Why Is Hollywood Shopping for International TV Channels?
Recent deals, from Australia to Argentina, point to an increased appetite for foreign acquisitions, as U.S. networks look abroad for growth opportunities.
For U.S. entertainment giants, it seems, 'tis the season to be doing deals.
As Hollywood heads into the holidays, talk of a potential $60 billion-plus mega-deal between 21st Century Fox and (likely) Walt Disney or (possibly) Comcast for a big chunk of Fox's assets is dominating the chatter among entertainment-focused bankers, Wall Street analysts and investors, along with continued discussion of AT&T's signed-but-not-yet-done deal to acquire Time Warner for $85.4 billion, an agreement recently thrown into question after the U.S. Department of Justice sued to block it.
For M&A watchers, Fox and Time Warner are the big-ticket items, the equivalent of that shiny new bike under the tree Christmas morning. But scattered about, outside the U.S., are boutique buying opportunities: foreign TV channels that have been snapped up or are generating major interest from Hollywood giants.
In November, CBS Corp. finished a deal to acquire Network Ten in Australia, the country's third-largest commercial channel, for $31 million. While the deal was a surprise for many — B. Riley FBR analyst Barton Crockett noted it was CBS' "first meaningful international acquisition” — it followed a number of similar moves by Hollywood powerhouses as they look to diversify by entering new international markets or to gain scale in regions where the TV industry is less mature, and often faster-growing, than in the U.S. For some networks, international deals can provide an opportunity to spread programming and other costs across a more global portfolio and achieve economies of scale.
In 2014, CBS corporate sibling Viacom bought Britain’s Channel 5 for $725 million and just last year the MTV parent picked up Argentina’s Telefe, which commands a third of the country's free-TV audience, for $345 million in cash.
In 2015 Discovery Communications bought out French group TF1 to the tune of $534 million to take full control of pan-European sports channel Eurosport, a deal that will be put to the test next year when Eurosport airs its first-ever Olympic Games. In a landmark, $1.4 billion move, Discovery acquired rights to the next four Olympics, covering 2018-2024, across 50 countries, including most of Europe.
More recently, German TV giant ProSiebenSat.1 has emerged as a possible takeover target, with NBCUniversal parent Comcast mentioned as a potential buyer. And there is renewed speculation that John Malone’s Liberty Global could made a bid for U.K. TV powerhouse ITV. Liberty holds a strategic 9.9 percent stake in ITV, which it acquired in mid-2015. Such prize assets could attract other U.S. bidders, particularly if a Disney-Fox deal does not get sealed.
But even the Fox and Time Warner deals have major, and often under-appreciated, international components. Alongside its global film distribution business and burgeoning local-language production operations, Time Warner has HBO, which already has a presence in 60 countries, through a mix of streaming offerings, cable channels and brand licensing deals. HBO CEO Richard Plepler has talked up further global expansion, including more aggressive international rollout of the company's HBO Go service as a competitor to Netflix.
And Fox's international assets include its 39 percent stake in European pay TV operator Sky, valued at around $12 billion, which has operations in five European countries, the Indian TV and streaming giant Star India and its Fox branded channels across Europe, Asia and Latin America.
While Disney’s possible deal for parts of Fox has led to much debate about its impact on the companies’ studios and U.S. cable networks, it would also have major ripple effects around the world and possible benefits for Disney.
“Traditional broadcasters are under intense pressure in every market, including the U.S.,” says Cenkos Securities analyst Alex DeGroote. “The distribution model for TV is changing in front of our eyes.”
DeGroote cites cord-cutting —users dropping pay TV subscriptions in favor of online video services — as well as declines in television advertising and the rise of Netflix and Amazon Prime as the main forces driving this change. Seeing opportunities shrinking at home, many U.S. TV giants view going global as one of the few chances left to grow.
“When broadcasters expand internationally they enlarge their revenue potential as it is a new market. And it increases their distribution footprint,” says DeGroote. “Size counts.”
Viacom's Channel 5 deal offers a model for how U.S.-led takeovers can pay off for Hollywood players. Under new management, the British network delivered two straight years of profitability, a first for the channel. Channel 5 managed the turnaround with much increased investment in new shows in addition to a continuation of select existing hits and homegrown versions of Viacom formats, such as Lip Sync Battle. A refocusing on a younger demo and cross-promotion by other Viacom networks have also helped drive improved performance. Channel 5 actually increased total audience share in its first two years under Viacom —from 5.99 percent of total TV viewership to 6.13 percent, leading to corresponding growth in advertising and affiliate revenue.
The Channel 5 success story was a major factor behind Viacom's decision to snap up Telefe in Argentina a year later. Speaking to The Hollywood Reporter shortly after that deal was announced, Viacom CEO Bob Bakish said "true local scale" in big or fast-growing foreign markets has important benefits for the conglomerate, citing both Channel 5 and Viacom 18, the company's Indian joint venture launched 10 years ago. "Both of those significantly increased our ability to benefit from the markets," Bakish said. "(With Telefe) we wanted to have a local cornerstone in Latin America given it is a relatively high-growth market, and we also wanted to have a Spanish-language cornerstone."
CBS' acquisition of Network Ten in Australia could offer similar benefits, given how much the U.S. network already sells down under and its track record in running successful free-to-air channels. "CBS believes [earnings] can be improved...by more efficient spending on programming,” said B. Riley FBR analyst Barton Crockett. “We give CBS the benefit of the doubt on this given its skill at programming in the U.S. and the fact that this is an English-speaking market where CBS already sells a lot of its content." Australia also offers an interesting international test market for CBS All Access, the network's new streaming service, which has already proved an early success in the U.S.
Similar arguments favor a U.S.-led buyout of Germany's ProSiebenSat.1. News last month that ProSieben CEO Thomas Ebeling would step down in February 2018, rekindled hopes the network might become an acquisition target.
Like Ten, ProSieben is a major local player —it commands around a third of free-TV audiences in Germany —but has seen its market share shrink recently and has struggled to diversify away from its traditional TV ad base.
Ian Whittaker, analyst at Liberum Capital in London, in a recent report called the German giant “an obvious M&A target” and named Comcast-owned NBCUniversal a possible buyer. “NBC has previously expressed interest for ProSieben,” Whittaker wrote. “It knows the German TV ad market and could offer significant cost synergies for ProSieben's U.S.-heavy programming grid.”
Several bankers familiar with the German sector played down the chances of a deal in the near future, citing ProSieben's ongoing structural problems. The company has a huge, but messy, group of assets, among them a number of e-commerce firms with no connection to the entertainment business, including an online travel agent, a dating site, a sex-toys mail order company and cost-comparison sites. Last week, Ebeling unveiled a new organizational setup designed to streamline ProSieben's operations and fold together the company's traditional TV and digital businesses. ProSieben has said it is seeking a partner or co-investor for its content division, Red Arrow Studios, and is taking bids for its e-commerce assets. If ProSieben can hive off its digital operations, its core German TV business remains an attractive asset, particularly given the company's relatively low stock price.
For U.S. giants such international deals are often much more affordable than a similar domestic deal and allow them to spread expenses, including spending on original content across a bigger footprint, one banker told THR.
A deep-pocketed American network also has a competitive advantage over international network operators, most of which “don't have the scale to do these (sorts of deals),” says Hal Vogel, CEO of Vogel Capital Management. He expects global TV dealmaking to pick up from here. “U.S. networks will likely be buying more international networks,” Vogel tells THR. “The U.S. is a mature market, there are bigger growth opportunities elsewhere. And the U.S. nets can spread overhead costs over more revenues and also use in-house productions to feed the overseas markets without having to buy as much from outside producers.”