After AT&T was cleared to buy Time Warner in mid-June, investors have been quick to place their bets on more mergers on the horizon.
And they are right to assume heightened M&A activity will continue.
Mergers in 2017 were down on tax uncertainty, and many deals were seemingly on hold awaiting the final decision on the AT&T-Time Warner deal.
“M&A activity across the media and telecommunications landscape has largely been in a holding pattern awaiting the outcome,” John Janedis, a Jeffries analyst, said in a note. “With the deal approved, we think it could spur other M&A activity for the group.”
Since then, huge media deals have dominated headlines. Consider the ongoing saga over the purchase of 21st Century Fox by Disney with competing bids from an aggressive Comcast. Comcast has also been battling it out with 21st Century Fox for the U.K. premium paid-channel provider Sky.
And it seems the environment is ripe for M&A activity to keep going.
Tax reform has freed up more cash, making potential acquisitions more attractive, and the economy is still strong. And there’s obvious logic in consolidation in several key sectors – media especially.
Rumors have swirled around these stocks as reported targets – and the possibility of an acquisition doesn’t necessarily look priced in just yet.
Both have long been seen as potential takeover targets due to their size, especially when the media industry seems to be convinced that being large is the only way to compete against Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN).
What makes Lions Gate particularly attractive for larger distributors is that it is a content creator with its ownership of the Starz network, films like The Hunger Games, and television shows such as Mad Men and Will & Grace.
With Discovery, in addition to being a potential takeover target, it could also step up to be a suitor as well. It has already demonstrated interest in being a buyer after its recent acquisition of Scripps Networks Interactive.
Discovery has jumped nearly 13% in the last month on speculation. Lions Gate is down 23% year-to-date but is up about 4% for the month.
For these two, it’s likely that if consolidation comes, it won’t develop until the drama between Disney (NYSE: DIS), and Comcast (NASDAQ: CMCSA) for 21st Century Fox (NASDAQ: FOX, FOXA) has resolved. But keep on eye out, especially for Lions Gate as its content portfolio makes it one of the most attractive takeover targets to buy right now.
Just as media companies are looking like attractive takeover targets, so too are video game publishers. And two such companies that may be particularly interesting are Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA).
Bernstein analyst Todd Juenger said in a recent report that traditional media companies purchasing video game publishers “makes strong industrial logic and could be (or should be) imminent.”
“Video game publishers are net cash (as opposed to highly levered), put forth an entertainment product which is perfectly suited for young people and growing in engagement (as opposed to the opposite), and have secular tailwinds driving revenue growth and margin improvement,” Juenger said.
Both EA and Activision Blizzard may be good targets for Disney.
Activision Blizzard and Disney announced Wednesday that the video game producer’s Overwatch League playoffs would be broadcast across ESPN, ESPN2, Disney XD, ABC, and several Disney-owned streaming services in what will be the biggest deal yet for Blizzard. The deal reportedly also includes Overwatch League Season 2, and will result in hundreds of hours of live coverage and highlights, some of which will be broadcast in primetime.
This deal marks a continuation in ESPN’s push into eSports. “The Overwatch League Grand Finals is by far our most comprehensive television distribution for an eSports event over a single weekend: 10 total hours over four networks and three days,” ESPN executive Justin Connolly said in a statement about the deal.
“This overall collaboration with Disney/ABC, ESPN, and Blizzard represents our continued commitment to eSports, and we look forward to providing marquee Overwatch League coverage across our television platforms for fans.”
As the popularity of eSports explodes, having an eSports giant in its portfolio with Activision Blizzard could be a smart move for Disney.
As for EA, the company is building a “Netflix for video games,” according to Needham analyst Laura Martin.
Martin believes EA will benefit from the shift to “games as a service” in which consumers subscribe to video games instead of buying them outright.
“It is our view that millennials want to rent content (e.g. Spotify, Pandora, Netflix, Hulu) rather than own it, and that content companies with data about what their consumers view/play/use create valuation upside from programming, e-commerce, and advertising revenue streams,” Martin said in a note to clients.
Disney is already developing a subscription-based streaming platform for its content, affirming its commitment to the subscription model, and EA would be a good fit in this vein.
What’s more, one of EA’s biggest properties is its Star Wars Battlefront games. It also owns the sports video game properties “Madden NFL,” and “FIFA.”
This focus on Star Wars and sports games is a match made in heaven for Disney. As Juenger put it, “What is Disney? ‘Star Wars’ and sports. What is EA? ‘Star Wars’ and sports.”