VideoAge International October 2018

46 October 2018 V I D E O A G E (Continued from Cover) Hol lywood’s Love Affairs entertainment industry this summer has been tho- roughly dominated by mergers and acquisitions. AT&T was approved to purchase Time Warner, and Disney also went ahead and acquired a signi- ficant portion of 21st Century Fox’s properties. Time Warner’s imminent buyout is a parti- cularly poignant reminder of how enthusiasm around a merger can impact share price: In early October of 2016, TimeWarner shareswere trading at around $75. However, by the end of the month that the initial merger agreement was hamme- red out the formerly stable price had crept up to $82. Even as negotiations dragged on, and even earned disapproval from regulators (including the Antitrust Division of the United States Justice Department), the market remained enthusiastic, with shares hitting a high of $104 in June of 2017. The merger was completed in June of this year with Time Warner valued at a stable $103 per sha- re. With nearly a 30 percent share price increase in two years, investors will be going home happy. Disney and 21st Century Fox were involved in a similarly complex negotiation. In a series of unu- sually rapid moves, over the past year Disney took decisive steps to purchase the bulk of 21st Centu- ry Fox’s assets save for broadcasting, news, and sports. Disney and Comcast had been in a bidding war for Fox’s assets since November 2017. However, in July of this year Comcast dropped its overtures to outbid Disney in order to concen- trate on acquiring Sky, Fox’s pan-European pay- TV platform. Although Disney’s $71.3-billion ac- quisition is set to be completed sometime in 2019, 21st Century Fox’s share price has been reveling in the anticipation. Trading at around $25 per share when acquisition talks began last Novem- ber, shares had risen to $45 by the end of August of 2018, even though Disney’s acquisition agree- ment values the company at $38 per share. As is often the case, acquisitions have had an adverse effect on buyers’ share price, as the enor- mous amount of money involved invariably re- quires an increase in long-term debt. At the end of August, AT&T traded at around $32 per share. The price has fallen, with ups and downs, from a high of $39 at the beginning of the year.  Disney’s share price has instead crept upwards, from a low of $100 a share in early June to $112 by August’s end. This might change, however, once the implications of the acquisition of Fox’s assets become clear.  Comcast shares were hovering at $42 during the height of the bidding war with Disney in Ja- nuary of this year, only to fall to a low of $32 in June as news that the acquisition was to be aban- doned got out. In early September, Comcast sha- res were trading at around $36, more or less whe- re they had been hovering prior to the acquisition proposal last November. Netflix has crept upwards over the course of the past year, and briefly surpassedDisney in total mar- ket cap this past May. This is in spite of backers of traditional media companies being quick to point out that Netflix — due to un-diversified revenue streams and large debt to finance acquisition and production— should warrant a smaller valuation. The market’s appetite for Netflix stock has not been dampened in spite of the company’s rising debt levels. Instead, investors have rewarded Netflix for having disrupted the industry, intro- ducing a new way to reach viewers, and demon- strating the applicability of a new technology: lion), Comcast ($164 billion) and Netflix ($150 billion). As of early September of this year, Com- cast and Netflix control both content and viewer platforms — Netflix through its eponymous stre- aming service, and Comcast through its cable- television services. With a Disney-developed streaming service forthcoming, the line between content producers and providers will be increasingly difficult to de- cipher. With so much emphasis on streaming plat- forms, it will be interesting to see how traditional cable providers like Comcast react. Comcast sub- sidiaries, like NBC, have already begun offering free web-based streaming with advertising. NBC promos even encourage viewers to go online and catch up on episodes. It might be worth considering that the applica- bility of streaming technology, and its ability to target viewers with curated content by gathering data on their viewing habits, might not just cap- tivate investors, but will also attract growing at- tention from advertisers. The trend might see entertainment groups incre- asingly resembling Social Media and technology companies. With Social Media giant Facebook va- lued at almost three times Disney’s market cap in spite of some selloffs in light of Facebook’s negative media attention and scrutiny from legislators, it is clear themarket continues to reward the company’s direct access to consumers and viewers. A solid prediction for the future might be that media and entertainment companies will conti- nue to expand on the use of streaming technolo- gies, not just because the market believes it is the way of the future, but because highly profitable firms like Facebook and Google’s parent company Alphabet (worth over $800 billion) have already proven a digital model can deliver. Given the segmentation that will inevitably oc- cur as subscription services proliferate, new plat- forms to transmit content like Facebook might be interesting partners for growth, or even potential acquirers of content producers. The chart below offers a quick reference of the top 10 entertainment companies’ profitability. It should be noted that Netflix has negative opera- ting cash flow, but its overall revenues ($13 bil- lion) are higher than its debt ($8 billion), mea- ning the company can service its debt, and debt levels are lower than other companies in the in- dustry. (By Yuri Serafini) web streaming. Markets looked favorably on the proposed mer- ger between CBS and Viacom. CBS shares traded at a high of $59 in June, reversing the year’s ove- rall trend of seeing share prices fall, with broad fluctuations in between, from a high of just un- der $60 in January to a low of $48 in May. Mar- kets seem confident even as CBS CEO Les Moon- ves stepped down from his role following sexual harassment allegations and the merger was put on hold, with the stock creeping up from $52 in late August to $55 in early September. CBS sister-company Viacom, on the other hand, saw its channels show strong numbers in the early quarters of 2018. Coupled with talks of mer- gers, share price fluctuated between $36 and $39 over the course of February and March. However, once the talks stalled, the price went down to a low of $32 in June.    Discovery stock value grew some 20 percent in June of 2018 alone. Markets rewarded Discovery for securing a $2 billion deal for the right to bro- adcast the PGA Golf Tour outside the U.S.  Lionsgate lost some 30 percent of its value between January and August this year, more or less consistently creeping down from $33 per sha- re to its current $22. However, shares had been reveling in the financial fruits of Oscar-winning picture  La La Land  over the course of 2017, and while 2018’s selloff might have been self-perpe- tuating, shares had been fluctuating in the $20 to $30 range in the past.  AMC has been creeping upwards over the course of 2018, climbing from $15 in January to $19 in early September, with some ups and downs in between. The market is rewarding the company for strong performance, which includes a 20 per- cent increase in total revenues.  With consolidations and conglomerations con- trolling the narrative around corporate valua- tions, it’ll be interesting to see how Disney and Time Warner’s competitors react, and, if there will be a flurry of smaller acquisitions to keep pace — and if so, what sort of companies will be targeted. Current patterns might point towards control of platforms. The ability to reach viewers is be- coming increasingly vital, especially as enter- tainment companies will have to deal with cable service providers that keep acquiring content producers and networks. Indeed, the three largest media companies by total market capitalization are Disney ($165 bil- Top Entertainment Companies’ Profitability* Revenues Cash Flow AMC $5 bil $737 mil CBS $14 bil $992 mil Comcast $87 bil $23 bil Discovery $8.67 bil $1.9 bil Disney $57 bil $14 bil Lionsgate $4 bil $435 mil Netflix $13 bil - $1,6 bil Viacom $12.7 bil $2 bil * Going into the acquisition by Disney, 21st Century Fox has revenues of around $30 billion, while Time Warner has been delisted. However, at the end of 2017, TimeWarner posted revenues of around $31 billion.