How media stocks are shaping up for 2012
Most reports are spinning 2011 as a bad year, which is coloring Wall Street perception and putting shares under pressure.
Media stocks had a quiet week, yet a few tidbits caught my interest.
At the movies: The box office saw a mixed year in 2011. Total domestic revenue finished down about 4%, but the international box office rose 5%. 2011 was the third largest on record for the domestic box office. In April, it was down 22% year to date. Summer was an all-time record. Early fall was up big. The holidays were weak, but the day after Christmas saw a surge, bringing the four-day weekend in up 3%.
Was it a good or bad year? Most reports are spinning it as a bad year. I do not think that is the case, but it is coloring Wall Street perception with theater stocks under pressure.
Cable networks: The NBA started its season on Christmas Day. Despite the lockout, TV ratings on TNT and ESPN were quite strong. This continues a trend of great ratings for live sports. The NFL is setting records this season. And even with the bad press of the NBA lockout, viewers showed up. Into the strong sports market, Comcast (CMCSA) relaunched Versus as NBC Sports Network on Monday.
Good ratings, new national networks -- it seems all is well in televised sports. However, there is great underlying tension as the value of the sports networks as defined by ratings, and advertiser demand is bumping up against aggressive increases in affiliate and retransmission fees. I expect the cost of sports networks to remain front and center in 2012. The outcome and intensity of this debate could affect Disney (DIS), which owns ESPN.
Could a bear case be setting up? ESPN is by far the most expensive cable network. Time Warner Cable (TWC) CEO Glenn Britt publicly discussed moving sports to its own tier. NBC is going to make a somewhat direct attack on ESPN by rebranding Versus. What if NBC bids aggressively for rights, driving up ESPN’s costs? ESPN has been the most consistent growth engine in Disney's stable. Could that be changing? Will Wall Street worry about it?
Don't look now, but Cablevision (CVC) is trading above the price where it was immediately before the announcement that Tom Rutledge was leaving. The shares have regained the 20%-plus loss reached on the day of the announcement. I suspect some investors are buying Cablevision on the premise that the Dolan family will put the company up for sale. I own a small Cablevision position in my hedge fund, but I am not adding to it.
Online services: Yahoo (YHOO) appears to have added a meaningful step in its restructuring by agreeing to a term sheet with Alibaba and Yahoo Japan. At the time, reports indicated that if the deal fell through, Alibaba was prepared to bid for all of Yahoo. This rumor received a small confirmation when Reuters reported that Alibaba had hired a big-time Washington, D.C., lobby firm, presumably to smooth the way if a full takeover is launched.
As a reminder, in the cash-rich spin Yahoo would sell about 60% of its stake in Alibaba and all of its stake in Yahoo Japan. In return, Yahoo would receive cash plus operating assets. Presumably it would continue to look at options for its core business.
Assuming the assets received in the cash-rich spin are fairly valued to Yahoo, I think this deal could push Yahoo shares to the upper teens. If the company executes a large share buyback, the low $20s are a reasonable target. Yahoo remains a full position in my hedge fund, and I added a small option play, expiring in February, that will pay off if the stock heads toward $20.
Disclosure: CVC and YHOO are net long positions in the Entermedia Funds, which are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company and has personal monies invested in the Funds. This column was previously published by SNL Kagan on www.snl.com.
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