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Content Pirates

As the private jets returned from Allen & Co.’s annual media mogul summer camp in Sun Valley, Idaho, last week, speculation around possible deals in the content sector grew louder.

Allen’s conference has been the petri dish for several huge media mergers over the past several decades — including The Walt Disney Co.’s 1995 purchase of Capital Cities/ABC, Comcast’s 2009 acquisition of NBCUniversal and Verizon Communications’s 2014 purchase of AOL.

And this year’s soirée comes at a pivotal point in the content business, as programmers contemplate adding scale to compete against heftier distributors like Charter Communications and Altice USA, as well as subscription video-on-demand services such as Netflix.

At the same time, boardroom turmoil at Viacom — Shari Redstone, a company director and Sumner Redstone’s daughter, was a much-watched figure at the Allen conference — could set the deal wheels moving at full speed. Analysts would like to see Viacom and its former bandmate CBS reunite, but there is also the possibility the parent of MTV, Nickelodeon and Comedy Central could continue to go solo or attract the attention of a larger suitor, such as 21st Century Fox.

Consolidation has always been an option for programmers in a land of giant distributors. Most analysts expected a wave of deals after Charter made its first overtures to Time Warner Cable in 2013, starting with Fox’s aborted $80 billion takeover of Time Warner Inc.


Content merger fever waned in 2015, when stocks fell sharply over subscriber-loss concerns. But deal activity has begun to pick back up, with last month’s $4.4 billion Lionsgate-Starz merger and NBCUniversal’s $3.8 billion purchase of DreamWorks Animation.

Download "Media's Free Radicals," a guide to the content consolidation possibilities

According to research company Mergermarket, which tracks the number and value of media deals globally, 260 transactions worth $43.9 billion were announced in the first half of 2016, up 91% from the $23 billion announced in the same period in 2015. That pace is expected to continue.

Mergermarket TMT Group Sector editor Ed Mullane said in an interview last week that more deals will come in the wake of Starz-Lionsgate, as programmers look to insulate themselves from larger distributors demanding lower prices and skinnier packages, as well as SVOD companies that are pumping billions of dollars into original programming.

“Lionsgate and Starz is an example of two companies that didn’t have the scale to compete against the new players and the incumbent players,” Mullane said.

Netflix, which has committed to spend about $6 billion on content in 2016, also is driving consolidation talk, especially among smaller programmers.

“How are production companies going to compete against that?” Mullane asked. Bigger may be better.


Lionsgate, which many pundits see as cable legend John Malone’s latest consolidation vehicle — he owns 4.5% of Lionsgate and is the largest individual Starz shareholder — is expected to go back to the deal well. And it makes sense in that Malone’s hands are tied on the distribution-deal front, at least for the near term, as Charter focuses on integrating its $78.7 billion purchase of Time Warner Cable.

On a conference call with analysts after the Starz transaction was announced, Lionsgate vice chairman Michael Burns said the Starz deal “would not preclude us from additional acquisitions.”

Wunderlich Securities media analyst Matt Harrigan said he believes Lionsgate will reenter the deal fray within the next 18 to 24 months, but its potential targets are unclear. Movie studio Metro-Goldwyn-Mayer is a possible target, as is Viacom’s Paramount Pictures, which is in the process of selling off a minority interest.

While in the past some pundits have pointed to another Malone holding — Discovery Communications — as a target, particularly because of its reality programming, that value diminished after Lionsgate’s purchase of Pilgrim Studios late last year.

For Harrigan, the most likely consolidation candidates are Viacom, CBS and Time Warner Inc., for two simple reasons: Viacom and CBS shouldn’t have been broken up in 2009 in the first place, and Time Warner’s corporate structure — it has no overly dominant shareholder — makes it ripe for a takeover.

Rupert Murdoch’s 21st Century Fox, which abandoned its $80 billion pursuit of Time Warner Inc. back in 2014 after the Time Warner’s board of directors nixed that deal, could rethink another bid. Adding to the speculation is that Time Warner’s stock has fallen below the $85-per-share threshold of the old Fox bid.

Back in 2014, one of Time Warner’s biggest arguments against the merger was that it could surpass the per share valuation of the Fox off er, which it did for a period. But like other media stocks, Time Warner shares have fallen, as pressures from over-the-top and subscription video-on-demand providers and a weak advertising market have taken their toll.

Time Warner stock is up about 15% ($9.87 each) so far in 2016, but the shares are down 14.6% in the past 12 months. Like many programming stocks, Time Warner never fully recovered from the August 2015 sector bloodbath in the wake of Disney’s revelation that sports programmer ESPN had lost subscribers. It was also the last time that Time Warner shares traded above the $85-per-share mark Fox set in its aborted takeover bid.

Typically, weak stocks and readily available capital — despite the economy, debt is still cheap — lead to deals.

“The obvious target is Time Warner,” Mullane said. “It doesn’t have the ownership structure that large companies do. Everyone would target Time Warner.”

A Viacom-CBS deal makes sense in that adding broadcast network CBS could give cable programmer Viacom additional leverage during carriage negotiations. For CBS, the benefits are less evident, and Harrigan said that a recombination could attract attention from regulators.

“Gigantism can be a little unhealthy,” Harrigan said.

Adding to the fray is the emergence of several Chinese companies into the U.S. entertainment sector. Focus Media, a Chinese advertising and media conglomerate, has said it plans to invest heavily in sports and entertainment properties. Other players like e-commerce company Alibaba and conglomerate Dalian Wanda Group have focused on movie studios, but could turn their heads toward pay TV content.

Still, Harrigan said he doesn’t see an imminent combination of major media properties because of the regulatory angle. For example, he estimated that a Fox-Time Warner hookup would create a company that generates about 40% of total linear TV production through its 20th Century Fox and Warner Bros. studios. That concentration, he said, has little chance of cutting the regulatory mustard.

Moreover, the top five programmers already have a “ridiculous amount of eyeballs,” Harrigan said, so adding another huge company to the mix doesn’t necessarily solve any problems.

Plus, with the advent of skinny bundles, consumers want packages of fewer channels, not more networks being forced on them from a mega-programmer with dozens of channels.


Indeed, for all of Malone’s emphasis on “free radicals” in the programming business, there’s no guarantee that bigger is better. Some of the most-watched and respected shows on TV are coming from smaller networks like AMC, which has the top-rated show on cable, The Walking Dead. AMC Networks CEO Josh Sapan said as much at last month’s Gabelli & Co. Movie & Entertainment conference.

“Big is better if it’s really good stuff, and big is worse and is a weight if it’s not really good stuff ,” Sapan said at the conference. “You would rather not have that weight because it will actually burden your fair reward for what you have that is performing.

“Scale’s good if the stuff punches at or above weight,” he added. “Scale’s bad if the stuff punches below weight.”

There is an argument for both philosophies, Harrigan said, adding that having multiple networks can help insulate a programmer from a chilly ratings spell.

“If you’re hot and you’re small, people want the content,” Harrigan said. “But if you hit a cold streak, you’re irrelevant.”