While Time Warner is in limbo, watch the walking dead

Recent developments in the media world are suddenly highlighting the takeover value of also-ran TV-network operators such as AMC Networks Inc. and Viacom Inc., just as many of their stocks trade near lows.
AT&T Inc.’s pending acquisition of Time Warner Inc., the parent of HBO, has been hogging the media spotlight, with the US Justice Department suing to block the $109 billion transaction on the grounds that it will hurt competition. The case not only threatens to derail AT&T’s hyped strategy around video entertainment, but it will shape the
entire industry’s deal-making
decisions in 2018.
If the deal goes through, the companies’ rivals will undoubtedly try to build or expand their own conglomerates — as evidenced by the multiple approaches made recently to 21st Century Fox Inc., the next-biggest network owner after Time Warner. (We crunched the numbers here on a potential
Fox deal.)
Should the AT&T merger be blocked, buyers may look more seriously at smaller, weaker players that are less likely to be of concern to regulators, including AMC Networks, Viacom, World Wrestling Entertainment Inc. and MSG Networks Inc. One of them might even function as a consolation prize for AT&T.
Let’s take a closer look at each:
AMC Networks: The maker of “The Walking Dead” franchise has gotten lost in the narrative this year as investors focus on larger combinations. And while some worry AMC is a one-trick pony, it does have the industry’s cheapest valuation relative to its earnings and a track record of developing cult followings for its shows. The $3.1 billion company’s loyal audience and the relatively cheap cost of its content make AMC an attractive addition to slimmer streaming bundles, such as AT&T’s DirecTV Now and the one Disney says it’s developing to exhibit its own shows and movies. AMC is controlled by the Dolan family, so any bidders would need to persuade them to sell, but that may not be as large of a hurdle now as in the past.
MSG Networks: The $1.3 billion owner of regional sports networks is another Dolan family operation. It was separated from Madison Square Garden Co. — the parent of the Knicks team and Radio City Music Hall — in 2015, and has since become the subject of sale speculation amid a slump in its stock. Even as some viewers ditch the expansive cable packages that carry its sports channels, MSG’s programming (it airs New York Knicks and New York Rangers games, among other things) would still be of value to another content provider or distributor. With the passing of the two-year anniversary of the spinoff, a takeover also becomes more feasible from a tax standpoint.
Viacom: Don’t laugh, but I do think Viacom could also be appealing to certain buyers, given its younger audiences and also that it’s in possession of a movie studio, Paramount, even if it is a struggling one. The $11 billion company has lost substantial leverage with cable and satellite providers in the last few years and it has a burdensome debt load, but its ratings are starting to come back for some of its biggest networks — MTV, Nickelodeon and BET — which is the first step in restoring the business. Viacom’s controlling shareholder, Sumner Redstone, turns 95 in May, and the company has caused more than its share of headaches for Shari Redstone, his 63-year-old daughter who’s been calling the shots. Last year she withdrew plans to recombine Viacom with their other, far healthier property, CBS Corp. So while the Redstones have since decided to keep Viacom independent and entrusted new CEO Bob Bakish with turning around the business, it’s not unthinkable that they would sell it if the right offer came along.
World Wrestling Entertainment: The $2.1 billion company has a faithful following and was an early mover in creating its own video-streaming service, which now
has more than 1.5 million paid subscribers. WWE Raw also remains among the most-watched cable shows on Monday evenings. Founder Vince McMahon, 72, has long been opposed to selling WWE, but what better a time to do so than when the stock is near a record high as it is now? And as I’ve explained before, selling to a larger company such as Disney or Comcast doesn’t necessarily mean his family couldn’t still run WWE and have some say over the fate of the franchise. This is one bite-size
company to keep an eye on.
Even though US merger activity has slowed this year from the frenzied levels of 2014 to 2016, cord-cutting and online streaming are likely to drive a resurgence in media mergers as content creators and distributors seek more scale and pricing power. It’s inevitable. We already saw Discovery Communications Inc. this year launch a $14.6 billion deal for HGTV’s parent, Scripps Networks Interactive Inc., to try to weather the tough
industry trends together.
Until we have a better idea of which way the AT&T situation will go, it’s the smaller companies that may be worth watching because their fates are less tied to the outcome of the Time Warner case. And once one goes, it may create a domino effect.

— Bloomberg

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News