In this week’s The Ledger newsletter:
- The ramifications of media mergers, from the just-completed Skydance deal to the pending Fox-Roku acquisition, will be the story as the rest of earnings season play out. One analyst lays out which deals might pay off for investors.
- A smattering of new deals, including investors putting money into the creator economy.
- YouTube has conquered TV, and its market value shows it.
- But YouTube and the rest of the TV world better look out for Instagram’s new longform format Features.
Thanks for reading.
THE DEEP DIVE
The M&A Undercurrent Surrounding Earnings Season
As the third-quarter earnings season ramps up, a topic that keeps coming up is how each media company will adjust to the new competitive dynamic. After all, Skydance shook up the hierarchy of media companies with its acquisition of Warner Bros. Discovery, and still pending is Fox’s upcoming takeover of streaming player Roku.
We’ve already seen some of those ripples, including the staffing shakeup at Netflix and Comcast’s update on the progress of its spinoff of NBCUniversal and Sky, but the next few weeks will see major hitters like Skydance, Disney and more report their results.
TD Cowan analyst Doug Creutz will be looking for the impact of the big M&A deals that could reshape the entertainment industry.
Creutz sees a shift from profiting on companies being bought to figuring out which ones will be best able to integrate their new assets, and how the new, larger merged companies will affect their competitors.
“Media M&A is shifting from deal-making to deal-doing,” Creutz said. Transactions that are closed, or heading toward completion, are headlined by Paramount’s $110 billion acquisition of Warner Bros. Discovery to create Skydance, which closed after a delay caused by antitrust suit drama; Fox’s $22 billion acquisition of Roku and Comcast’s plan to spin out NBCUniversal and Sky.
- The entertainment business is being reshaped by several big deals that either closed recently or will complete soon.
- Analyst Doug Creutz said that the business model for media companies remains in flux because of the shift to streaming and the shrinking value of linear assets.
- Cost cutting could further damage the collection of cable networks Skydance owns following the acquisition of Warner Bros. Discovery.
- Creutz does not think macro-economic conditions or international tensions will impact the advertising market or theme park attendance.
Because of concerns over debt and cost cuts, Creutz rates Skydance stock as a hold. “We remain quite cautious on the ability of the company and its management to avoid integration and execution problems that have bedeviled other major media mergers,” he said.
Creutz questions what Skydance will do with its linear assets, warning that cutting programming costs would accelerate value destruction and cord cutting. On the streaming front, Creutz expects margins to grow at a slower rate than in the past few years, but that combining Paramount+ and HBO Max could offer a one-time margin step-up.
“Ultimately, we think the only way the industry returns to real health is to give up on the standalone DTC product dream and figure out a way to rebundle everyone’s content together,” he said.
Skydance’s struggles should benefit competitors like Disney. “Disney has the best IP of any media company and we expect it to benefit competitively over the next several years from what we expect to be a choppy Skydance integration,” the analyst said, adding that Disney stock “lacks a clear catalyst path to renew investor interest.”
Creutz expects Fox to close its Roku deal in the first quarter. “After an initially chilly reaction, investors appear to be warming to the deal,” he said. “We will at least say that this deal could offer a bit more than just brute force industry consolidation and 1+1=1.5.”
After the Comcast spinoff, “NBCU (Plus Sky) as a standalone is yet another reasonably interesting media asset, although the future of Peacock remains a large question mark,” Creutz said.
On its earnings call last week, Comcast execs said the company would take a $1 billion charge next quarter to cover costs related to separating the cable company from its entertainment businesses, although much of the shakeup will take place within its embattled cable business.
The analyst also noted that Lionsgate remains the subject of M&A chatter, but he doesn’t think a deal is likely in the short term. “The economics of the TV/film industry are still too uncertain for most likely buyers to want to commit significant capital just to add a bit of scale. In our view, Lionsgate lacks the type of top-tier IP that made WBD attractive.”
Creutz noted that thus far, there aren’t any significant signs that macro worries or geopolitical tensions are significantly affecting either the advertising market or domestic theme parks. “We don’t expect any downside to show up in third-quarter results. However, we do expect it to be a source of caution on the calls again this quarter,” he said.
Creutz believes that “media’s business model remains in flux, with no clear answers to the question of what TV/film/OTT value creation will look like in five or ten years.”
Creutz has buy ratings on Take Two, Warner Music Group, Universal Music Group, Live Nation and Comcast.
DEAL SHEET
- Newpress, a creator media company, said it is raising $12 million in a funding round led by Laurene Powell Jobs’ Emerson Collective. Also investing are media executives Jesse Angelo, David Leavy, Brent Montgomery and Patrick Steel. Former “60 Minutes” executive producer Bill Owens is joining Newpress as EP. The company’s goal is to have a dozen creator-led channels.
- Marketing services holding company Stagwell acquired Freestar, which helps publishers monetize their content through advertising. Financial terms were not disclosed. The deal raises questions about media independence and data control that might result in regulatory issues like what Publicis’ purchase of LiveRamp faced earlier this year.
- Barry Diller’s People Inc. agreed not to own more than 29.9% of MGM Resorts and will vote with the MGM board of directors on future change of control transactions. People owns a 27% stake in the casino company and last month withdrew a bid for MGM that would have valued it at $18 billion.
- Pitchwise Holding agreed to buy a 42% stake in Valencia, a soccer team in Spain’s La Liga in a deal that values the club at $1.4 billion. Henry Kravis and George Roberts of KKR have invested in Pitchwise, also with Greg and Carrie Penner. Pitchwise, founded by former MLS player Corey Woolfolk in 2015, will provide Valencia with $111 million in new capital.
- RedBird Capital agreed with Sound Ventures to form a partnership that plans to invest $1 billion in companies involved in technology, media and culture. Redbird X, the company’s AI investment unit, will contribute its expertise to the partnership. Sound Ventures was co-founded by Guy Oseary and Ashton Kutcher, who left earlier this year.
- Byron Allen sold his 10.7% stake in Starz Entertainment in transactions made between Aug. 9 and Sept. 29 at prices ranging from $21 and $27 a share. His Allen Family Capital disclosed buying the 1.8 million shares for about $25 million in March. He sold them for $45 million, netting about $20 million.
FINANCIAL ROUNDUP
YouTube Tops Netflix, Disney in Market Value
YouTube, the leader in TV viewing share, is worth $340 billion, or 10% of the value of parent company Alphabet, according to Needham analyst Laura Martin.
That’s bigger than the market cap for Netflix ($256.7 billion) or The Walt Disney Co. ($188.7 billion).
Martin expects YouTube’s revenue to grow by 20% a year, with a larger share coming from subscriptions, lessening its dependence on advertising. More importantly, Martin sees YouTube providing a constant flow of proprietary and differentiated data for Google’s Gemini AI model and services.
Trying to track YouTube’s business as part of Alphabet can be difficult and frustrating, Martin noted. On earnings calls, “they almost never repeat the same metric quarter to quarter to describe how well YouTube is doing,” she said. “We find this frustrating since YouTube becomes more of a ‘trust me’ story as subscription revenue grows.” On top of that, “over time management is giving investors less information about ad vertical strength and weaknesses at YouTube.”
The attention devoted to YouTube is falling over time, Martin adds, as the company spends more time on earnings calls to discuss its cloud and AI businesses.
That said, Martin rates Alphabet a buy with a $450 price target.
Here Comes Instagram
Analyst Rich Greenfield of Lightshed Partners warns that Hollywood should be terrified about Meta’s Instagram launch of Features, horizontal videos up to 90 minutes long that will be viewable via Instagram’s TV app.
Greenfield noted that YouTube already has the largest share of TV viewership. “Another major creator-based platform that leverages an insanely good algorithm is not good for linear and streaming TV incumbents. Every hour Instagram wins on TV is an hour not spent on Netflix, Disney+, Paramount+, Peacock or what is left of the multichannel bundle.”
Meta will also be able to compete for TV ad dollars.
For investors in Alphabet, Greenfield asks if Instagram Features will slow YouTube’s growth on TV and force it to pay more for creator talent. And for shareholders of Netflix, Disney, Skydance, Comcast, Fox, Amazon and Apple, “competition for time spent is about to get even more intense.”
The post Earnings Season Has an M&A Elephant in the Room appeared first on TheWrap.
