With somewhat predictable frequency, the media, telecom and communications industries go through waves of consolidation every few years. Typically, such seismic events occur when interest rates are low, technology is changing rapidly (or even discontinuously) and valuations reach historic highs. Recently, a new wave has begun; a wave, however, unlike any in the past. The current wave involves the very biggest companies in the communications industries; and the logic behind the transactions ranges far afield from the strategic considerations of the past. 

This time around the landscape is also unrecognizable from prior consolidations. Broadband subscriptions are racing past video subscriptions. Advertisers will soon spend more on social media outlets than over the air broadcasters and cable networks. At the same time, video streaming services will compete on equal terms with the best programming offerings of any legacy programmer.  The demand for streaming services has already out stripped the capacity of existing wired and wireless networks.

The fencing matches among big players involve a great deal of thrust and parry. While we list eight deals, two have already been withdrawn: Murdoch’s offer to acquire Time Warner Inc. and Sprint’s offer to merge with T-Mobile US. In the former case, financing and resistance from TWX’s management stymied the Murdoch offer, while in the latter case, the poor prospects for passing required regulatory approval seems to have been decisive. (Whether these offers are permanently withdrawn isn’t clear, in the former case, it is possible that Time Warner could attract other bidders, while T-Mobile already has an underbid from Iliad of France.)

Why all the strategic maneuvering among media players? Is this not some kind of chair shuffle on a sinking ship or is there more to it?

Below, we lay out a table of the current media deals that have been publicly announced.

Pitcher

Batter

Story

Motivation

Comcast Corp

Time Warner Cable

Aggregate Cable Subscribers

Video subscriber losses in both MSOs: TWC lost almost 400K video subscriber over the last twelve months. Comcast has been losing between 130K and 150K per quarter.

21 Century Fox

Time Warner Inc

Buttress to basic cable Sports and Entertainment, Consolidate Cable News

Add to Mr. Murdoch’s empire

Charter Communication

Time Warner Cable

Aggregate Cable Subscribers

Had wanted all of TWC, had to settled for subs unwanted by Comcast

Sprint

T-Mobile US

Consolidate Third and Fourth Carriers to achieve cost savings and bolster the subscriber base and acquire more spectrum.

Enforce price discipline in unstable oligopolistic market. T-Mobile has aggressively lowered contract pricing and switching costs to subscribers

Iliad, S.A

T-Mobile US

4th Place French Wireless Competitor looks for growth outside France: “US large and attractive Market”

4th Place French Wireless Competitor looks for growth outside France: “US is a  large and attractive Market” Also, a possible cost-effective way to gain a minority interest in a combined Sprint-T-Mobile US

EW Scripps Broadcast

The Journal Companies

Combine Newspaper/Group Broadcasters, then spin out Newspapers into a Newco.  Near-term cost savings will total about $35 million, as Scripps newspapers in 13 markets are combined with the Milwaukee Journal Sentinel, and Scripps, while remaining controlled by its founding family, operates television and radio stations in 27 markets, up from 21.

Both local Newspapers and Broadcasters face withering revenue streams.

AMC Networks

BBC America

Take 50% Equity Investment in Standalone Network to give it more marketing clout with cable operators.

BBC under financial pressure at home. BBC America needs additional support which home BBC can’t provide

As usual, the publicly stated rationale for each deal seems to center on bromides (disputed heavily by bloggers) proposing to serve better subscribers’ or viewers’ interests; or, for the investment community, to enhance growth. By and large, however, it is clear that this round of consolidation is motivated either by a need to eliminate cost and/or to gain scale. It is an all-out race for dominance and for ever greater negotiating power. So, the question remains, why? Are we seeing further value being created or an industry cannibalizing itself?What are the common themes?

In prior waves of consolidation, shareholders of both buyers and sellers tended to benefit (particularly in stock deals) as demand by advertisers and consumers for greater media choice fueled growth in fundamental measures-(e.g. subscriptions, advertising and revenue). Consolidation often, though not always, was further accompanied by increased efficiency and pushed higher margins in merged companies.

This time, it seems,  we don’t see significant growth opportunities, merely attempts to gain margin.

Here are a few of the common themes we see in the current round:

Is there an urgent investment recommendation here?  Not urgent, but cautionary.  While scale and tax reduction may improve cash flow (or at least stem declines) in the short term for many of the proposed combinations, we doubt shareholders will benefit in the long term. Shareholders in a newly consolidated industry may have to look for other value creating vehicles outside traditional media players.