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So Much Winning in This Bidding War

Say what you want about how bidding wars are bad for business and how nobody truly wins in the end, for cable programming stocks, the battle between The Walt Disney Co. and Comcast over 21st Century Fox’s entertainment assets has been plenty good.

Programming stocks have been under the gun since the summer of 2015, when a market sell-off decimated the sector after Disney admitted its flagship sports network ESPN had shed about 3 million subscribers.

Cable programmers watched their stocks plunge and the sector lost more than $60 billion in market capitalization as investors panicked that over-the-top services would take over, gutting affiliate fees and ad revenue.

That may still happen. And though most programming stocks haven’t fully recovered from that 2015 bloodbath, the battle for Fox’s entertainment cable networks and TV and movie studios has done more for the overall sector than just about anything else over the past six months.

AT&T Deal Raises Deal Tides

For some, the past two weeks has been particularly productive, after U.S. District Court Judge Richard Leon approved AT&T’s purchase of Time Warner Inc., on June 12, ending what had been a 20-month regulatory process and possibly opening the door for further consolidation.

Disney's "The Fox Hunt"

Disney's "The Fox Hunt"

The day after the judge’s decision, Comcast made a formal, all-cash bid of $65 billion for the Fox properties, touching off what some expect to be a lengthy bidding war.

So far, Disney hasn’t disappointed, sweetening its December offer for the assets with a $71.3 billion cash and stock on June 20.

And on June 27, the U.S. Justice Department approved the Disney-Fox deal, on the condition that Disney divests Fox’s 22 regional sports networks.

That approval could complicate Comcast’s quest for the other Fox assets, but it also puts more programming assets in play. Comcast, at press time, had yet to up the ante for Fox, but was widely expected to escalate the bidding.

Comcast, which has an investor base that doesn’t seem to want it to pursue expensive content assets, has seen its stock fall about 20% as its management did just that.

Disney, down about 3% in the months just leading up to the official Comcast bid, fell another 4.5% in the two weeks after June 13 as the bidding war threatens to heat up.

Fox, owner of the prize assets coveted by Comcast and Disney, has seen its stock rise steadily (41% or about $14 per share) in the past six months.

Also benefiting has been Discovery Inc., which closed on its $14.6 billion purchase of Scripps Networks Interactive in February. It’s enjoyed a resurgence recently amid speculation it could be involved in the latest consolidation wave.

Discovery shares are up 15.5% since June 13, more than twice the 7.3% they gained between Dec. 29 and June 12.

Pivotal Research Group senior advertising analyst Brian Wieser changed his rating on Discovery from “hold” to “buy” and back to “hold” again between June 4 and June 18, mainly because the stock’s 30% gain over that period exceeded his $28 price target. Wieser has maintained that price target, but is still a bit skeptical about the prospects of more consolidation.

“There are many legitimate concerns about the company’s strategic position vs. its peers and around the industry in which it operates,” Wieser said in a research note. “And while we recognize that M&A has the potential to provide favorable benefits to Discovery stock, we’re hard-pressed to see any buyer urgently pursuing Discovery at this time.”

Other stocks that could be attractive to consolidators have gained, too. Regional sports programmer MSG Networks, which could benefit in a Fox RSN spinoff, is up more than 13% since June 13. The stock rose just 0.5% in the prior six months.

Who Might Be Buying?

But who might roll up programmers in the wake of Comcast-Fox-Disney? Some analysts think one of the online video giants — Facebook, Apple, Amazon, Netflix and Google, the so-called FAANG stocks — could easily snap up networks. Others point out that Netflix’s strategy has been to build, not buy.

“Tech is NOT buying legacy media, they are replacing legacy media,” BTIG media analyst Rich Greenfield wrote in a blog post. “[W]hy acquire legacy media assets when you can simply invest and acquire Hollywood talent without all the unwanted baggage that is embedded in legacy media assets?”

Some still hope for a buying spree. The New York Yankees, the Major League Baseball team that is a partner in and the primary content provider to YES Network, could buy out Fox’s 80% stake in the sports channel for an estimated $4 billion. Should that happen, FBN Securities analyst Robert Routh believes MSG Networks would be an attractive target to whoever owns the other Fox RSNs.

In a recent interview with The Wall Street Journal, cable legend John Malone said Charter Communications could be a possible buyer if the Fox RSNs were spun off. Malone’s Liberty Broadband is Charter’s largest individual shareholder.

In a client note, Routh said whoever gets the Fox RSNs will likely have no presence in the New York metro area if the Yankees buy YES. “This would make MSGN the only other ‘game in town’ as far as the New York RSN market is concerned, and thus we think whoever acquires Fox’s RSNs will look to acquire MSG Networks to complement the other RSNs they would be purchasing from Fox.”

MSG Networks could fetch as much as $35 per share from a buyer, about 10 times its forward looking cash flow and a 52% premium to its current stock price, Routh said.