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May 19, 2009
M&A Speculation Hits Hollywood
Over the past few trading days, shares of the two major independent Hollywood studios have moved up sharply. Dreamworks Animation (DWA) is up four straight days for a total of 13%. Lionsgate (LGF) is up 16% over two days. Both stocks were unusually strong on Tuesday on well above average volume.
Another studio in the news is MGM which is looking to refinance its balance sheet. MGM is privately owned by Comcast (CMCSA), Sony, Providence Equity, and TPG Group (formerly Texas Pacific Group).
I suspect what is going is speculation that these studios are going to be acquired. The Breaking News Blog at SNL Kagan reported that Liberty Media President and CEO Greg Maffei stated "We would look at a studio." Maffei also said that studios were an attractive and relatively stable business, while stating that "one or two" could be for sale in the near future. It does not hurt studio values that the movie business is booming so far in 2009, with the North American box office up 15%.
Besides Liberty there could be other buyers. Time Warner (TWX) is looking for acquisitions and has a very good balance sheet post its separation from Time Warner Cable (TWC). I find it interesting that TWX was down more than 3% as DWA jumped 3% on Tuesday. DWA's market cap of $2.3 billion is not massive and Warner Brothers could use the animated/family fare as it becomes more important to the new, smaller TWX. Also, TWX is looking to be more integrated, similar to Disney (DIS), and animated properties offer the best cross platform synergies in media.
CBS is a long shot buyer as it seeks to diversify from its reliance on advertising, particularly local advertising. CBS has a stretched balance sheet but recently refinanced its 2010 maturities relieving pressure. In addition, CEO Les Moonves is not shy and would gladly do a controversial deal if he thought it was in the interests of the company. In fact, he just did that when he bought CNET.
LGF has been in Carl Icahn's sites for several months. Sale to Liberty might be a good alternative. Liberty already owns a movie network in Starz and has started Starz Media for original productions similar to HBO or Showtime.
I think both DWA and LGF are overvalued presently and if no deals or stronger rumors emerge both are vulnerable to a pullback.
Posted by Steve Birenberg at May 19, 2009 03:09 PM in Media
the market in general and media stocks in particular[i..e cetv and micc] should be ripe for a correction at this time but keep rising.
what is the best way to handle this situation?
should one sell into strength and keep 20 or 30% in cash, or keep these stocks but use tight rachet stops? one wants to avoid a rapid downturn but also not to lose the continued upward momentum.as always, this market is impossible to time
Got your voicemail message as well.
I think the market is rising because everyone and I mean everyone is expecting a pullback. That means people have already sold are sitting on cash. This means there is not a lot of selling required and buying power exists. As long as there are enough positive datapoints on the economy to keep the recovery theme intact the bulls are in charge. That said, I still expect a pullback and have not committed my cash reserves.
As for CETV, I think US dollar weakness and growing conventional wisdom that advertising has bottomed is driving the stock. Earlier today I noticed that in 4Q09 currency will no longer be a headwind and might be a small benefit. In 1Q10, currency, if at today's levels, would be a 10-15% tailwind. this mean you could see EBITDA jump back a huge amount in 2010 is advertising growth resumes. Thus investors willing to look out that far see reasonably priced stock that could re-emerge as a growth stock. I trimmed at $17.60. I am thinking of trimming again.
Overall, I think you need to commit more ouf your funds to a trading portfolio but the timing remains next to impossible.
Posted by: Steve at May 20, 2009 01:55 PM