Merger Talk Takes Bite Out of Earnings Season

Wall Street focuses on status of big media deals
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WHY THIS MATTERS: The forces reshaping the media business are accelerating merger and acquisition activity. 

It’s hard to put too much analysis into the first-quarter earnings of the TV business when so many of the industry’s companies are in the process of being taken over.

Comcast, Viacom and Time Warner have reported their Q1 earnings. There were some positive results — and some not so strong — but that wasn’t what analysts and investors really wanted to know about.

Comcast is in the middle of a battle for Sky plc, formalizing its effort to outbid 21st Century Fox for the European satellite-TV company. The Walt Disney Co. has also expressed interest in bidding for Sky to protect its deal to acquire other assets from Fox. (Comcast offered to pay even more for those assets, but was rebuffed by Fox patriarch Rupert Murdoch.)

Deal status is what’s most important in gauging the value of those companies’ stock.

[TV Network Profits to Fall 41% by 2025, Analyst Says ]

“In January, we wrote that we couldn’t remember a time when fundamentals mattered less and externalities mattered more,” analyst Michael Nathanson of MoffettNathanson Research said. “Since that time, that sentiment has only gotten stronger.”

Comcast chairman and CEO Brian Roberts

Comcast chairman and CEO Brian Roberts

On an April 25 conference call, Comcast chairman and CEO Brian Roberts told analysts: “Strategically, we are focused on where we can enhance our position through scale with complementary businesses that provide us with new capabilities, new markets, and other growth opportunities. We think Sky is a great fit when judged against these criteria.”

The potential of a future Sky or Fox deal overshadowed the $1.1 billion in revenue Comcast’s NBCUniversal unit generated during the Olympics and the $414 million in ad revenue generated by NBC’s broadcast of Super Bowl LII.

On Viacom’s call’s, analysts were warned that management wouldn’t answer questions about the potential combination with CBS hanging over the company’s head. Reports focused on how Shari Redstone — the daughter of CBS and Viacom controlling shareholder Sumner Redstone — wants the combination, but that CBS CEO Les Moonves was balking at having Viacom CEO Bob Bakish as his No. 2.

The intrigue threw shade on Bakish’s cheerleading for the turnaround he said is happening at Viacom.

In the first quarter, cost-cutting and a rare hit movie at Paramount boosted Viacom’s earnings. But at Viacom’s domestic networks advertising and affiliate revenue was down.

[Viacom Reports Higher Earnings Despite U.S. Network Declines]

Bakish is bullish because Viacom will be adding subscribers under its distribution deal with Charter and he sees the Paramount TV studio and Viacom’s advanced advertising business starting to generate real returns. Paramount TV will generate $400 million in 2018, he said on the call. CFO Wade Davis pegged Advanced Media Services at $300 million.

Wall Street is also mostly rooting for Bakish’s turnaround, but there are also doubters. “We believe the core fundamentals remain a ‘show me’ story,’ ” Nathanson said.

Meanwhile at Time Warner, taxes boosted earnings, but income was down at all three key operating divisions, Turner, HBO and Warner Bros.

Time Warner didn’t do a conference call, but in a statement CEO Jeff Bewkes said “we remain excited about the benefits of the merger, such as the potential to further strengthen our businesses by accelerating our innovation and increasing our ability to connect more directly with consumers.”

The theme is likely to continue when Disney, in the process of buying assets from Fox, and CBS, enmeshed in the Viacom drama, announce.

[Tax Benefits Boost Q2 Earnings at Time Warner ]

Fundamentals Still Weak

In the meantime, the big issues faced by the TV industry remain.

“We continue to see weak fundamentals for video-centric media owners,” Pivotal Research Group analyst Brian Wieser said. “Cord-shaving and cord-cutting erodes subscriber bases, constraining affiliate-fee revenue growth. Viewing of video content is still expanding, although much of its growth accrues to newer SVOD services and YouTube.”

“Advertising continues to look relatively negative as well, as the large brands who dominate it are generally limiting growth or reducing spending on the medium and are not likely to be replaced by enough emerging brands to make up the difference,” he said.

WHY THIS MATTERS: The forces reshaping the media business are accelerating merger and acquisition activity. 

It’s hard to put too much analysis into the first-quarter earnings of the TV business when so many of the industry’s companies are in the process of being taken over.

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