Will M&A Be the Big Entertainment Story in 2019?
Some insiders caution that the volatile stock market investors are witnessing, plus an economy some say is headed for recession, will lead to a cooling off in deal activity.
After AT&T's $85 billion-plus takeover of Time Warner, Walt Disney's $71.3 billion agreement to buy most of 21st Century Fox and Comcast's $39 billion deal for Sky, some are forecasting a banner year in mergers and acquisitions for 2019 as entertainment companies keep scrambling in an era of streaming media and cable cord-cutting.
Not so fast, some insiders are now saying.
Some caution that the volatile stock market investors are witnessing, plus an economy some say is headed for recession, will lead to a cooling off in deal activity. Plus, analysts says it is unclear what the regulatory outlook will be for deals after the Democrats have retaken control of the House of Representatives.
Aryeh Bourkoff, the CEO of media- and telecom-focused investment and merchant banking firm LionTree Advisors, in his year-end letter to clients and staff, noted that Bloomberg data shows that 2018 technology, media and telecom sector deal volume rose 22 percent to a record $793 billion.
"Even as we remain alert to the possibility that a correction in the credit markets could precipitate a broader economic slowdown and that M&A activity might not reach recent highs, I feel confident that any potential dislocation will create opportunities for trusted advisors and innovative providers of capital," Bourkoff wrote.
Meanwhile, Mergermarket data that focuses on announcements of strictly U.S. media companies being acquired shows $25.9 billion worth of deals in 2018, which is down 77.2 percent from $113.6 billion in 2017, even as the number of deals increased by 14 to 191. The data excludes, among others, Comcast's purchase of Sky since the latter is not a U.S. company and Disney's Fox deal since that was first unveiled in late 2017.
"It’s worth noting that this year has not seen any mega-deals, transactions valued over $10 billion, at all in the U.S. media space," Elizabeth Lim, senior analyst at Mergermarket, tells The Hollywood Reporter. The top U.S. media deal in 2018 that's part of its data was Nexstar Media Group’s $6.1 billion purchase of Tribune Media Group in early December.
"Though (2018) has seen a significant decrease in U.S. media M&A in terms of deal value, at the same time we’ve also seen a rise in deal count, indicating that there is some consolidation continuing in the industry but on a smaller level than in the last couple of years," Lim adds. "This is not altogether unsurprising, given how much scrutiny there has been on mega-mergers lately, and especially on mega media mergers, not least of which included the AT&T-Time Warner transaction."
Wall Street's entertainment sector analysts also have gone into the new year with a cautious forecast for deal making. In 2019, "M&A activity could remain relatively subdued though Disney’s divestiture of the Fox regional sports networks could spark more activity, and a few more notable deals could materialize," CFRA Research analyst Tuna Amobi tells THR.
In a year-end report, he also shared this forecast: "National Amusements, under the direction of Shari Redstone, will propose another combination between Viacom and CBS. That would be the third such proposal in as many years. After a recent reconstitution of the CBS board, the third time would be the charm, despite some likely shareholder opposition on both sides."
On Monday, BTIG analyst Richard Greenfield issued his 19 predictions for 2019, and No. 4 is that CBS and Viacom merge, with the latter's CEO, Bob Bakish, becoming CEO of the combined company while Shari Redstone is made chairman of the board.
Even if a combined Viacom-CBS doesn't come to fruition, there are many on Wall Street who presume both are still in play as potential acquisitions, or as acquirers.
Among Greenfield's other predictions is that Facebook, Amazon, Netflix or Google will acquire a video game studio and that Walmart will buy Roku, the maker of smart-TV boxes for streaming video. He also says the new Fox (made up of the assets Disney is not purchasing) will buy the regional sports networks it now owns back from Disney once that deal closes.
Greenfield predicts that Comcast will not sell its stake in Hulu, even though Disney (which will own 60 percent of the streamer after its deal with 21st Century Fox closes) would love to buy it.
As for Amobi, he also predicts that "at least one of the smaller- to mid-sized content providers will explore strategic alternatives or attract unsolicited overtures." Among the content companies of this size that have been mentioned as potential takeover seekers or targets have been Lionsgate and AMC Networks, even though management of the latter has long said that the firm is strongly positioned to succeed on its own.
"Consolidation is still a theme in content, and we still see logic in an Internet/tech player like Amazon or Apple stepping up to buy Lionsgate, or Lionsgate being swept into a larger media family, such as CBS/Viacom, or Discovery/Liberty Global," B. Riley FBR analyst Barton Crockett wrote in a recent report.
Bourkoff, in his year-end letter, also highlighted that key factors aren't changing anytime soon.
"Global platforms like Netflix, Google, Facebook, Microsoft, Apple, and Amazon are exerting enormous pressure on traditional stand-alone media models, and driving the need for scale, integration, and differentiation even as they position themselves as the single address for every conceivable customer need," he wrote.
"If 2018 was a year characterized by media industry consolidation to meet the challenges posed by technology and to take advantage of scale efficiencies, we expect this to continue during 2019 with an added focus on execution and digestion (and even in some cases de-consolidation) of these deals," Bourkoff wrote.
If there's a big merger to be had in entertainment this year, some predict it will be in the music space. Sirius XM Radio has already taken a large stake in Pandora, and many are forecasting that Live Nation Entertainment, the leader in concerts, is also on its shopping list.
"We continue to believe Sirius' controlling shareholder, Liberty Media, wishes to eventually control a combined Sirius XM, Pandora and Live Nation, and that this will become reality with a Sirius acquisition of Live Nation and a clean-up of Sirius' share structure," BTIG analyst Brandon Ross said in a research note three months ago.