Wall Street is ready for the next big media merger.
As companies in the space face challenges such as cord cutting, a tough ad environment, and more pressure to turn profits, many are reevaluating their portfolios. That means a breakup— or outright sale — of one or more of America's biggest media names could be in the cards next year, analysts say.
"We believe the media industry is inching closer to the tipping point for another wave of consolidation," Bank of America analyst Jessica Reif Ehrlich wrote in a recent note.
She explained the secular declines of linear television subscribers coupled with challenges in achieving profits in the streaming business add to the narrative that "consolidation is a matter of 'when' not 'if.'"
That "when" may be sooner rather than later, with Axios reporting late last month that Warner Bros. Discovery (WBD) CEO David Zaslav and Paramount Global (PARA) CEO Bob Bakish met in New York City to discuss a possible merger.
Both companies declined to comment on the report, although Paramount appears to have become the industry's No. 1 pick for structural changes ahead.
Shari Redstone, non-executive chairwoman of Paramount Global and president of her family's holding company National Amusements, at the Nasdaq Market site in New York, Dec. 5, 2019. (Brendan McDermid/REUTERS) ·REUTERS / Reuters
Paramount deal could set off frenzy
Last month, multiple outlets reported that Shari Redstone was considering selling her family's controlling stake in Paramount. Redstone is president of her family's holding company, National Amusements (NAI), which controls the company through its Class A shares. Private investment firm RedBird Capital has been reported as a potential buyer, along with Skydance Media CEO David Ellison.
Paramount has long been viewed as a potential acquisition target due to its small size relative to competitors. The company boasts a current market cap of just around $10 billion, compared to Disney's (DIS) $170 billion and Netflix's (NFLX) roughly $210 billion.
Analysts have said a Paramount deal could set off an M&A frenzy.
In addition to Paramount, Bank of America's Reif Ehrlich said Warner Bros. Discovery and NBCUniversal (CMCSA) are also "likely to be impacted [by consolidation] over the next 18 to 24 months." As the Axios report suggested, it's possible two of those three players could merge.
Individual assets are also reportedly in play. Bloomberg reported Paramount is once again in talks to sell BET Media Group — this time to its CEO Scott Mills and former Blackstone executive Chinh Chu, who now runs private investment firm CC Capital Partners. A price of just under $2 billion is under discussion, according to the report.
The company's TV portfolio includes broadcast network ABC and cable channels FX, Freeform, and National Geographic.
He eventually reversed course, clarifying at last month's DealBook summit that linear TV assets "are not for sale." Still, the company is "constantly evaluating" their fit within the overall business, he said.
Separately, Altice USA (ATUS) sold its news arm Cheddar News to media company Archetype, which is owned by private equity firm Regent. Altice had acquired Cheddar for $200 million in 2019. Terms of the Archetype deal were not disclosed.
"Handicapping the precise timing of any transformational deal is difficult," Reif Ehrlich said. "However, we believe the challenging backdrop creates ripe conditions for consolidation."
Media challenges likely to spur deal activity
2023 represented a year of change for the industry after rising costs and debt-ridden balance sheets weighed on the sector in 2022 — and wiped off more than $500 billion in market capitalization.
But all of that wasn't enough to satisfy investors. Valuation levels remain depressed. And streaming profitability still has a long way to go, with virtually all media companies (with the exception of Netflix) losing money on that business.
Bart Spiegel, partner of global entertainment & media deals at PwC, said those challenges are exactly why companies will begin to explore possible deals.
"We're seeing a lot of companies focus on divestitures," he told Yahoo Finance, explaining that the high interest rate environment, coupled with various regulatory hurdles, are forcing more companies to assess their existing portfolios — and position non-core assets for sale.
"A lot of these companies are engaging us because they see opportunities in 2024," he said, noting private equity funds are sitting on more than $1 trillion in dry powder, or cash reserves. "We're seeing a lot of capital sitting on the sidelines, people are preparing their businesses for sale, and, in some areas, there's a lot of interest in activity."
PwC said demand for live sports, including sports-adjacent industries like sports gambling, will likely drive future M&A activity. Gaming, which companies like Netflix have recently doubled down on, should serve as another catalyst.
Deal volumes and values in the media and telecommunications sector continued to slow in 2023 — falling even further from last year's declines, according to PwC's biannual US deals outlook.
Over the past 12 months ending in November, there have been 2,028 media and telecom deals — a 22% year-over-year decrease — with announced deal value totaling $95 billion, a 63% dip versus 2022.
Spiegel warned a comeback could be slow. Interest rates remain high while regulatory approval hurdles will likely weigh on potential deals. Uncertainty surrounding the 2024 election cycle could also be a headwind.
Still, he predicted the second half of 2024 should be a "welcome opportunity for the deals market to turn around" — especially after the conclusion of both the writers and actors strikes earlier this fall.
"Now you've got some level of transparency and predictability," Spiegel said of the strikes.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
