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October 01, 2009
M&A Back in the Forefront of Media Investing
Merger and acquisition rumors have reemerged as drivers of media stocks after a mutli-year absence. The latest rumor was posted by The Wall Street Journal in a Heard on the Street column speculating about a possible Verizon Communications Inc. takeover of DIRECTV Group Inc. The speculation emanated from Verizon CEO Ivan Seidenberg discussing TV as the "core product" for the company's wireless network.
Given that FiOS TV, despite having more than 2 million customers, lags far behind the major cable and satellite distributors, an acquisition of DIRECTV is a logical way to quickly expand Verizon's TV business. Of course, DIRECTV would do virtually nothing to directly help the consumer fixed-line phone business, which is rapidly losing residential phone customers to cable companies and wireless substitution.
DIRECTV would, however, allow full bundling of TV, wireless and wireline telephony and broadband. This could reduce churn for both Verizon and DIRECTV. There would also be programming expense savings, especially for the FiOS TV business.
DIRECTV takeover rumors are getting a boost due to the near-term closing of DIRECTV's acquisition of Liberty Entertainment Group. Liberty owns 54% of DIRECTV, so simplifying the ownership structure would make a takeover much easier. In addition, Liberty is controlled by John Malone, a noted deal-maker. Malone and Greg Maffei, who oversees many of Liberty's businesses, have both mentioned in the past that a sale of DIRECTV could make sense.
It is not just DIRECTV that is subject to renewed takeover rumors, however. Merger and acquisition speculation has once again moved to the top of the list of factors impacting media stocks. Many factors have reignited investor interest in takeover speculation, including Walt Disney Co.'s purchase of Marvel Entertainment Inc., several corporate restructurings, Time Warner Inc.'s planned spinoff of AOL LLC and Cablevision Systems Corp.'s spinoff of the Madison Square Garden assets, as well as a key asset remaining up for sale, Cox Communications Inc.'s Travel Channel.
Most importantly, renewed risk appetites by investors and the reopening of credit markets have turned M&A rumors from pure speculation to plausible again.
This is all good news for media stock investors. Any industry sees their stocks perform better when it is consolidating. Multiples rise as takeover premiums are built into current stock prices. Rising multiples and stock prices attract fast money investors, further boosting stock prices in what ultimately becomes a positive feedback loop for the stocks.
The media industry has always had a lot of merger and acquisition activity, and investors have often embraced takeover speculation in the group. Even though many commentators, analysts and investors continue to pooh-pooh the idea of media mergers based on the high-profile perceived failure of many past deals, I think the speculation is here to stay under one condition. Credit markets have to remain open with companies fairly easily able to obtain financing from banks and the corporate bond market.
Besides DIRECTV, other often-mentioned takeover candidates include DISH Network Corp., Cablevision, Scripps Networks Interactive Inc., DreamWorks Animation SKG Inc., Lions Gate Entertainment Corp., Time Warner Cable Inc. and Discovery Communications Inc.
DISH Network is viewed as an alternative acquisition target to DIRECTV for both Verizon and AT&T Inc. And Cablevision is an often-rumored target of Time Warner Cable, which itself has been recently rumored to be a target of Comcast Corp.
A recent ruling by a federal judge tossing out the 30% cable ownership cap has contributed to speculation in the group.
For example, Discovery and Scripps are both thought to be good candidates for major media conglomerates, which all seem to be betting their future on cable networks. DreamWorks and Lions Gate, meanwhile, are independent movie studios that could provide content to established players or those wishing to balance content with distribution. DreamWorks rumors received a boost from Disney's acquisition of Marvel. Time Warner is most often mentioned as a home for DreamWorks given that Warner is viewed as weak in animation, and the company has dramatically slimmed down its asset base and improved its balance sheet.
AT&T, Discovery Communications and Liberty Entertainment are widely held by clients of Northlake Capital Management LLC including in Steve Birenberg's personal accounts.