big to be on some company's wish list.”

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