Why The Next Set Of Media Mergers Are About To Start

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Includes: BABA, CBS, DIS, FWONA, T, TWX, VIA, VIAB, VZ
by: Dana Blankenhorn

Summary

Sumner Redstone is 91, putting both Viacom and CBS in play.

The only companies big enough to bid and profit have vertical integration, like Comcast.

Expect a huge premium.

Whether or not the current wave of media infrastructure mergers go through - and I suspect they will - they will likely be followed by a new wave of media content mergers in 2015.

The acquisition of Time Warner Cable (TWC) by Comcast (NASDAQ:CMCSA) (CMCSK) and of DIRECTV (DTV) by AT&T (NYSE:T) make clear that vertical integration is necessary for a company to be a player in the new media landscape, and that the definition of integration is changing.

Back in "the day," as they say, CBS (NYSE:CBS) looked quite integrated. CBS programs were shown on CBS owned-and-operated stations and across its network of affiliates. The same was true for Viacom (NYSE:VIA) (NASDAQ:VIAB) - its shows were put on the company's various cable networks, such as Nickelodeon and Comedy Central.

But that is not good enough anymore. Now you have to be able to reach a potential customer no matter where they might be. CBS just announced an "over the top" offering this quarter. Viacom fought the Internet for years, and the Internet won.

To have true vertical integration, you need a dedicated pipe running from what you're selling to where the customer is buying, a pipe you control. Neither Viacom nor CBS have that. This makes them vulnerable to takeover.

Another reason both are vulnerable is Sumner Redstone. Redstone is the majority owner of both companies. Sumner Redstone is 91. His will leave his money to his grandchildren. He has been feuding with successors at both companies, changing them at will, for over a decade. He will die without a clear line of personal succession, and leave both companies dangling at the end of a legal string. Sales are inevitable.

Redstone's death is the last possible event that might set the dominoes falling, but in fact, it could happen at any point, if only for estate planning purposes. Mental or physical incapacity has a way of concentrating the mind. The final exit awaits all of us. Among the potential bidders for the Redstone assets, according to the New York Post, are Liberty Media (LMCA), Alibaba (NYSE:BABA) and Time Warner (NYSE:TWX).

The problem is there are few real potential buyers, due to the size of the properties. Viacom has a market cap of $30.8 billion. CBS has a market cap of $28.7 billion. That's nearly $60 billion, and in an auction the price could easily reach $80 billion or more.

The only companies big enough to buy such outfits and turn them into greater profit have vertical integration - wired assets in the ground that reach consumers. Like Comcast, they could pay rights fees from one pocket into another pocket.

Verizon (NYSE:VZ) is big enough to make a play, with stock. Network assets would make its wired and wireless networks more valuable, and provide a compelling sales pitch for its FiOS fiber builds. Verizon is worth $203 billion - it could easily engineer a stock deal for both companies. The company is already engaged in rights fights with programmers.

AT&T may be a better fit, however. Verizon has a debt-to-assets ratio of nearly 50%, much of it incurred in the purchase of its own mobile network from Vodafone. AT&T has a balance sheet with only 25% debt, and could afford to put some cash into the deal. It will also have a management structure at DIRECTV that the two companies could report to.

The purchase of network assets by either AT&T or Verizon would put either company on a par with Comcast, which owns NBC, and well ahead of Fox (NASDAQ:FOX) (NASDAQ:FOXA), which owns 39% of Sky Broadcasting in Europe. Either Fox or Time Warner could thus be the next domino to fall. It was Fox, in fact, that really got this ball rolling, because its domination of markets through Sky's sports programming assets forced British Telecom (NYSE:BT) to overbid, successfully, for rights to English Premier League games a few years ago.

I haven't yet mentioned Disney (NYSE:DIS), which owns both the ABC Network and ESPN, as well as other cable networks. Will this company, worth $158 billion, stand idly by? Antitrust concerns would seem to preclude a bid for CBS, but they wouldn't stop a bid for Viacom. And a merger of equals with one of the phone companies - Disney executives being on top - should not be ruled out.

There will be political opposition to further media consolidation. There is still political opposition to both AT&T and Comcast with their present purchases. But Redstone's age is going to force the issue, and investors in both CBS and Viacom have a once-in-a-lifetime opportunity to get taken out at a substantial profit.

Disclosure: The author is long CMCSA, DIS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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