Time Warner Targeting Shows Content's Considerable Strength

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Includes: AAPL, CBS, DIS, FOX, NFLX, T, TWX, VIAB
by: Motif Investing

Summary

Cord-cutting might mean long-term struggles for some content providers, but a potential battle to buy Time Warner suggests original programming is still highly desirable.

Disney's ESPN may have boxed itself in with high costs.

The growing trend of cable television "cord-cutting" has called into question how much leverage the country's film and television content providers will continue to have.

At the sector's highest levels, however, popular content appears to still be a prized possession.

Time Warner Earlier this month, Time Warner Inc. (NYSE:TWX) Chief Executive Jeff Bewkes reportedly said that he was open to a sale of the media conglomerate. The statement appeared to be a response to calls by some investors for Time Warner to explore selling or spinning off two of its core content generators - HBO and the Turner Broadcasting System.1

According to a report by the New York Post, Bewkes has been opposed to any sales or spinoff, citing concerns that such moves "can destroy value."

But a sale of the entire company is another matter entirely, and the list of potential suitors for Time Warner is a Murderer's Row of US corporate giants. The Post reported that Apple Inc. (NASDAQ:AAPL), which is rolling out a streaming TV service and previously teamed up with Time Warner on the launch of HBO Now, is "staying extra close to any possible movement on this front."

AT&T Inc. (NYSE:T) and Twenty-First Century Fox Inc. (NASDAQ:FOX) have also been mentioned as possible suitors. In 2014, Fox made a bid to acquire Time Warner for $85 a share, but withdrew after Time Warner shunned its efforts.

As Bloomberg's Tara Lachappelle recently suggested, a Fox/Time Warner tie-up "made sense back then and it still does."2

Fox and Time Warner create and supply television content, LaChappelle noted, and that side of the TV industry is under pressure and "in need of the consolidation that has already swept through their rivals on the cable side."

As for HBO, that business alone may be worth $20 billion to $36 billion, according to an estimate by Bloomberg Intelligence analysts Geetha Ranganathan and Paul Sweeney that applies peer cable network multiples to HBO's estimated 2015 EBITDA of nearly $2 billion.

Unsurprisingly, the possibility of a merger has been a boon for Time Warner investors. The stock has gained 8.4% in the past month.

Time Warner has a 21.2% weighting in the Content is King motif, which has helped the portfolio outperform in the short term. The motif has lost 3.4% in the past month; in that same time, the S&P 500 has fallen 8.9%.

Over the last 12 months, the motif has decreased 11.1%; the S&P 500 is down 8.5%.

Admittedly, other giant media conglomerates not in potential merger play haven't shared the same success with their stocks. Shares of Walt Disney Co. (NYSE:DIS), for example, have fallen 9.3% already this year, despite the company's studio riding high with the newest Star Wars release becoming the largest US box office gainer in the history of film.3

One problem for Disney has come from its formerly high-flying ESPN division, which has raised concerns among investors about subscriber losses and concerns that it has overpaid for rights to sports events.

Earlier this month, analysts at Barclays downgraded Disney's stock, maintaining that "in a secularly fragmented media environment, ESPN is the most exposed."

However, that doesn't mean media companies aren't still angling to improve their sports programming lineups.

Earlier this month, TheStreet.com reported that Fox Sports has emerged as the top rival to CBS Corporation (NYSE:CBS) in the bidding for the broadcast rights to pro football games on Thursday nights in an effort to keep CBS from extending its two-year agreement for the nation's most popular sport.4

The bidding is expected to substantially exceed the estimated $300 million that CBS currently pays for the telecasts.

Ironically perhaps, a large part of the optimism for the stocks of large content providers is that very rising price for original programming. In a separate piece last week for TheStreet.com, investor Doug Kass noted that the market capitalization of Netflix, Inc. (NASDAQ:NFLX) is approaching both Fox's and Time Warner's and has left Viacom, Inc.'s (NASDAQ:VIAB) in the dust.5

But Netflix buys content rather than making it - and while it might not be true that "content is not king, its price is definitely going up," Kass wrote. "Does that benefit content buyers or content makers?"

  1. Elaine Low, "If Time Warner's Selling, Who's Buying? AT&T? Apple?," investors.com, Jan. 13, 2016, (accessed Jan. 25, 2016).
  2. Tara Lachapelle, "Time's Up for Time Warner," Bloomberg.com, Jan. 12, 2016, (accessed Jan. 25, 2016).
  3. Mathew Ingram, "Disney: The Force Is Not Strong With This One," fortune.com, Jan. 15, 2016, (accessed Jan. 25, 2016).
  4. Ronald Groger, "Fox Sports in Aggressive Bid to Steal NFL Thursday Night Games from CBS," thestreet.com, Jan. 9, 2016, (accessed Jan. 25, 2016).
  5. Doug Kass, "Netflix, Apple, Twitter: Doug Kass' Views," thestreet.com, Jan. 25, 2016, (accessed Jan. 25, 2016).