The increase in global mergers and acquisitions (M&A)
activity in the last 6 months is not likely to slowdown anytime
soon. The deal volumes hit a 7 year high in Jun 2014, increasing
75% year over year as per
Analysts had predicted 2014 to be a year of M&A activity based
on the presence of large amounts of cash on corporate balance
sheets, favorable credit markets, low interest rates and strength
in the stock market. As internal opportunities remained elusive,
mergers and acquisitions were the next best route to achieve
Moreover, shareholders extended full support to big acquisitions in
order to make their company gain market share amid the rampant
Media and Entertainment sector deserves a special mention in this
regard. The sector has witnessed extensive consolidation in the
past and this year has been a year of mega bids. The latest being
the Rupert Murdoch-led
Twenty-First Century Fox, Inc.
) nearly $80 billion bid for rival
Time Warner Inc.
). Though the offer has been rejected by Time Warner, it is
unlikely that Murdoch will give up.
Shares of Time Warner increased over 17% on the index whereas that
of Twenty First Century Fox tumbled 6.2%.
Rumors of Time Warner as a potential takeover target has surfaced
after the company shed its assets to focus on its core operation.
The company has spun off its America Online, Time Warner Cable and
Time Inc. units in to independent companies in the past. Time
Warner has thwarted Murdoch's offer citing the company's own robust
strategies and an efficient management team were enough to drive
shareholder value. However, industry analysts do not view this as
What is Driving Consolidation Among Media Content
Production costs of shows and sports games have increased
substantially. To add to the woes, cable companies have been
charging higher for content. Moreover, the year witnessed two mega
bids among cable service providers -
) $45.0 billion offer for rival
Time Warner Cable Inc.
) $48.5 billion bid for DIRECTV. Though these bids are facing
regulatory hurdles, any positive development could lead to creation
of mega-service providers which in turn would give them more
To tackle these issues and maintain a good bargaining stand, it is
most likely that the media content companies may explore lucrative
M&A opportunities. Moreover, with live streaming finding more
and more takers, M&A seems the viable option to cut costs and
Though Twenty First Century Fox - Time Warner deal is off for now,
Murdoch's interest seems unaffected. In the future, if this
potential deal materializes, it would establish Twenty First
Century Fox as a premier media and entertainment company which
would boast two major Hollywood studios Twentieth Century Fox and
Warner Bros under one roof. The deal of this magnitude will
definitely raise serious anti trust concerns and will be subjected
to intense regulatory scrutiny.
3 Stocks to Watch
The ongoing changes in the media sector are likely to make M&A
activity more palatable in the coming days. Therefore, we bring you
three stocks that are likely to take the centre stage:
The Walt Disney Company
): Disney needs no introduction. As one of the world's largest
diversified entertainment companies, this Burbank, CA.-based
company's assets are spread across movies, television, publishing
and theme parks. Moreover, the company has made strategic
acquisitions in the past to boost its profitability. In the recent
past, the company has acquired Pixar studios, Marvel Studio,
Lucasfilms and Maker Studios which has done wonders for its movie
This was well reflected by the incredible success of
, which helped Disney post better-than-expected second-quarter
fiscal 2014 results. In the trailing four quarters, Disney has
beaten the Zacks Consensus Estimate by an average of 10.0%.
Moreover, this Zacks Rank #3 (Hold) stock continues to generate
sizeable cash flow which would provide the impetus for strategic
buyouts. During the first half of 2014, Disney generated free cash
flow of $2,380 million, up 9% year over year.
Scripps Networks Interactive, Inc.
): Headquartered in Knoxville, TN, Scripps Networks is one of the
leading developers of lifestyle-oriented content for television and
the Internet, where on-air programming is complemented with online
videos, social media areas and e-commerce components on companion
websites and broadband vertical channels.
In the past, it acquired U.K.-based Travel Channel International
Ltd. and Singapore-based Asian Food Channel, a leading food-focused
pay-TV network. With Scripps planning to foray into Latin American
countries, it is likely to make tactical acquisitions. This Zacks
Rank #3 stock's good financial performance and cash flow generation
abilities position it well. In the trailing four quarters, the
company has beaten the Zacks Consensus Estimate by an average of
1.4% and has generated free cash flow of $643.7 million in the
Discovery Communications, Inc.
): Headquartered in Silver Spring, MD, Discovery Communications
owns and operates nine television networks in the U.S., including
Discovery Channel, TLC, Animal Planet, Science Channel,
Investigation Discovery, Military Channel, Planet Green, Discovery
Fit & Health, and Velocity. Discovery also has ownership
interests in Oprah Winfrey Network, the hub network, and 3net, a
The company has made several acquisitions in the past to boost its
operations. These include a controlling stake in Eurosport
International, a popular sports entertainment group, for $1.2
billion in Jan 2014. It also acquired the SBS Nordic operations of
Prosiebensat.1 Media AG for around $1.8 billion. SBS Nordic has 12
TV networks, 19 radio stations and several digital brands in
Norway, Sweden, Denmark and Finland.
In the trailing four quarters, this Zacks Rank #3 stock has
beaten the Zacks Consensus Estimate by an average of 2.7% and has
generated cash flow of $1,170 million, up 14% year over year, in
The year 2014 is definitely turning out to be a landmark year as
the number of mega deals/bids keep increasing. Regulatory hurdles
aside, if these deals materialize, it would set off a chain
reaction in the media sector. We are likely to see more
consolidation activity as content companies jostle for market
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