Media stocks continue to be market leaders in the latest phase of
the stock market rally. The market rally is based on improved sentiment
and data toward a global economic recovery. Most revenue drivers for
media companies are highly sensitive to economic growth so it is not
surprising that media stocks are among the sectors leading the rally.
However, I think another is at work. After a multi-year lull, mergers
and acquisitions have returned to the forefront of media company
strategic planning.
Until this decade, media companies were very acquisitive providing strong support for media stock prices. The AOL-Time Warner
merger represented the peak and quickly went wrong putting an end to
media M&A except for divestitures. The recession, the collapse of
credit markets in 2008, and accelerating secular challenges completely
took takeover activity off the table. Now it appears that activity is
picking up. In the past, media properties always were sold at a premium
to their public market values because they were trophies and often
produced good cash flow. Renewed acquisition activity now supports
higher valuations for media properties which still trade at a discount
to private market value.
The big M&A news, of course, was Disney's (DIS) recently announced acquisition of Marvel Entertainment. The deal garnered major headlines but to put it in perspective, Disney
is paying $4 billion for Marvel against its own market cap of $48
billion. I think this is an important deal for Disney but we are not
talking AOL-Time Warner.
Published reports rehashed the deal pretty well so I am not going to
dwell on it. However, I think the major takeaway is that branded
entertainment may have a leg up on advertiser supported entertainment.
Marvel has great brands which Disney can exploit in movie production,
theme parks, merchandising, and cable and broadcast TV. No media
company has a better array of consumer touch points than Disney but the
idea that revenue share for major entertainment conglomerates may shift
in favor of branded product at the expense of advertising is legitimate.
Brands can be exploited through any distribution. Advertising is
fragmenting and its effectiveness in the digital age is being
questioned. All the entertainment companies are already exploiting
brands. Time Warner has DC Comics and Harry Potter. Viacom is late to the game but has Transformers, Star Trek, and maybe a revived G.I. Joe.
