David Zaslav on the Allen & Company Sun Valley Conference on July 9, 2024 in Sun Valley, Idaho.
David Grogan |
Comcast Chief Executive Officer Brian Roberts had a not-so-subtle message this week for Warner Bros. Discovery CEO David Zaslav: If you are promoting, I’m not shopping for.
“Instead of engaging in a process to buy content companies, we have focused primarily on organic opportunities like the NBA,” Roberts mentioned Tuesday throughout Comcast’s second-quarter earnings convention name.
If you ask Zaslav, although, the explanation Roberts and different potential consumers of media property aren’t is as a result of the federal government has scared them away.
Zaslav earlier this month publicly said a theme that many legacy media executives have privately mentioned for years: The present U.S. administration has stymied deal-making, and enterprise leaders are determined for the following U.S. president to usher in additional mergers and acquisitions.
“We just need an opportunity for deregulation, so companies can consolidate and do what we need to be even better,” Zaslav informed reporters at Allen & Co.’s annual Sun Valley convention.
Roberts’s disinterest and Zaslav’s lament shine a light-weight on a elementary query that will decide the way forward for the media and leisure business: Do the largest media and expertise corporations need to purchase smaller rivals for his or her content material and may’t achieve this due to overly stringent rules, or are they merely uninterested within the property?
Exhibit A: During months of Paramount Global sale conversations, controlling shareholder Shari Redstone engaged with dozens of potential consumers earlier than touchdown on a take care of Skydance Media, a comparatively small studio that earlier this month agreed to purchase a controlling stake in Paramount with out buying the complete firm.
Shari Redstone on the Allen & Company Sun Valley Conference on July 10, 2024 in Sun Valley, Idaho.
David Grogan |
Redstone obtained scant curiosity from large media and tech gamers who may have used her firm’s film and TV studio and library to bolster their very own streaming providers, in accordance with folks conversant in the matter. The sale course of proved the biggest media and expertise did not need Paramount.
Other corporations, reminiscent of Starz, AMC Networks and Vice Media, have additionally looked for deeper-pocketed consumers and are available up empty.
There are two believable explanations for why bigger media and expertise corporations aren’t , mentioned Rob Kindler, world chair of M&A on the legislation agency Paul, Weiss.
“Either they don’t want the assets, or they’ve decided the regulatory hurdles are too high,” Kindler mentioned.
A push towards deregulation will give the media business extra readability. It’s doable expertise and the biggest leisure corporations have sworn off important media property as acquisition targets given the governmental crimson tape round antitrust, nationwide safety and antiquated communications guidelines.
Or, maybe, legacy media corporations are merely undesirable property to personal.
Deal or no deal
Zaslav’s perspective stems from his personal expertise. He prolonged the lifetime of his earlier firm, Discovery Communications — and possibly his personal tenure working a media firm — by merging it with AT&T’s WarnerMedia in 2022. Without a deal, Discovery would have wallowed as a subscale content material supplier and proprietor of declining cable networks.
Now, Zaslav sees the identical dynamic repeating with Warner Bros. Discovery, whose shares have fallen 36% up to now yr as the corporate focuses on turning its flagship streaming service Max right into a globally profitable business and grapples with the possibility of losing NBA media rights after practically 40 years as a companion.
One method of doing that will be to seek out an acquirer with a trillion-dollar valuation to assist pay for costly content material, reminiscent of Amazon, Apple or Google. Zaslav may additionally merge Warner Bros. Discovery with one other legacy media firm, reminiscent of Paramount Global, Fox or Disney, or NBCUniversal, if it have been spun off from Comcast.
Zaslav’s perspective on deregulation in media — {that a} lighter contact would inherently imply extra big-money offers — is tantamount to life or demise for legacy media.
David Zaslav on the Allen & Company Sun Valley Conference on July 9, 2024 in Sun Valley, Idaho.
David Grogan |
His stance is that consolidation is the one path ahead for not solely his personal firm however all legacy media corporations that are not Apple, Google and Amazon, in accordance with an individual conversant in his considering.
His message might be persuasive with politicians who need to save native information and tamp down the ability of massive expertise. If the largest corporations on this planet throw tens of billions of {dollars} at the most well-liked dwell sports activities rights, it is doable, if not possible, that the legacy media business is on a sluggish demise march to obscurity.
In accordance, Warner Bros. Discovery has sought to sue the NBA as a last-gasp effort to keep up the corporate’s standing as a platform to air dwell video games after the league selected the deeper-pocketed, bigger Amazon as its companion of alternative.
Zaslav declined to remark for this story.
Terrible observe document
The drawback for Zaslav is that whereas large media mergers might hold the business aggressive, they have not been winners for shareholders. In current years, a handful of massive media offers have occurred — and the outcomes have been ugly.
In 2018, Zaslav’s Discovery accomplished its acquisition of Scripps Networks Interactive for $14.6 billion. Three months later, AT&T closed its deal to acquire Time Warner for $85.4 billion.
In 2022, the combined Discovery-Scripps then merged with WarnerMedia valuing the company at $43 billion.
Today, the complete market capitalization of Warner Bros. Discovery is about $20 billion. The numerous mergers have saddled the corporate with about $40 billion in debt.
Other large media offers have not labored out significantly better. Viacom and CBS merged in 2019, valuing the mixed firm at about $30 billion. Paramount Global (the brand new identify of the mixed firm) now has a market capitalization of about $7 billion.
Disney acquired nearly all of Fox’s property for $71 billion in 2019. There’s little doubt the worth of the property have dramatically declined up to now 5 years. Disney’s market capitalization is decrease now than it was when the deal closed.
As an offshoot of the Disney-Fox deal, Comcast acquired Sky for $39 billion. That, too, seems to have been a major overpayment. Comcast wrote down $8.6 billion of Sky’s worth in 2022.
While it is clear none of those mergers have been winners, it is solely honest to evaluate them versus what would have occurred to the businesses had they stayed impartial, mentioned Kindler.
“While it appears that many of these deals have not worked well, what would have happened if they hadn’t done these deals? That is the real question,” Kindler mentioned.
There aren’t many smaller media and leisure corporations which have tried go-it-alone methods lately, however of those which have (or, have as a result of they could not discover a purchaser), the outcomes have been tough for shareholders. Shares of AMC Networks, proprietor of cable networks together with AMC, IFC, We TV, and Sundance TV, are down about 80% within the final 5 years. Lionsgate inventory is down greater than 35% in the identical interval.
The S&P 500 has gained 81% over the identical time span.
It’s additionally doable the transactions have failed as a result of management has made poor strategic selections. Media corporations largely pivoted their companies to streaming in 2019 and 2020, spending billions on new content material, solely to reverse course lately when traders stopped rewarding unprofitable subscription development.
Hazy regulatory setting
There’s little question executives are involved regulators might block offers that will have beforehand sailed via the approval course of, mentioned Kindler.
“Twenty years ago, the first call when people were doing a deal was to a banker to see if it made financial sense. Now, the first call is always to a lawyer,” mentioned Kindler, who was once the worldwide chair of Morgan Stanley’s M&A observe. “It’s just changed completely because the first question that everyone is asking is what are the regulatory implications.”
What’s much less clear is that if there can be a significant distinction between a Republican or Democratic administration in 2024 and past. While former U.S. President Donald Trump’s Department of Justice allowed Disney to accumulate Fox with restricted pushback, his administration sued to dam AT&T’s deal for Time Warner.
There’s additionally been combined leads to President Joe Biden’s administration. A federal decide blocked the $2.2 billion sale of Simon & Schuster to Penguin Random House on antitrust grounds last year, but Amazon’s $8.5 billion deal for MGM got approval.
Further confusing matters, Trump’s vice president nominee, JD Vance, has publicly said he largely supports Federal Trade Commission Chair Lina Khan’s aggressive rhetoric when it comes to limiting corporate power through mergers.
“I look at Lina Khan as one of the few people in the Biden administration who is doing a pretty good job, and that sets me apart from most of my Republican colleagues,” Vance said earlier this year at RemedyFest, a dialogue discussion board on regulatory challenges. “You want to promote as much competition as possible, and you actually want to separate all of these market verticals as much as possible. That’s where I think antitrust is probably the most useful way to think about a solution to what we face.”
The now-de facto Democratic presidential nominee Kamala Harris will probably be quizzed on her regulatory philosophies within the coming months by the enterprise neighborhood.
Even if Zaslav is true, and deal quantity is down due to regulatory considerations, “it’s unclear if anything will change significantly with a new president,” mentioned Kindler.
More bark than chew
Zaslav’s notion that regulatory fears have hampered consolidation could also be extra fear-based than actuality, mentioned Mark Boidman, head of worldwide media at Solomon Partners.
“While we recognize the regulatory environment has shifted, we are still seeing both small and large-scale transactions occur across the media industry,” mentioned Boidman. “Despite any perceived uptick in regulatory scrutiny, deals across the media landscape are still getting done.”
While Khan’s FTC rhetoric has been aggressive, the variety of enforcement actions leading to merging events abandoning or restructuring transactions has not elevated, Boidman famous, citing 2022 FTC knowledge displaying that only one.5% of complete mergers that yr have been altered or failed to finish from regulatory points. That’s beneath the two.6% common of the previous 10 years.
From Sept. 30, 2022 to Sept. 30, 2023, federal companies challenged simply 17 transactions — the bottom variety of merger enforcement actions within the final 20 years, according to the legislation agency Covington & Burling.
Still, when isolating only for media offers, the quantity of offers accomplished as measured by greenback worth has noticeably slumped, illustrating the slowdown in bigger transactions. Last yr’s complete media deal quantity was $51 billion, and 2022’s was $35 billion, nicely beneath the median of $85 billion from the seven years prior, in accordance with Dealogic.
The rut seems more likely to proceed, with simply $22 billion in media offers introduced to this point in 2024.
Moreover, merely judging transactions based mostly on whether or not or not they in the end get permitted won’t be the most effective metric. Legacy media corporations could also be scared away from trying transformational transactions as a result of the time of approval is so prolonged. Skydance Media and Paramount Global guessed their merger could be permitted by September 2025, greater than a yr after the deal’s announcement. The lengthy lag time places each acquirer and vendor in an undesirable state of paralysis, unable to completely plan a future collectively.
— ‘s Lillian Rizzo contributed to this report.
