FOXA, CBS, DISCA, TWX, VIAB, DIS: Focus on M&A -- Pivotal Research

Ahead of 2Q17 earnings we see relatively weak fundamentals for videocentric media owners Cord shaving and to a lesser degree cordcutting continues to erode subscriber bases for most of these companies in the United States constraining affiliate fee revenue growth Viewing of videobased content is evidently growing indicating some healthy underlying elements to the industry although much of the growth accrues to newer SVOD services and YouTube Advertising is somewhat worse off with the large advertisers who drive most of the industry39s spending suffering somewhat subject to limited growth in their businesses paired with more aggressive applications of zerobased budgeting and heightened influence of marketing procurement departments on overall advertising activities Problems with digital advertising are now more widely appreciated as is television39s relative effectiveness in building and sustaining brands contributing to shifts of spending back to TV for some advertisers ie PampampG However we don39t think any kind of shift might be big enough to cause yearoveryear likeforlike normalized advertising revenue growth for national TV any time soon To point we think the strong Upfront market reflects a shift of spending from scatter into Upfront markets and concerns about limited commercial inventory that will be available later in the upcoming broadcast year given high single digit or worse declines in commercial ratingsHowever fundamentals such as these are likely to be deemphasized this earnings season in favor of a focus on MampampA for companies in the sector especially with news of Scripps discussing combinations with each of Discovery and Viacom coming to light on Tuesday Combinations such as these should be positively received by investors given the potential to drive efficiencies into these businesses We think that networks will require investments in programming that outpace revenue growth on an ongoing basis limiting the opportunity for margin improvement without the synergies that might follow from this kind of MampampA Network owners who attempt to reduce growth in spending on programming will probably find that they lose audience share and advertising budget share as well as clout with distributors or the ability to sell directly through to consumersWith all of that noted each of Discovery Scripps and Viacom are in particularly difficult positions especially relative to owners of broadcast networks including Disney Fox and CBS Discovery Scripps and Viacom each lack sports programming or much in the way of other highend original content on their core US networks Each of them will generally have a harder time persuading distributors to increase the fees paid by much or to ensure carriage of every network Each of these networks are also probably worse positioned vs peers to create directtoconsumer offerings Consequently it appears to us that the advantages that may be realized are probably less strategic than financial so far as we can tell Further whether or not any of these combinations actually occur is harder to assessAt current levels we remain relatively neutral with a negative orientation on the sector and retain one Buy rating with Fox where we retain our 36 YE2017 price target We note that Fox remains the one large network group faring the best in terms of its cable network distribution and continues to be the most aggressive among peers investing in growth opportunities The Sky transaction if it is eventually approved will be helpful at a strategic level as well to the extent that it may help in the longrun with a reinvention of Fox News and help provide Fox with a second approach after Hulu towards investing in SVOD services given Sky39s efforts in this space By contrast Disney is the only Sell in the group given our 85 price target One of the key factors supporting this view is that we think that margin erosion will occur at Disney39s cable networks given advertising and affiliate fee revenue growth that is unlikely to exceed ongoing cost increases which are primarily associated with sports rightsVALUATION We value companies on a DCF basis Key variables driving valuations across the agency holding companies include longterm costs of capital ranging from 68 for Discovery to 97 for Disney Longterm growth rates range from 35 for Viacom to 50 for DisneyRISKS Risks to companies in the sector include the hitdriven nature of video production threats to TV advertising and a pay TV slowdownFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE TV Update 71917newspdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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FOXA, CBS, DISCA, TWX, VIAB, DIS: Focus on M&A -- Pivotal Research

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