One investment theme I have pounded on repeatedly here over the last year has been media consolidation based on vertical integration.
When you own the store from which people have to buy your content, you are selling to yourself and getting the full value of what you have to sell. When you sign a contract to re-sell programs you control, you simply move money from pocket-to-pocket. For investors, it's a beautiful thing.
That the stock market also wants this is clear from this week's action, in which media stocks fell after earnings based on fears of "over the top" competition from Netflix (NASDAQ:NFLX) that would cut what program owners squeeze out of their holdings.
One by one media owners sought to refute this thesis, but investors were hearing none of it. Thus Disney (NYSE:DIS), CBS (NYSE:CBS), Fox (NASDAQ:FOX) (NASDAQ:FOXA) and Viacom (NYSE:VIA) (NASDAQ:VIAB) all fell on earnings despite reporting quarters that weren't half bad, certainly not out of line with what they had been doing before.
Now that Jon Stewart, one of Viacom's biggest properties, is finally letting go of his anchor chair, the stage is set for my thesis to come to pass.
In any consolidation like this, your best play is with the laggards, the lacking, and the little fish that are swallowed by the bigger fish. Viacom itself is one such fish. CBS is another.
Who will be the buyers? The market is telling you one name. Comcast (NASDAQ:CMCSA) (CMCSK), alone among the network owners, continues to sail along, and is up 14% over this time last year. Comcast has the infrastructure to deliver over-the-top programming, and it also owns a lot of programming through NBC Universal.
Who else might be a buyer? I have suggested in the past that, for the phone carriers, this stage of media consolidation may be their last chance to get some vertical integration. Verizon (NYSE:VZ) took some tiny steps in that direction by buying AOL. By this logic AT&T (NYSE:T) should also be a buyer, but it has shown no inclination in that direction, preferring to buy more pipe in the form of DirecTv and protect its very high dividend.
Liberty Global (NASDAQ:LBTYA) is another likely player. The company has a market cap of $47 billion, it made out like a bandit (literally) on the move of the Atlanta Braves to Cobb County, it knows the intrinsic value of owning "must-have" content. As a cable operator, it controls some first-class pipe.
Of course, as an investor you don't necessarily want to be on the side of the buyers in this game, you want to be on the side of the sellers. Scripps Networks (NYSE:SNI) is a likely seller. Discovery Networks (NASDAQ:DISCA), AMC Networks (NASDAQ:AMCX) and Starz (NASDAQ:STRZA) are others.
The position of Dish Network (NASDAQ:DISH) in all this is interesting. They are both a satellite competitor with AT&T's DirecTv and a big owner of spectrum that should represent another big pipe, but they are only worth $32 billion and thus are in the financial position of a seller. The most logical buyer would be another mobile company, like T-Mobile (NASDAQ:TMUS), which is of a similar size, but that's not the kind of game Charlie Ergen accumulated these assets to play. More likely Fox will make that move, again by selling on the spectrum. It would be a lot like the BSkyB deal they've been trying to work for years.
Disney should be a buyer, with their $180.5 billion market cap at the start of Thursday's trading. But Disney is seen as a primary victim in the current cycle because its cable networks, such as ESPN, are seen as vulnerable to cord-cutting. This makes no logical sense, since ESPN alone among major programmers has been able to get the equivalent of cable subscriptions out of Internet customers with its ESPN3, which is "free" to Comcast customers because they're paying a monthly fee for it in their Internet bills. Disney, in short, knows how to build the new bundle and it should be a winner. Look for them to buy one of the current programming losers after the battle is joined, when these companies become desperate for dance partners.
Most of what you have read is speculation. How it plays out depends on who moves first, against whom, how the big swinging brains in various boardrooms decide to act, and a whole host of other things. But something will happen, more likely a bunch of somethings, and your best bet is to have positions in the strongest possible take-out candidates.
Hang on to your seats, it's going to be a bumpy night.
Disclosure: I am/we are long DIS, CMCSA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.