Large-Scale M&A To Reshape Media

15 February 2018


The next 24 months will be pivotal in US media & entertainment as major M&A transactions take their course. Some transformational ideas will transition to operating entities and executable action plans for heavy hitters such as Comcast, CBS, Discovery, Disney, Fox, Time Warner and Viacom. Significantly, Disney launches its much-awaited streaming platform next year, with movies and shows from Marvel, Pixar, Disney and Lucas as well as, potentially longer-term, Fox. Price could become a factor as a new scalable platform enters the US marketplace, which totaled ~120 mil. paying OTT subs at end-2017.

We summarize some of the key themes and current trends percolating in the marketplace, based on the latest batch of earnings calls for Disney, 21CF, Viacom and Time Warner.

Disney OTT. All the movies and original series that Disney makes from 2019 onwards – spanning Marvel, Pixar, Disney and Lucas (including Star Wars) – will be licensed to its own streaming platform, scheduled to launch next year. The jury is out on Fox, pending deal approval. Fox’s studio output with HBO, meanwhile, expires in 2022. If the deal is approved, the real scale from Disney buying Fox will come from outside the US, including Sky OTT services across Europe (Now TV) as well as Hotstar as it rolls out across Asia, the Middle East, Africa and Europe.

Disney’s strategy appears to be based more on quality rather than quantity, although the company is hedging its bets. “We won’t necessarily go in the volume direction, say that Netflix has gone, because we have this unique brand proposition, and the demand for those brands, we believe, will give us the ability to spend less on volumes,” remarked Disney CEO Bob Iger. “Not to suggest that we’re going to be low, because we obviously are going to need enough critical mass from a product perspective, but we are going to market with Star Wars movies, Disney movies, Pixar movies, Marvel-branded and branded TV shows under those umbrellas, in some cases using very well-known IP,” Iger added. “We’re developing a Monsters series, we’re developing a High School Musical series, we’re developing a Star Wars series, just to name a few. That will give us the ability to probably spend less than if we had gone to market with a direct-to-consumer service without these brands.”

ESPN Plus. ESPN’s forthcoming OTT service, ESPN Plus, will be priced at US$4.99/month, launched in the next few months in conjunction with updates to the existing ESPN app (including changes to the interface, mobile functionality and personalization features). ESPN Plus will carry MLS, MLB and NHL games that are unavailable on the linear channel.

Hulu. Total Hulu losses increased 73% in 2017 to US$920 mil. on a base of 17 mil. paying subs, as per filings from Disney, Fox and Comcast. Disney now expects its equity (30%) loss from Hulu for the year to be US$275 mil. higher, with one third of that impacting its Q2 results. The increase is largely related to content licensed from Hulu’s equity owners. Inevitably, Disney’s portion of these incremental costs will largely be recouped by ABC’s program sales as well as affiliate revenues from some of its networks.

Star India. Star India appears to be on track for ~US$2 bil. in top-line revenue for its FYE June 2018, primarily due to its acquisition of IPL rights and despite macro and policy volatility in the Indian market. MPA estimates suggest US$1.9 bil in revenues (~4-5% from Hotstar) for FYE June 2018, with US$420 mil. in Ebitda. The more prescient question remains the velocity with which Star – under a potential new owner after 2019 – can reinvest cash and new capital to boost assets such as Hotstar, local sports and cricket, and Hindi and regional entertainment in a highly competitive market for TV and online video.

“There’s ups and downs in these things, but we see nothing at this point to make us feel any differently about [Star India’s] profit targets, both in the short term and the medium term,” remarked James Murdoch, CEO of 21st Century Fox, Star India’s owner. “And we’re thinking about the long term as well, so we’re very excited about the balance of the year,” Murdoch added. “Star Bharat, the big free-to-air channel, has done very, very well in its launch this year.”

Viacom. CEO Bob Bakish continues to laud Viacom’s international business, which has enjoyed double-digit growth in affiliate sales, ad sales and overall revenue, as well as very strong double-digit growth in earnings. Viacom is now selling 1% of its biggest business in Asia (Viacom18 India, a JV with Reliance, India’s biggest private company). The move dilutes Viacom’s stake to 49% at a face value of US$2 bil. MPA estimates that Viacom18 revenue will cross US$500 mil. in FYE March 2018 with a high single-digit Ebitda margin. Viacom will increase its secured revenues from India for the next decade, thanks to a 10-year licensing deal and no more cash injections in Viacom18, making India a healthier and more predictable cash generator for the company.

“We did this deal to set the company up for its next wave of growth by more closely aligning with our partner’s affiliated Jio platform, one of the largest and fastest-growing mobile broadband and video distribution platforms in India,” Bakish said. “So, they really take kind of day-to-day operational control over this business; it’s going to facilitate a much deeper integration of our business into the Jio platform. This business was not, was never a consolidated asset, so the sale of 1% and giving day-to-day operating control to our partner isn’t something that has any impact on our financial statements whatsoever. What does have an impact on our financial statements is the fact that we extended and enhanced our licensing agreement with Viacom18, and that’s one of the things that not only allows us to benefit from the top-line growth of the business as we accomplish the strategic objectives that I just described, but it also immediately has a material impact on Viacom International Media Networks’ financial performance.”

Time Warner. Some resolution to the US Department of Justice’s battle with AT&T on its acquisition of Time Warner is expected by early April. Time Warner’s CY and Q4 2017 results were strong. Standalone SVOD service HBO Now spiked to 5 mil. subs versus 2 mil. in 2016 while the overall HBO business grew subs fees by 16% Y/Y in Q4, adding more than 5 mil. subs for HBO and Cinemax, its largest-ever increase, as a result of deals with new digital operators offering paid linear streaming services. Turner grew CY 2017 revenues by 6%, with subs fees up by 11% in Q4. Turner’s adjusted operating income contribution to Time Warner remains strong at US$4.5 bil. in CY 2017, followed by HBO at US$2.5 bil. and Warner Bros at US$1.9 bil.

For full analysis with charts and tables, please contact Lavina Bhojwani, VP, Client Services, Media Partners Asia