Weekly Media Notes: Disney’s Consumer Products And Interactive Merger, CBS-AT&T Carriage Deal And More

The media industry remained active last week, with Disney merging its consumer products and interactive media division. In another development, Fox inked a deal with Lee Daniels to develop more programming for the media giant. In yet another, CBS and AT&T reached an agreement for carriage of CBS’ networks on U-verse. On that note, we discuss below these developments related to media companies over the last week or so.

Disney

Disney (NYSE:DIS) recently announced the merger of its two business units, consumer products and interactive. ^[1] This was long expected as both the units had similar interests. While the interactive division has been developing digital products and video games, the consumer products unit in the recent past has also forayed into digital arena with initiatives such as Playmation and Imagicademy. The interactive media suffered massive losses in its early stages but its 2013 release of Infinity video game was the turning point. The game became immensely popular and turned around the entire unit into profits. Now that both divisions are merged, the technology team at interactive could be helpful in improving the consumer product division’s existing offerings and also jointly develop new products. We currently estimate the combined segment revenue of a little under $6 billion in calendar year 2015 and an estimated EBITDA margin of over 35% will translate into EBITDA of around $2.20 billion, representing around 12% of company-wide EBITDA.

We forecast revenues of around $53 billion for Disney in 2015 and EPS of $5.00, which is in line with the market consensusof $5.00, compiled by Thomson Reuters. We currently have a $105 price estimate for Disney’s shares, which is more than 5% below the current market price of $115.

CBS

CBS (NYSE:CBS) recently inked a carriage deal with AT&T (NYSE:T) for its U-verse service. CBS was pushing hard for higher retransmission consent and may have got $2 per subscriber in the recent deal, according to a media report. ^[2] CBS is the most watched network in the U.S. and AT&T had to get the deal done, as a blackout could have been ugly for the telecom giant. If CBS were to be blacked out for U-verse’s 6 million subscribers, it would not only have resulted in subscriber erosion but also wouldn’t have gone well with the regulatory authorities that are currently reviewing its proposed merger with DirecTV. Looking at CBS, it is aggressively moving towards its goal of $2 billion in annual revenues from retransmission consent by 2020.

We estimate revenues of about $14.35 billion for CBS in 2015 with EPS of $3.60, which is in line with the market consensus of $3.60, compiled by Thomson Reuters. We currently have an $58 price estimate for CBS, which is in line with the current market price of $56 per share.

21st Century Fox

21st Century Fox’s (NASDAQ:FOX) television studio arm, 20th Century Fox has inked a deal with Lee Daniels, Executive Producer and Director of Empire TV series. Empire has seen stellar success and is highest rated broadcast drama in past seven years. ^[3] This is great given that the industry at large is currently struggling with lower ratings amid the rise of alternative video platforms. It is thus  important for the media companies to bring more programming that can fuel the ratings, which in turn, will boost their advertising income (also see – Softer Advertising Marketplace Likely To Weigh Over Fox’s Broadcasting Operations). It will be interesting to see if Lee Daniels can deliver other television hits for Fox.

We estimate revenues of about $30 billion for 21st Century Fox in 2015 with EPS of $1.70, which is in line with the market consensus of $1.71, compiled by Thomson Reuters. We currently have an $39 price estimate for 21st Century Fox, which is around 20% ahead of the current market price of $32 per share.

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1. NEW DISNEY SEGMENT TO COMBINE CONSUMER PRODUCTS AND INTERACTIVE DIVISIONS, Disney Press Release, June 29, 2015 [↩]
2. CBS, AT&T Reach Carriage Deal After All-Night Negotiations, Variety, July 1, 2015 [↩]
3. Lee Daniels Inks Overall Deal With 20th Century Fox TV, Deadline, June 29, 2015 [↩]