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Some Votes Against Media Merger Mania

Mergers are top of mind in the TV business today, but completing potential deals will not be easy.

Analyst Rich Greenfield of BTIG Research doesn't think the big cable merger now on the table will pass muster with government regulators.

Comcast withdrew its offer for Time Warner Cable because it couldn't overcome regulatory concerns about broadband concentration, but Charter Communications, which is looking to buy TWC and Bright House, thinks it has a better chance partly because it's smaller than Comcast.

"Given the FCC's public statements and thinking through how the Department of Justice will look at market concentration, we have a very hard time seeing how the government will allow Charter, Time Warner and Bright House to join together," Greenfield says in a note published Friday.

If somehow Charter convinces the government to give the deal a go ahead, Greenfield foresees conditions being put on the combined company.

One is that the new bigger Charter must agree to accept net neutrality and reclassification as a Title II carrier as part of its deal.

Regulators might also require the cable giants to overbuild one another to create competition for consumers.

Greenfield thinks it unlikely that Charter would accept such a condition.

"The entire reason why cable investors have loved the sector and why investors want Charter to grow substantially larger through acquisitions, is that there really is no competition.  The industry's near monopoly on a local level creates significant and unknown power as horizontal scale grows, which is what worries the government so much (monopsony power).  The unknown question is which is worse for Charter - unconditionally accepting Title II reclassification and the Open Internet Order, along with agreeing to overbuild its cable industry peers OR remaining a small, standalone industry player and disappointing investors," Greenfield said.

Mere talk of consolidation on the distribution side of the business seems to inevitably lead to talk about the need for programmers and content companies to also get larger.

Todd Juenger of Sanford C. Bernstein notes that last year's frenzied discussion of potential mergers, touched off by a bid for Time Warner Cable by Comcast and Time Warner by 21st Century Fox, fizzed as those deals fell through.

At this point, Juenger sees the media sector weakening, making it easier for the stronger acquisition minded companies to wait while the stock price of the weaker fish decline.
"We believe potential M&A is mostly a reason not to be short these stocks, as opposed to a reason to be long," Juenger says.

In a research report Friday, Juenger handicaps some of the more prominent possible media company deals.

To start with, Juenger believes it's unlikely to see a truly large scale merger because the most likely buyers—Disney, Fox, Time Warner and CBS—can take a wait and see approach on the companies they might buy—CBS, Viacom, Discovery, Scripps Networks Interactive and AMC Networks.

"Many of the potential combinations aren't big enough to be transformational for the big acquiring company. They would simply be increasing their exposure to a less-good business," Juenger says. "In fact, there is growing evidence that having more and more TV networks under one company's control may be more of a liability than an asset. There is less risk to having a small number of powerful networks, than a large number of marginal networks under the theoretical umbrella protection of a few anchors."

Juenger thinks that a merger of Viacom and CBS is likely eventual, partly because he doesn't see many other buyers for the company.

An interesting scenario involved John Malone, who in addition to his interest in Charter on the distribution side, also has tentacles in a number of content companies. Juenger says the idea on the street is that Malone will combine Starz and Lionsgate (whose Canadian tax status makes it especially attractive to him). After that, Juenger says he could also roll up Discovery, Scripps, AMC and even Viacom to create a comprehensive programming package for potential over the top distribution at $15 a pop.