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Up Next: Comcast's Move on Fox -- WSJ

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06/13/2018 | 08:48am CET

Court's approval of merger clears way for bid for Fox assets; deal frenzy is possible

By Shalini Ramachandran 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 13, 2018).

A court's approval of AT&T Inc.'s merger with Time Warner Inc. paves a clear path for Comcast Corp. to bid for 21st Century Fox assets as early as Wednesday and could trigger a round of deal-making by smaller media companies trying to keep up with the industry's titans.

The AT&T deal, which survived the U.S. Justice Department's legal challenge, will create a juggernaut with an unprecedented mix of assets spanning TV distribution, cable programming, wireless and broadband.

Separately, Walt Disney Co. and cable giant Comcast appear headed for a bidding war over Fox assets, including its Hollywood studio and international properties.

For Comcast, approval of the AT&T deal bolsters its case with Fox that a tie-up between the companies can pass muster with regulators. Comcast is expected to submit an all-cash bid at a substantial premium to Disney's all-stock $52.4 billion offer, people close to the situation say.

The AT&T-Time Warner and Fox deals are the sort that media executives hope could give them the best shot to compete in a world where the superpowers of tech, from Netflix Inc. to Facebook Inc., have disrupted the old ways of doing business and consumers are turning away from the cable TV bundle.

As the giants get even bigger, there could be a reckoning for smaller U.S. media concerns including CBS Corp., Viacom Inc., Discovery Inc., AMC Networks Inc. and Lions Gate Entertainment Corp. The combined market values of all those companies is around $58 billion, compared with $150 billion for Comcast and around $285 billion for a combined AT&T-Time Warner.

Media stocks rose in after-hours trading following the decision, as investors anticipate heightened deal activity. Lions Gate and Fox shares rose around 7%, while Disney shares fell more than 1% and Comcast shares declined more than 3% with a bidding war looming ahead over Fox. Netflix shares fell about 1% after the ruling.

The second-tier of companies will be under pressure to find deals of their own that don't just increase their exposure to traditional TV, but give them the scale and mix of assets to withstand the industry's changes, investment bankers and industry analysts say.

"The floodgates will open," said Jessica Reif, a veteran media and cable analyst at Bank of America Merrill Lynch.

The twin pillars of traditional TV -- revenue from cable TV subscriptions and advertising -- are under attack. Netflix has pioneered a model selling television directly to consumers, not through the cable bundle. And its willingness to pay staggering premiums for programming and tie-ups with star producers such as Shonda Rhimes is driving up the market for talent.

Alphabet Inc.'s Google and Facebook, meanwhile, have revolutionized advertising, channeling large amounts of data on users to target ads at specific groups of people in a way that TV can't match.

"The combination of new technologies and new entrants...has changed the competitive dynamic in a dramatic way," said Jonathan Levitsky, a mergers and acquisitions lawyer at Debevoise & Plimpton who has played a role in several big media deals in recent years. "This cozy ecosystem is under attack, and those changes are what's driving people's desire to do deals."

Across the media industry, moguls are calculating whether now is the time to exit. 21st Century Fox Executive Chairman Rupert Murdoch's decision to sell the Fox assets he had assembled over decades was a powerful signal to many observers that something fundamentally had changed.

"Some of the most iconic media executives are transitioning right now and that's a very big deal," said Jennifer Nason, global chairman of Investment Banking at J.P. Morgan.

Until relatively recently, mergers between midsize TV network owners seemed like a logical response to upheaval in media. The idea was that bigger programmers could ensure widespread carriage in cable TV packages and extract the highest fees.

But those tie-ups may not be enough in a post-cable-bundle world where companies will need greater scale and resources for programming; the technological know-how to create streaming products for a direct relationships with consumers; and data to appeal to advertisers, analysts say.

Cable tycoon John Malone, who owns stakes in Discovery, Lions Gate and Charter Communications Inc., has been advocating for a roll-up of content companies for years. Discovery's merger this year with HGTV-parent Scripps Networks Interactive was one move in that direction, and Discovery also sought unsuccessfully to acquire beleaguered Spanish-language broadcaster Univision Communications Inc., another likely target.

Shari Redstone, whose National Amusements Inc. controls CBS and Viacom, has pushed for a merger of those companies. But she is engaged in a legal power struggle with CBS and many of its directors, who oppose the deal and are trying to strip her of voting control.

Even if the merger happened, it would be unlikely to result in a combined company with enough scale to compete, Bank of America's Ms. Reif said. Ms. Redstone's endgame may be to sell the merged company to a bigger player like Verizon Communications Inc., court documents and people familiar with her thinking have said.

Time Warner, which owns premier cable brands like HBO and CNN as well as the Warner Bros. studio, fits into AT&T's plans to go after cable TV cord-cutters and build a robust advertising-sales business. The telecom giant has promised a $15-a-month bundle of channels without sports. And it is banking on data from its wireless arm to help target TV ads at consumers in more sophisticated ways.

Companies are also eager for international growth with the U.S. pay-TV business in the early stages of a secular decline. In the case of the battle for Fox's entertainment assets, both Disney and Comcast are eager to acquire Fox's European, Latin American and Indian businesses -- more so than even some domestic assets in the mix like regional sports networks that were once considered valuable.

Which other buyers could emerge? Two of AT&T's rivals in the distribution arena -- Charter and Verizon -- have danced around the idea of buying content companies but have expressed more interest in strengthening their "pipes" through acquisitions.

Apple Inc., Google, Facebook and Amazon.com Inc. are all widely viewed on Wall Street and among media executives as potential acquirers of media assets, partly because of the moves they've already made to disrupt traditional TV and film.

Amazon explored the idea of splitting up the Fox assets with Comcast -- whereby Amazon would get the domestic properties and Comcast would get international assets -- but the idea didn't advance so Comcast is proceeding on its own, people familiar with the matter said.

Apple showed interest in Time Warner -- HBO in particular -- and considered lobbing in a bid for it before its agreement with AT&T, people familiar with the matter have said.

Media companies will be on the lookout for partners. "There isn't a public or private company that isn't rethinking their assets mix," Ms. Reif said.

Write to Shalini Ramachandran at shalini.ramachandran@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
AT&T -3.06% 29.42 Delayed Quote.-21.94%
COMCAST CORPORATION -3.72% 36.76 Delayed Quote.-4.67%
TIME WARNER 0.00%-End-of-day quote.7.98%
TWENTY-FIRST CENTURY FOX -0.70% 48.57 Delayed Quote.40.66%
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Financials ($)
Sales 2018 94 323 M
EBIT 2018 19 713 M
Net income 2018 12 045 M
Debt 2018 97 431 M
Yield 2018 1,96%
P/E ratio 2018 14,84
P/E ratio 2019 13,90
EV / Sales 2018 2,89x
EV / Sales 2019 2,41x
Capitalization 176 B
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Number of Analysts 31
Average target price 43,9 $
Spread / Average Target 14%
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Brian L. Roberts Chairman, President & Chief Executive Officer
Michael J. Cavanagh Chief Financial Officer & Senior Executive VP
Kenneth J. Bacon Independent Director
Sheldon M. Bonovitz Director
Jeffrey A. Honickman Independent Director
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