The decisive wave of media consolidation is always just over the horizon. Now that the full impact of the Covid-19 crisis has become clearer, questions linger about whether the long-predicted shakeout is upon us.
By Jonathan Guilford and Ed Mullane
Despite years of speculation about whether MGM, Lionsgate, AMC Networks and others will look to combine under the pressure of a changing industry, we’ve seen just a handful of big deals among the content producers.
The pandemic has only accelerated the erosion of incumbent cable networks’ and studios’ economics. Cord-cutting continues apace, while turbulence in the advertising market impacted results and killed company sale processes across the media sector.
Uncertainty about the industry’s future affects the largest telco-media conglomerates as well as the smaller players, with shareholder activists positioning themselves as catalysts for change.
AT&T, home to WarnerMedia, has been dismantling whatever pieces it can afford to lose after activist Elliott Management pointed out that a decade of empire-building under former CEO Randall Stephenson had only dragged on results.
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Comcast has also drawn an activist in Nelson Peltz’s Trian Management, which says it has held “constructive” discussions with management.
The natural question is whether these companies will remain together or break up. While no one sees such a move as imminent, it is not difficult to imagine that AT&T could eventually become this era’s AOL, demerging from Time Warner after a costly tie-up. NBCUniversal, meanwhile, is seen as a mini-Disney, replete with a theme park business, cable networks, streaming bets and a traditional broadcast business that could stand on its own.
If we’re really pushing into the land of hypotheticals here: could those companies look to a spin-merge transaction, combining their media businesses with smaller peers?
Most willing among counterparties might be John Malone, who sits atop a web of companies led by consolidator Discovery. Malone is seen as being in the industry’s driver’s seat, with freedom to consider deal partners across the globe of various sizes – as evidenced by reports of an approach for Italy’s Mediaset over the summer. Discovery is seen as a buyer of last resort for some of the stranded independents, which are said to have pitched various deals at Malone.
Loneliest among these independents might be AMC: at a market capitalization of $1.3 billion, it is smaller than many peers and dependent on a trickle of expensive prestige content. AMC has nonetheless made some smart bets, including a pivot to meet consumers where they are through streaming services.
Still, compared to Netflix, which can turn on a firehose of money to feed new content, it may not be enough. Netflix isn’t just beating AMC and its peers on content spend; it’s collapsing the traditional cable media ecosystem from which they earn affiliate fees. Dealing with this loss of higher-margin income while also facing the daunting task of spending to keep up in the new ecosystem puts the Dolan family-controlled AMC and its peers in a tough position.
Those peers are also subject to deal chatter: MGM is a perennial target, its aspirations for a sale said to be thwarted by various complications. Lionsgate has explored selling Starz or a stake in the network’s international streaming business, with sources telling Dealreporter that the resulting cash would give the company a chance at follow-on deals to expand its content library or merge with a peer.
Some of these deals could shake loose once we have a coronavirus vaccine and the potential sellers have a chance to sift through the wreckage. A clear concern is emerging, though: what if there are too many sellers for too few buyers?
Jonathan Guilford is an assistant editor at Dealreporter, where he covers the telecom, media and technology sectors. He can be reached at firstname.lastname@example.org.
Ed Mullane heads the activism team for Activistmonitor in North America covering many complex and contentious campaigns in the public markets. He can be reached at Ed.Mullane@iongroup.com.