Wible's Weekly: TV Merger Matrix - Who Is Next?

As we predicted in out 2014 Outlook, mergers are playing an important role in shaping the media landscape. We believe the consolidation will continue and shift towards the content companies that will seek to balance out changes in purchasing power. An OTT induced deterioration in ad revenue growth and increases in content costs make the TV networks more dependent on collecting larger increases in affiliate fees, which is jeopardized by MVPD consolidation. This is the impetus for TV network consolidation - especially among the smaller/independent names (e.g. AMCX, STRZA, MSG, CRWN). We explore a number of consolidation scenarios to screen for the ideal mix of strategic and financial benefits that could point to higher probabilities for certain merger combinations. Overall, we find there are greater financial and strategic benefits for larger deals with the best combinations providing about 20% accretion. To be clear, we are not advocating for any of the deals listed but are simply trying to put context around what could be considered by senior management teams.

Financial Benefits - We screened every possible combination of deals amongst 12 of the public TV media companies. Stock deals are more accretive than cash deals but are skewed by NFLX's high multiple that provides significant accretion in four of the top ten deals. Although NFLX would be the top stock buyer, we believe there is less likelihood they would pursue deals for a number of reasons. SNI ranks at the top cash buyer but we see less strategic value in some of the deals and believe it is more likely to be a seller than a buyer. The most accretive deals in order are: NFLX/SNI (+60%); MSG/CRWN (+36%); FOX/TWX (+24%); NFLX/AMCX (+23%); NFLX/STRZA(+21%); and CBS/VIA (+19%). The financial benefits do not always align with the strategic benefits, which are why we screen these scenarios against the deals that we believe add the greatest strategic value.

CBS and VIA - We generally see CBS as a buyer of cable networks but would see the greatest benefit from a VIA deal. This merger increases CBS's exposure to affiliate fees, allows it to leverage sports/retrans across more networks, provides studio content, and greatly increases its European ad exposure. The deal would be about 19% accretive.

DISCA and SNI - Both companies have a common interest to gain purchasing power and it is one of the few deals DISCA could do that provides substantial accretion. The deal would greatly increase DISCA's share around non-scripted programing but SNI's content may not ideally export as well across the globe. Regardless, the deal would be 16% accretive.

DIS and DISCA - The DISCA portfolio would complement DIS's current programing and greatly increase DIS' ad exposure in Europe. More importantly they would get access to the global sports network - Eurosport. DIS' retrans and sports leverage would certainly help DISCA maximize its carriage economics and the brands are compatible. However, the deal would only be about 5% accretive.

FOX and TWX - However improbable it may seem, one cannot overlook this mega deal given its immense financial benefits that dovetail with a number of strategic benefits like the added sports rights, studio market share, TV production synergies, large content library, news programing synergies, distribution savings, and brand compatibility. Any deal would have to cope with overlapping networks and would very likely face more regulatory scrutiny. Large cap shareholders may also have disdain as they would see cash diverted away from the return of capital that has helped boost media stocks. This deal would be 24% accretive - the highest accretion of any large cap merger scenario.

Tony Wible can be reached at twible@janney.com.

IMPORTANT DISCLOSURESTony Wible
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I, Tony Wible, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report.
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