Fox Move Signals M&A Time
Any army watching its foes girding for battle might have the same reaction: Time to arm up as well.
In the war between media networks and pay-TV providers, 21st Century Fox appears to be the first to attempt to put those thoughts into action. In June, the company offered to buy rival Time Warner TWX +17.22% for $80 billion, or $85 a share--an unsolicited offer that was rejected. Until last year, 21st Century Fox and The Wall Street Journal owner News Corp. NWSA -0.16% were part of the same company.
The bid comes against a backdrop of pending mergers by pay-TV distributors, including the combinations of Comcast CMCSA +0.20% with Time Warner Cable TWC +0.02% and AT&T T +0.36% with DirecTV. DTV +0.08% As that side of the affiliate-fee negotiating table gains heft, it follows that media networks might want to bolster their own. Plenty of hurdles remain for a Fox-Time Warner tie-up. Time Warner says it is worth more as a stand-alone company than Fox can pay.
But if a deal does happen, it would likely be just the tip of the iceberg for media consolidation.
The U.S. market isn't adding pay-TV subscribers, and the growing number of low-cost online video alternatives, such as Netflix, NFLX -0.99% means distributors are loath to raise prices. For media companies, garnering higher affiliate fees—paid to them by pay-TV providers—in this environment means offering must-have content. Like tools in a kit, having a full array of assets therefore becomes increasingly important. Among the most valuable are sports rights and a broadcast network with exposure to rapidly growing retransmission fees.
Of course, the rationale for many deals would go beyond negotiations with pay-TV providers. Gaining a deep library of content, which can be syndicated or licensed to Netflix and its ilk, also could prompt consolidation. Perhaps even more important is having exposure to international markets where pay-TV penetration is still growing.
Shares of all major media companies, apart from Fox and Walt Disney DIS -0.96% —also seen as a potential acquirer—rose Wednesday alongside those of Time Warner. But it is worth remembering that some would bring a more attractive combination of tools to the ultimate media kit than others.
Time Warner offers rights to pro and college basketball, as well as Major League Baseball, and a deep content library. AMC Networks, AMCX +4.39% by contrast, lacks sports and has a content library that is relatively shallow, albeit highly rated.
In another example, Discovery Communications DISCA +6.34% got 45% of revenue from its international segment in 2013. That could make it more attractive than fellow stand-alone cable network Scripps Networks Interactive, SNI +4.93% whose segment primarily consisting of international operations represented only 2% of revenue.
Broadcast-focused CBS CBS +2.14% and cable-focused Viacom, VIAB +3.30% once part of the same company, each have elements the other lacks. That has led to recent speculation that they will ultimately reunite. Helpfully, they also share a controlling shareholder in Sumner Redstone's National Amusements.
For media investors, it is worth considering which potential targets have the best ammunition when called into battle.