A favourite and feverish recreation from Wall Avenue to Hollywood heading into 2024 is pairing up media firms, or items of them, to see what matches the place in a high-stakes jigsaw puzzle that can form the way forward for the business.
Ongoing streaming losses, anticipated rate of interest cuts (that would decrease financing prices), extra sturdy inventory costs and the tip of WGA and SAG-AFTRA strikes — in addition to precise, high-level conversations — have many believing that sluggish media M&A of all sizes might decide up dramatically within the new yr. Simply on this final week of 2023, Warner Bros. Discovery acquired Turkish streaming service BlueTV, Altice USA offered monetary information streamer Cheddar and Lionsgate closed its acquisition of eOne.
There’s a logic to larger offers as effectively. With Disney being “the one scaled legacy media firm,” wrote Vijay Jayant of Evercore ISI, “a merger of some mixture of NBCUniversal, Paramount, and Warner Bros Discovery has sturdy financial rationale.” He sees as a lot as $5.5 billion in synergy price financial savings in a Paramount-WBD merger, for example.
Twin Hollywood strikes weighed closely on the business, however with actors’ and writers’ contracts settled, “We anticipate to see upward momentum within the sector and a rise in transformational offers and artistic deal buildings,” mentioned Bart Spiegel, World Leisure & Media offers lead for PwC, in a report on M&A earlier this month.
Others on Wall Avenue groan on the considered levered firms piling on extra legacy property in offers that can have a a tough time passing regulators. However, “The extra determined these media firms and executives get within the weeks and months forward, the extra doubtless some deal will occur in 2024, even with none elementary motive for it,” wrote Robert Fishman of MoffettNathanson after information of conversations between Paramount and WBD.
Key 2023 transactions embody Endeavor shopping for WWE; French billionaire Francois-Henri Pinault taking a majority of CAA; Saudi Arabia bulking up in golf (LIV Golf+PGA) and blended martial arts (PFL+Bellator); and Disney shelling out for the third of Hulu it didn’t already personal. Paramount World divested Simon & Schuster on the second attempt, to KKR for $1.6 billion. Peter Chernin’s The North Highway Firm purchased an enormous stake in Ahmir “Questlove” Thompson- and Tarik “Black Thought” Trotter-founded Two One 5, and bought Turkish manufacturing firm Karga.
Vice Media was offered to Fortress Funding Group and others for $350 million. Charlie Ergen’s two firms, Dish Community and EchoStar, merged in an all-stock deal. Dan Snyder offered the Washington Commanders NFL franchise to the Harris Group for $6 billion – a file in North America. Mark Cuban simply acquired NBA approval to promote the Dallas Mavericks to Vegas Sands Corp., owned by the Adelson and Dumont households, for about $3.5 billion.
Theme park operators Six Flags and Cedar Honest merged.
Lionsgate closed its acquisition of eOne from Hasbro for $375 million in money plus the belief of some manufacturing financing loans. It additionally elevated its majority stake in 3 Arts Leisure
The biggest deal of the yr was Microsoft’s $69 billion acquisition of Activision Blizzard — introduced in January of 2022 — which lastly closed final month over the objections of regulators.
Possible Candidates
Heading into 2024, Paramount is going through monetary pressures and exploring a sale.
Warner Bros Discovery should purchase or promote beginning in April when a tax penalty on transactions expires. Paramount’s controlling shareholder Shari Redstone has talked with WBD CEO David Zaslav a couple of potential deal, and with David Ellison, chief of fast-growing Skydance Media, that would contain a transaction at her household holding firm NAI.
“There’s curiosity from rich people and all the standard suspects,” mentioned one dealmaker. “Individuals would like to personal the studio however have to determine what to do with the linear networks. A bunch of individuals have checked out it and might’t make the mathematics work” – but.
Par is extremely levered, lags in free money stream and nonetheless hasn’t put a timeline for streaming income. Redstone might wait. “But when you will promote and property are declining there isn’t any motive to,” mentioned one Wall Streeter.
WBD, some mentioned, needs to be laser targeted on paying down debt, not one other merger.
Deep-pocketed NBCUniversal mum or dad Comcast — which seems at every thing however received’t transfer with no “sturdy and compelling motive,” president Michael Cavanagh mentioned lately — is taken into account a purchaser.
Lionsgate studios will cut up with Starz in early 2024, creating two stand-alone firms and digestible acquisition targets. Nevertheless, at the same time as that course of has moved ahead, the corporate has additionally been a purchaser, saying the eOne deal earlier this yr.
One Wall Streeter puzzled if Fox and Information Corp. might take one other run at merging. That will make it tougher for feuding siblings ( if they’re feuding) to interrupt up Rupert Murdoch’s empire. A primary try early this yr was shot down by exterior shareholders of each firms.
Altice USA, which offered Cheddar to Archetype, a media firm owned by personal fairness agency Regent, has been below monetary stress and thought of a possible goal.
Amazon is reportedly planning to put money into Diamond Sports activities Group, which filed for chapter in March, in response to the WSJ. The corporate behind Bally sports-branded networks holds native broadcast rights many Main League Baseball and NBA groups.
The Financial Instances reported that Disney has a non-binding settlement to merge its Indian enterprise with Reliance Group right into a enterprise majority-owned by Reliance. Disney declined touch upon that. The corporate has additionally been looking for a strategic accomplice for ESPN.
“After which, there are at all times offers that come out of left area,” says one longtime media analyst. “Two years in the past, earlier than Vince McMahon acquired sued and walked away from WWE, nobody would have predicted” he’d promote it. Endeavor introduced a deal in April and it closed in September when UFC and WWE merged into a brand new firm referred to as TKO Group, managed by Endeavor. The Ari Emanuel-led firm mentioned it’s contemplating strategic alternate options, noting little question that the Pinault-CAA deal valued the company at $7 billion. Endeavor owns WME, reside sports activities and different companies. Its largest shareholder, personal fairness big Silver Lake, was engaged on a proposal to take Endeavor personal however no phrase on that but.
There’s chatter about media conglom aspect gross sales of linear property. Disney CEO Bob Iger walked again feedback round unloading ABC and cable networks. Paramount took BET off the desk earlier this yr when bids had been decrease than it needed. Worth is an enormous stumbling block. There’s an enormous hole between what patrons are prepared to pay for legacy media property “and what media firms are prepared to promote these property for,” says Jayant.
Distribution property will also be impaired by being peeled away from a studio.
If huge media firms wish to merge — relying on which firms and deal construction — they’d doubtless have to divest legacy property. One entity can’t personal two broadcast networks, for example, and regulators have by no means been eager on cable consolidation. Non-public fairness corporations, deal-hobbled lately by excessive rates of interest however with a historical past within the broadcast and media area, might step in, and will pay extra for companies that also throw off vital money stream even in decline.
Eleven rate of interest will increase beginning in March 2022 choked transactions by inflating the price of borrowing. However the Fed has left charges unchanged at current conferences and indicated on the final one earlier this month that cuts are most likely on the way in which in 2024. Decrease charges will pull personal fairness corporations off the sidelines.
FTC Blues
A large drawback for legacy media M&A is the present Federal Commerce Fee, some of the aggressive ever in difficult offers. It’s has had blended success blocking offers outright, however a number of huge wins. And a regulatory problem can delay closing a deal, which can be dangerous in a fast-changing enterprise. Tech giants like Amazon, Apple, Alphabet and Meta are essentially the most scrutinized group, eliminating some potential bidders.
“The countervailing pressure is the seeming resistance to massive cap M&A generally, and media and tech M&A particularly, in Washington, D.C. Bigger offers may need to attend,” mentioned Peter Supino of Wolfe Analysis.
“We’ve got a really laborious time believing the present FTC/DOJ, which has been very aggressive in combating business consolidation, would give this deal a move,” Doug Creutz of TD Cowen mentioned of a Paramount-Warner Bros Discovery deal. “It could contain merging two of the 5 remaining main film studios, two main tv studios, and would create a really excessive focus of linear community possession (which final we checked remains to be a really massive and EBIDTA-positive enterprise, even given wire reducing) together with a major consolidation of main sports activities rights.”
Even when they may merge, the reality is that “bigger-is-better” offers which have pushed many years of media consolidation have a blended observe file with buyers, firm funds and the media enterprise. “Placing these firms collectively doesn’t repair the issue,” mentioned Wealthy Greenfield of LightShed Companions. “The issue is, they will’t compete with Netflix. They should cease. They should shut down these streaming companies or scale them again dramatically.”
He’s not alone. Streaming losses are prime of thoughts on Wall Avenue right this moment. Nevertheless, mergers would additionally consolidate streamers and will assist create a Netflix rival.
“We’ve got this bizarre conundrum,” mentioned Citi’s Jason Bazinet.
He sees the present second formed by 4 “chapters,” beginning in 2017 when media firms had been in denial. Round 2019, the lightbulb went off — Netflix was not a complement to pay-TV, however a substitute. Then got here a flurry of consolidation and the launch of in-house streaming companies. “The price of capital was zero. The Avenue was rewarding progress,” Bazinet mentioned. The price of capital started to rise final yr as streaming losses mounted and Wall Avenue reversed itself, prioritizing revenue over progress. “And that was type of the catastrophe of 2022 and 2023. It was when media firms began to recalibrate.” They’ve turn into extra pragmatic.
“So, as we sit right here now, the way in which I’d describe it’s that the Avenue is singularly targeted on revenue and on how quickly the linear ecosystem in going to crumble,” he mentioned. Media firms now play down streaming. Their films are again in theaters. They’ve promised to not make investments big sums on manufacturing or on advertising and marketing. Bazinet believes they will generate income in streaming. “There’s nothing type of structural,” he mentioned. “It’s simply going to take time.”
Chapter 5, he mentioned, is the place a participant challenges Netflix and modifications the narrative. Disney is finest positioned, however a mix of different streamers could possibly be a 3rd. Thus hypothesis round Paramount World, Warner Bros Discovery and Comcast — particularly the primary two, since Peacock has limitless assets.
Stated Supino: “A few of these firms will determine to not be within the streaming enterprise in the identical manner that they’ve been. Others will maintain the pedal to the metallic.”