Is Media M&A Industrial Logic Or Wishful Thinking? Either Way, Deals Likely To Pick Up After Slow 2023

Jill Goldsmith
·9 min read

A favorite and feverish game from Wall Street to Hollywood heading into 2024 is pairing up media companies, or pieces of them, to see what fits where in a high-stakes jigsaw puzzle that will shape the future of the industry.

Ongoing streaming losses, anticipated interest rate cuts (that could lower financing costs), more robust stock prices and the end of WGA and SAG-AFTRA strikes — as well as actual, high-level conversations — have many believing that sluggish media M&A of all sizes could pick up dramatically in the new year. Just in this last week of 2023, Warner Bros. Discovery acquired Turkish streaming service BlueTV, Altice USA sold financial news streamer Cheddar and Lionsgate closed its acquisition of eOne.

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There’s a logic to bigger deals as well. With Disney being “the only scaled legacy media company,” wrote Vijay Jayant of Evercore ISI, “a merger of some combination of NBCUniversal, Paramount, and Warner Bros Discovery has strong economic rationale.” He sees as much as $5.5 billion in synergy cost savings in a Paramount-WBD merger, for instance.

Dual Hollywood strikes weighed heavily on the industry, but with actors’ and writers’ contracts settled, “We expect to see upward momentum in the sector and an increase in transformational deals and creative deal structures,” said Bart Spiegel, Global Entertainment & Media deals lead for PwC, in a report on M&A earlier this month.

Others on Wall Street groan at the thought of levered companies piling on more legacy assets in deals that will have a a hard time passing regulators. But, “The more desperate these media companies and executives get in the weeks and months ahead, the more likely some deal will happen in 2024, even without any fundamental reason for it,” wrote Robert Fishman of MoffettNathanson after news of conversations between Paramount and WBD.

Key 2023 transactions include Endeavor buying WWE; French billionaire Francois-Henri Pinault taking a majority of CAA; Saudi Arabia bulking up in golf (LIV Golf+PGA) and mixed martial arts (PFL+Bellator); and Disney shelling out for the third of Hulu it didn’t already own. Paramount Global divested Simon & Schuster on the second try, to KKR for $1.6 billion. Peter Chernin’s The North Road Company bought a big stake in Ahmir “Questlove” Thompson- and Tarik “Black Thought” Trotter-founded Two One Five, and acquired Turkish production company Karga.

Vice Media was sold to Fortress Investment Group and others for $350 million. Charlie Ergen’s two companies, Dish Network and EchoStar, merged in an all-stock deal. Dan Snyder sold the Washington Commanders NFL franchise to the Harris Group for $6 billion – a record in North America. Mark Cuban just got NBA approval to sell the Dallas Mavericks to Vegas Sands Corp., owned by the Adelson and Dumont families, for about $3.5 billion.

Theme park operators Six Flags and Cedar Fair merged.

Lionsgate closed its acquisition of eOne from Hasbro for $375 million in cash plus the assumption of some production financing loans. It also increased its majority stake in 3 Arts Entertainment

The largest deal of the year was Microsoft’s $69 billion acquisition of Activision Blizzard — announced in January of 2022 — which finally closed last month over the objections of regulators.

Likely Candidates

Heading into 2024, Paramount is facing financial pressures and exploring a sale.

Warner Bros Discovery can buy or sell starting in April when a tax penalty on transactions expires. Paramount’s controlling shareholder Shari Redstone has talked with WBD CEO David Zaslav about a potential deal, and with David Ellison, chief of fast-growing Skydance Media, that could involve a transaction at her family holding company NAI.

“There’s interest from wealthy individuals and all the usual suspects,” said one dealmaker. “People would love to own the studio but have to figure out what to do with the linear networks. A bunch of people have looked at it and can’t make the math work” – yet.

Par is highly levered, lags in free cash flow and still hasn’t put a timeline for streaming profits. Redstone could wait. “But if you are going to sell and assets are declining there is no reason to,” said one Wall Streeter.

WBD, some said, should be laser focused on paying down debt, not another merger.

Deep-pocketed NBCUniversal parent Comcast — which looks at everything but won’t move without a “strong and compelling reason,” president Michael Cavanagh said recently — is considered a buyer.

Lionsgate studios will split with Starz in early 2024, creating two stand-alone companies and digestible acquisition targets. However, even as that process has moved forward, the company has also been a buyer, announcing the eOne deal earlier this year.

One Wall Streeter wondered if Fox and News Corp. may take another run at merging. That would make it harder for feuding siblings ( if they are feuding) to break up Rupert Murdoch’s empire. A first attempt early this year was shot down by outside shareholders of both companies.

Altice USA, which sold Cheddar to Archetype, a media company owned by private equity firm Regent, has been under financial pressure and considered a potential target.

Amazon is reportedly planning to invest in Diamond Sports Group, which filed for bankruptcy in March, according to the WSJ. The company behind Bally sports-branded networks holds local broadcast rights many Major League Baseball and NBA teams.

The Economic Times reported that Disney has a non-binding agreement to merge its Indian business with Reliance Group into a venture majority-owned by Reliance. Disney declined comment on that. The company has also been seeking a strategic partner for ESPN.

“And then, there are always deals that come out of left field,” says one longtime media analyst. “Two years ago, before Vince McMahon got sued and walked away from WWE, no one would have predicted” he’d sell it. Endeavor announced a deal in April and it closed in September when UFC and WWE merged into a new company called TKO Group, controlled by Endeavor. The Ari Emanuel-led company said it’s considering strategic alternatives, noting no doubt that the Pinault-CAA deal valued the agency at $7 billion. Endeavor owns WME, live sports and other businesses. Its biggest shareholder, private equity giant Silver Lake, was working on a proposal to take Endeavor private but no word on that yet.

There’s chatter about media conglom side sales of linear assets. Disney CEO Bob Iger walked back comments around unloading ABC and cable networks. Paramount took BET off the table earlier this year when bids were lower than it wanted. Price is a big stumbling block. There’s a big gap between what buyers are willing to pay for legacy media assets “and what media companies are willing to sell these assets for,” says Jayant.

Distribution assets can also be impaired by being peeled away from a studio.

If big media companies want to merge — depending on which companies and deal structure — they’d likely need to divest legacy assets. One entity can’t own two broadcast networks, for instance, and regulators have never been keen on cable consolidation. Private equity firms, deal-hobbled recently by high interest rates but with a history in the broadcast and media space, may step in, and may pay more for businesses that still throw off significant cash flow even in decline.

Eleven interest rate increases starting in March 2022 choked transactions by inflating the cost of borrowing. But the Fed has left rates unchanged at recent meetings and indicated at the last one earlier this month that cuts are probably on the way in 2024. Lower rates will pull private equity firms off the sidelines.

FTC Blues

A massive problem for legacy media M&A is the current Federal Trade Commission, one of the most aggressive ever in challenging deals. It’s has had mixed success blocking deals outright, but a few big wins. And a regulatory challenge can delay closing a deal, which is also risky in a fast-changing business. Tech giants like Amazon, Apple, Alphabet and Meta are the most scrutinized group, eliminating some potential bidders.

“The countervailing force is the seeming resistance to large cap M&A in general, and media and tech M&A specifically, in Washington, D.C. Larger deals might have to wait,” said Peter Supino of Wolfe Research.

“We have a very hard time believing the current FTC/DOJ, which has been very aggressive in combating industry consolidation, would give this deal a pass,” Doug Creutz of TD Cowen said of a Paramount-Warner Bros Discovery deal. “It would involve merging two of the five remaining major movie studios, two major television studios, and would create a very high concentration of linear network ownership (which last we checked is still a very large and EBIDTA-positive business, even given cord cutting) including a significant consolidation of major sports rights.”

Even if they could merge, the truth is that “bigger-is-better” deals that have driven decades of media consolidation have a mixed track record with investors, company finances and the media business. “Putting these companies together doesn’t fix the problem,” said Rich Greenfield of LightShed Partners. “The problem is, they can’t compete with Netflix. They need to stop. They need to shut down these streaming services or scale them back dramatically.”

He’s not alone. Streaming losses are top of mind on Wall Street today. However, mergers would also consolidate streamers and could help create a Netflix rival.

“We have this weird conundrum,” said Citi’s Jason Bazinet.

He sees the current moment shaped by four “chapters,” starting in 2017 when media companies were in denial. Around 2019, the lightbulb went off — Netflix was not a complement to pay-TV, but a substitute. Then came a flurry of consolidation and the launch of in-house streaming services. “The cost of capital was zero. The Street was rewarding growth,” Bazinet said. The cost of capital began to rise last year as streaming losses mounted and Wall Street reversed itself, prioritizing profit over growth. “And that was sort of the disaster of 2022 and 2023. It was when media companies started to recalibrate.” They’ve become more pragmatic.

“So, as we sit here now, the way I would describe it is that the Street is singularly focused on profit and on how rapidly the linear ecosystem in going to fall apart,” he said. Media companies now play down streaming. Their movies are back in theaters. They’ve promised not to invest huge sums on production or on marketing. Bazinet believes they can make money in streaming. “There’s nothing sort of structural,” he said. “It’s just going to take time.”

Chapter Five, he said, is where a player challenges Netflix and changes the narrative. Disney is best placed, but a combination of other streamers could be a third. Thus speculation around Paramount Global, Warner Bros Discovery and Comcast — especially the first two, since Peacock has unlimited resources.

Said Supino: “Some of these companies will decide not to be in the streaming business in the same way that they have been. Others will keep the pedal to the metal.”

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