When I think about media and telco companies these days, I feel kind of like a seismologist looking at my instruments. I see all kinds of signs beneath the surface that make me believe that we’re going to see a bunch of major merger activity in these businesses. And while I don’t know the exact details, I feel pretty certain about the general point.
To those who follow these companies closely this may seem obvious and priced in the stocks already. I would agree to a point, except that no one knows which companies will be bought, and there’s usually always still upside for investors, as buyers need to offer a premium to market prices.
The way I see it there are at least five reasons why there will be deals and soon.
Reason #1: The ceiling effect. Big cable companies—Comcast (CMCSA) and Charter (CHTR) for instance — and the big wireless companies—AT&T (T) and Yahoo’s parent company, Verizon (VZ) — are hitting a peak in terms of revenue and subscriber growth in their traditional businesses. Combining with each other, or with a big independent media company (a faster growing business if run properly), is a way out of the slow growth zone, which is what AT&T is betting on with its purchase of Time Warner (TWX). The CEO of Sprint, Marcelo Claure, recently all but announced his company would do a deal in the near future. It’s grow or go-home-time for these companies.
Reason #2: One stop shop. The big cable and wireless companies want to offer a complete communication package to consumers. AT&T with Direct TV, Verizon with Fios and Comcast with its new Xfinity phone service are doing this. But it’s still in the early days. These companies need more scale and other companies want to offer a full array of services too. I would argue that consumers also like the convenience of one-stop shopping for cable and phone service—as long as there’s still choice and reasonable pricing.
Reason #3: The government is friendly. Despite potential federal pushback against the aforementioned AT&T/TimeWarner deal — which is all about President Trump’s feud with TimeWarner’s CNN — the new head of the FCC, a former Verizon lawyer by the way, Ajit Pai is considered to be friendly to big mergers.
Reason #4: Bankers delight. According to Bloomberg, over the past four years there has been $300 billion of M&A in media and telecom, on average, and over the decade to date there’s been way over $200 billion each year. So far this year there’s only been $100 billion in deals, i.e., Discovery buying Scripps and KKR picking up WebMD. Small potatoes stuff. We’re due for more—certainly the bankers are pushing for it.
Reason #5. The personalities. Brian Roberts, CEO of Comcast; John Malone, chairman of Liberty Media (the big shareholder in the nation’s #3 cable company, Charter and of SiriusXM Radio); and Masayoshi Son, CEO of Japan’s Softbank, which owns Sprint, are big-time dealmakers. And right now they are all actively exploring deals. (I could go through the confirmed and speculative combinations they have been exploring but that would take paragraphs.) There’s another group of CEOs that figures in too, that being leaders who may be nearing an end of their tenure who may be looking to do a signature deal a la Jeff Bewkes at Time Warner. This group would include Les Moonves of CBS, Lowell McAdam, CEO of our parent company Verizon, and Bob Iger, CEO of Disney. Naturally, CEOs from Group A, (Roberts, Malone, Son) are also talking to CEOs from Group B (Moonves, McAdam, Iger.) Do not underestimate the motivation of personal ambition in all of this sturm und drang.
So what will happen and how does one play this? It’s always very hard to predict how these things pan out. But what might make sense is to take a page out of media super-investor Mario Gabelli’s playbook, which is to buy a portfolio of media companies and then sit back and watch the show. Instead of focusing on the big companies which already have scale and might be buyers (i.e., Comcast and AT&T), focus on the target companies, such as Sprint, T-Mobile, Disney, Cox, Dish, CBS, Viacom and maybe even Netflix. And speaking of Netflix, there’s also an outside chance that one of the other FANG stocks (stands for Facebook, Amazon, Netflix and Google) is a buyer. And note that Charter on the cable side and Verizon on the wireless side could be either buyer or buyee.
Don’t be surprised if you start to feel the Earth moving here pretty soon.
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Andy Serwer is Yahoo Finance Editor-in-Chief. Read more: