The increase in global mergers and acquisitions (M&A) activity in the last 6 months is not likely to slow down anytime soon. The deal volumes hit a 7 year high in Jun 2014, increasing 75% year over year as per Thomson Reuters.
Analysts had predicted 2014 to be a year of M&A activity based on the presence of large amounts of cash on corporate balance sheets, favorable credit markets, low interest rates and strength in the stock market. As internal opportunities remained elusive, mergers and acquisitions were the next best route to achieve growth.
Moreover, shareholders extended full support to big acquisitions in order to make their company gain market share amid the rampant consolidation.
The Media and Entertainment sector deserves a special mention in this regard. The sector has witnessed extensive consolidation in the past and this year has been a year of mega bids. The latest being the Rupert Murdoch-led Twenty-First Century Fox, Inc.'s (NASDAQ:FOXA) nearly $80 billion bid for rival Time Warner Inc. (NYSE:TWX). Though the offer has been rejected by Time Warner, it is unlikely that Murdoch will give up.
Shares of Time Warner increased over 17% on the index whereas that of Twenty First Century Fox tumbled 6.2%.
Rumors of Time Warner as a potential takeover target has surfaced after the company shed its assets to focus on its core operation. The company has spun off its America Online, Time Warner Cable and Time Inc. units in to independent companies in the past. Time Warner has thwarted Murdoch’s offer citing the company’s own robust strategies and an efficient management team were enough to drive shareholder value. However, industry analysts do not view this as the end.
What is Driving Consolidation Among Media Content Companies?
Production costs of shows and sports games have increased substantially. To add to the woes, cable companies have been charging higher for content. Moreover, the year witnessed two mega bids among cable service providers – Comcast Corp’s (NASDAQ:CMCSA) $45.0 billion offer for rival Time Warner Cable Inc. (NYSE:TWC) and AT&T, Inc.’s (NYSE:T) $48.5 billion bid for DIRECTV. Though these bids are facing regulatory hurdles, any positive development could lead to creation of mega-service providers which in turn would give them more bargaining power.
To tackle these issues and maintain a good bargaining stand, it is most likely that the media content companies may explore lucrative M&A opportunities. Moreover, with live streaming finding more and more takers, M&A seems the viable option to cut costs and maintain profitability.
Though Twenty First Century Fox – Time Warner deal is off for now, Murdoch’s interest seems unaffected. In the future, if this potential deal materializes, it would establish Twenty First Century Fox as a premier media and entertainment company which would boast two major Hollywood studios Twentieth Century Fox and Warner Bros under one roof. The deal of this magnitude will definitely raise serious anti trust concerns and will be subjected to intense regulatory scrutiny.
3 Stocks to Watch
The ongoing changes in the media sector are likely to make M&A activity more palatable in the coming days. Therefore, we bring you three stocks that are likely to take the centre stage:
The Walt Disney Company (NYSE:DIS): Disney needs no introduction. As one of the world’s largest diversified entertainment companies, this Burbank, CA.-based company’s assets are spread across movies, television, publishing and theme parks. Moreover, the company has made strategic acquisitions in the past to boost its profitability. In the recent past, the company has acquired Pixar studios, Marvel Studio, Lucasfilms and Maker Studios which has done wonders for its movie business.
This was well reflected by the incredible success of Frozen, which helped Disney post better-than-expected second-quarter fiscal 2014 results. In the trailing four quarters, Disney has beaten the Zacks Consensus Estimate by an average of 10.0%. Moreover, this Zacks Rank #3 (Hold) stock continues to generate sizeable cash flow which would provide the impetus for strategic buyouts. During the first half of 2014, Disney generated free cash flow of $2,380 million, up 9% year over year.
Scripps Networks Interactive, Inc. (NYSE:SNI): Headquartered in Knoxville, TN, Scripps Networks is one of the leading developers of lifestyle-oriented content for television and the Internet, where on-air programming is complemented with online videos, social media areas and e-commerce components on companion websites and broadband vertical channels.
In the past, it acquired U.K.-based Travel Channel International Ltd. and Singapore-based Asian Food Channel, a leading food-focused pay-TV network. With Scripps planning to foray into Latin American countries, it is likely to make tactical acquisitions. This Zacks Rank #3 stock’s good financial performance and cash flow generation abilities position it well. In the trailing four quarters, the company has beaten the Zacks Consensus Estimate by an average of 1.4% and has generated free cash flow of $643.7 million in the 2013.
Discovery Communications, Inc. (NASDAQ:DISCA): Headquartered in Silver Spring, MD, Discovery Communications owns and operates nine television networks in the U.S., including Discovery Channel, TLC, Animal Planet, Science Channel, Investigation Discovery, Military Channel, Planet Green, Discovery Fit & Health, and Velocity. Discovery also has ownership interests in Oprah Winfrey Network, the hub network, and 3net, a three-dimensional network.
The company has made several acquisitions in the past to boost its operations. These include a controlling stake in Eurosport International, a popular sports entertainment group, for $1.2 billion in Jan 2014. It also acquired the SBS Nordic operations of Prosiebensat.1 Media AG for around $1.8 billion. SBS Nordic has 12 TV networks, 19 radio stations and several digital brands in Norway, Sweden, Denmark and Finland.
In the trailing four quarters, this Zacks Rank #3 stock has beaten the Zacks Consensus Estimate by an average of 2.7% and has generated cash flow of $1,170 million, up 14% year over year, in 2013.
Conclusion
The year 2014 is definitely turning out to be a landmark year as the number of mega deals/bids keep increasing. Regulatory hurdles aside, if these deals materialize, it would set off a chain reaction in the media sector. We are likely to see more consolidation activity as content companies jostle for market share.