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The big news in the cable industry of late is that Twenty-First Century Fox (NASDAQ: FOXA) founder Rupert Murdoch is finally stepping down. The 84-year-old is handing the CEO reins over to his son, James Murdoch.
With the old guard shifting, the big question is this: Will this set the stage for a rise in merger and acquisition activity in the cable industry?
Just last month I noted that merger and acquisition activity in the cable industry could be getting ready to heat up. But things have changed a bit. Rupert Murdoch’s retirement might set Fox on a new path, but not one toward M&A.
Rupert was considered the risk-taker, making several acquisitions in the late 2000s that were risky, including Dow Jones and MySpace. Recall that Fox tried to buy Time Warner Inc. (NYSE: TWX) last year, but walked after the Time Warner balked at the price. This was a divergence from Murdoch’s old tactics of wearing a company down until it gives in.
New Partner for Time Warner?
It’s truly a change in strategy for Fox, so it likely won’t make another run at Time Warner anytime soon. In addition, Time Warner shares are up 26% over the last year, while Fox shares are down 10%, making the acquisition that much more expensive. Rather, James Murdoch might look to strengthen Fox’s international position and focus on dividends and buybacks.
Fox’s strong concentration and owned-rights for college football, MLB and NFL games gives it a large audience. But it’s also turning its focus to emerging markets like Asia, where pay-TV concentration is still below 50%, compared to over 90% in the U.S.
In any case, Time Warner could still be a prize for another cable company, with its sought-after HBO asset. But it also has the Time Warner sports business, which owns rights with the NBA. Then there’s Warner Bros., which is a big player in broadcast network television. It owns high-profile cable networks as well, including TBS, TNT and CNN.
Viacom’s Appeal
But back to M&A. Sumner Redstone is the 91-year-old founder of CBS Corp. (NYSE: CBS) and is still firmly in control there and at the CBS spinoff Viacom (NASDAQ: VIAB). It’s only a matter of time before Redstone has to pass the torch. This could put either CBS or Viacom in play. Viacom is the most interesting.
Shares of Viacom have been taken to the woodshed over the last year; the stock is down close to 25%. Much of Wall Sheet is shunning this $25 billion market cap cable operator with the worry that de-bundling will have a negative impact on Viacom. It still owns well-known cable networks such as BET, MTV and Nickelodeon, giving it a leg up when marketing to teens and young adults. In the film business, Viacom’s Paramount Pictures is a major player with hundreds of film rights.
Let’s talk dividends. Viacom is the leader here, with a 2.4% dividend yield, while other players like Comcast (NASDAQ: CMCSA), Fox, CBS and Time Warner all offer dividend yields well below 2%.
The death of the cable industry has been grossly overestimated. All three companies – Fox, Viacom and Time Warner – have unique offerings, but they also appear to be well-positioned to either roll up other companies or become targets themselves.
Even if all three don’t participate in the current M&A craze, a smaller and more concentrated industry should better position all the companies to take on the onslaught of competition from streaming and unbundling.
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