MediaTalk | Season 4 | Ep. 29 - Debt, Deals and Distribution: A Credit Analyst's View of Media's M&A Wave

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Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence Tech, Media and Telecom News team. Welcome to “MediaTalk,” a podcast hosted by S&P Global Market Intelligence, where the news and research staff explore issues in the ever-evolving media landscape.

Today, "MediaTalk" is lucky to have Naveen Sarma join us in the virtual studio. Naveen is managing director and sector lead for US media and telecom at S&P Global Ratings. S&P Global Ratings is a separate division of S&P Global. Naveen leads credit analysis and ratings for the media, entertainment and telecommunication sector.

Naveen spoke on the M&A panel at Kagan's Media & Telecom Summit back in June, that was led by my boss, Sarah James, who's also the editor of “MediaTalk.” A lot of M&A. Naveen, how you doing?

Naveen Sarma: I'm doing good. Thank you for having me.

Reynolds: All right quick scorecard. Nexstar-Tegna deal was done and then undone. Charter's looking to add Cox. Paramount SkyDance has outbid Netflix for Warner Bros., and there's perhaps a [Temporary Restraining Order] involved with this. Comcast wants to spin off the remaining parts of NBCU that it didn't already spin off to cable-centric Versant earlier this year. That's a real mouthful. Busy times. Naveen, is there anything why there's so much activity at this juncture?

Sarma: Yeah and I think the Comcast spin-off is probably separate from this conversation, but I think basically all- ... the M&A we're seeing is really driven by the need for scale. Scale in content, scale in global reach, scale in distribution.

Historically the media and distribution were both regional. Yes, you had global media companies, but they were primarily US-centric, and generally relied on local companies in those countries to distribute their content outside the United States. That changed a number of years ago with distribution with Netflix, which clearly is a global distribution and media company.

So now that distribution has become globalized, at least with the big streaming services, the content companies feel that they need to gain scale and to do the same things, especially if they want to do their own distribution overseas. So media companies have all started consolidating and so that's been the, the big topic for the last couple of years.

Reynolds: All right. Naveen, as a credit analyst, strategic thinking for these media companies, what role does debt play in their thought processes?

Sarma: Oh, debt is the key component for all global M&A, right? They don't issue equity when they do these deals.

These companies generally use debt to fund their M&A aspirations. Look, the, their ability to go and raise debt, to fund these acquisitions, the market defines a company's credit quality based off of things like leverage, so debt-to-EBITDA or cash flow or credit ratings, whatever metric you want to see or use. And that has a major impact on a company's access to the debt markets and what the cost of that debt is. So what's been the biggest change over the past 10 years, how much leverage media companies can take on. We've seen this especially with media sectors that have faced secular pressures, TV broadcasters, radio, newspapers.

The amount of debt that the market is willing, or the amount of leverage that the market is willing to allow these companies to have has declined. And so the conversations that we have with these companies is really important. What's the right credit rating? What's the right amount of leverage that is acceptable to us, but also to the market to fund these transactions?

Reynolds: Is there, again sensibilities around private credit?

Sarma: Yeah, private credit is another source of capital, not just for the media sector, but for a lot of other sectors. But media sector and media companies are- have been attractive to private credit for a number of years. I think it's the capital light model that the media companies have.

It's light CapEx, really strong cash flows. And so- you've got pretty good outside of economic considerations or volatility. You've got a pretty good handle on the cashflow that comes back so you can get pretty predictable returns. And like I said, it's a source of capital. The public markets are the most liquid and the cheapest.

So the cost of private debt has always been more expensive, but it's always been a, a source of capital for companies that need to access that capital.

Reynolds: How about foreign money, funds coming from outside the US?

Sarma: Yeah that's also been a source of capital for the media sector. And I'm going to go back in my way back machine and look. You can go all the way back, and I looked this up you go back to 1989. That's when Japan got interested in buying into the United States, and that's when Sony purchased Columbia Pictures. You had the Chinese come in 2024, and probably even before that when Wanda purchased Legendary Studios or when, if you remember, Viacom tried to do a partial sale of the Paramount Studio to Chinese investors.

And you've always had b- wealthy investors who've come in and tried to make their mark by acquiring media companies. Now it's the Middle East. You've got the- Yeah ... Saudis who are buying EA and you've got a pool of money coming in from that region from a number of sovereign wealth funds that are helping to fund the potential acquisition of Warner Brothers by Paramount.

And then you've got, you've historically had this from around the world, investors coming in who want to own a piece of Hollywood.

Reynolds: Yeah, it has a certain charm to it. All right, let's break down a couple of the things I mentioned above. Nexstar, Tegna.

Nexstar is the biggest station owner in the US, wants to buy Tegna, $6.2 billion purchase. It's approved by the d- Department of Justice, the FCC. The deal is consummated, and then DirecTV and a number of states' AGs convince a federal judge in California that it is anti-competitive.

It is now on hold. This is months now, Naveen. Any update? Where do they stand?

Sarma: Yeah. Let's see how this plays out. The, the courts are going to make their call. I'm guessing that there's going to be some kind of a negotiation between all the players. I, I think it's hard to tell right now how this is going to play or how long this is going to take.

Yeah, Yeah, I mean- From a credit perspective the deal will push up Nexstar's leverage. And the de-leveraging that we expect, especially the de-leveraging to keep the current rating, requires Nexstar to integrate the two businesses and to achieve cost synergies in a timely fashion.

And by delaying the timing of this transaction closing, it means that these synergies are going to take longer to realize, which may put pressure on things like our credit rating. So there are credit ramifications the longer that this lawsuit goes on.

Reynolds: Okay. This deal, again, in terms of US government got the okay.

It happened with, through waivers or approvals. There is still on the books, a 39% TV station ownership cap. That could change perhaps on August 6th. FCC Commissioner Brendan Carr's going to hold a vote, Naveen.

Sarma: And that isn't officially in the docket, but yeah, I guess that's, that, that seems to be the rumor, that he's going to go ahead and do that. Now, having said that, he may push that through, but if you go back and you remember the 39% cap was actually put in place by Congress. It was legislated by Congress back in, in 2004.

And so we'll see what happens there. Congress might decide to step in, especially if there's, a change in the, ranks of Congress and Congress becomes a Democratic Congress. Maybe Congress is going to step in and say, "No, you can't do that, FCC." And clearly I think we're going to get litigation over this by a number of parties.

And so- ... you're going to have Congress overseeing this potentially, and you're going to have the courts. So I think the answer to this is stay tuned.

Reynolds: Yeah, again, that's been the whole argument all along, and Sarah's written about this extensively. Again, whose purview is it under? Is it both? I guess we'll find out in August 6th. Yep. Anyway, all right, let's go to the cable side. Charter is looking to finalize a $34.5 billion purchase of Cox. It would extend its leadership position in terms of video and broadband subscribers. This one seems to be going along okay. I think there still may be some scrutiny in California, but this one's going to happen, Naveen?

Sarma:  We'll see, right? The PUC will look at this transaction, or may look at this transaction at its next voting meeting, which is, I think, August 13th.

Reynolds: Okay.

Sarma: And we'll see what the PUC decides. I'm guessing the PUC is looking for some kinds of concessions from Charter, things like, lower income pricing build-out requirements.

Those are the things that we've generally seen in the past. And the question is, If the concessions that the PUC is look for, are they acceptable to Charter?

Reynolds: All right. We mentioned Paramount SkyDance ultimately outbid Netflix from Warner Bros. Discovery.

It's $110 billion transaction if it gets approved. That seems to be up in the air. Taking a page out of the Tegna-Nexstar situation. States' attorney generals, they're, they've looked to file a temporary restraining order, and I think that came to pass today on July 20th.

Is that right, Naveen?

Sarma: That's correct. It sounds like they put in a temporary restraining order that will go until August 3rd, when the courts will hear arguments about making that, that restraining order permanent.

Reynolds: Okay. And if it follows suit to what happened with with Tegna-Nexstar, I guess we'll be in legal limbo for some time after that.

All that aside, just on the surface, Naveen, what is S&P Global's ratings view on Paramount SkyDance and Warner Bros. Discovery?

Sarma: Yeah. So what we said was that if and when the transaction closes, we'll cut our ratings on Paramount, the acquiring company, from double B plus to double B, so that's one notch.

And why are we doing that? It's leverage. At the end of the day the leverage will go up significantly as a result of this transaction. We estimate that leverage will go above seven, seven and a half times.

Reynolds: Okay.

Sarma: And it'll sit there for the next two years. That's very high leverage, and that, that...

Look, that includes the synergies that they think they're going to realize, $6 billion, as well as the cost to achieve those synergies. So you're going to have high leverage. You're going to have negative cashflow for the next couple of years. And only after they get through that, that time period, when you hit 2028, is when you're actually going to start to see leverage come down.

And and so we're, that's, we're rating to essentially that scenario. We're saying that leverage will remain above five times into 2028 and that is frankly a double B.

Reynolds: Wow.

Sarma: Now, the ability for them to get under five times, which is what they really need to do to attain the double B rating, is is to get leverage down under five times.

And one of the things here that's really important is the Ellison family has made a commitment to doing whatever's necessary to get leverage actually below three and a half times by 2028. That's really important to us. And so we'll pay close attention to, the company's commitment to doing that and the timetable for them to do that.

Reynolds: In terms of the state's attorney generals and their concerns about the deal it pointed to the number of theatricals and the, the studio production being some high rates high ratios there. Interestingly, given that, the cable landscape, still generates billions of dollars, but maybe not as attractive as it once was.

Our Scott Robson, Kagan Principal Analyst, he says that if this deal goes through, I think there's 58 or 60 cable networks between what Warner has and what Paramount has. That's an incredible number, Naveen. What do you think about that?

Sarma: Yeah, that is a really big number, but I think you also have to look at the networks that the proposed company will have.

So I think if you break it up into two buckets, the broadcast network, CBS news between CNN the sports networks, I think those are the things that consumers are still watching. And so having a concentration of those networks makes a lot of sense. The general entertainment, reality-based networks that's where the audience ratings have been tumbling.

And so I think if you break it up into how many networks they have, the valuable ones, yeah, you want to have a good collection of those. The other ones, I think, it would be nice to see some kind of consolidation or reduction in the number of those networks. I- look, when you talk to distributors, they've been talking about having the optionality or wanting the optionality to offer consumers skinnier bundles.

Reynolds: Sure.

Sarma: And look, they think, and I, we agree with them, that this is the best way to preserve the pay TV ecosystem. So just having 58 networks and charging for that, I think is a recipe for potentially accelerating cord-cutting. And so it would be nice to see some of these networks- shrink

Reynolds: Now we will see. We'll see if this happens, and then, yes, over time which networks kind of go away. But anyway, since the Kagan Summit last month, been a flurry of deals and announcements. The big one involves Comcast. Comcast and NBCU they looked at Warner Brothers last fall, then they spun off a bunch of the cable networks to Versant.

Now they just recently announced that Comcast wants to spin off NBCU. it's going to make Comcast, basically going back to the days, it's a distributor, cable, broadband, mobile. NBCU, the argument would be, yes, they would be more flexible, more agile to deal within that space. Naveen, what do you think about this and what does Ratings think about, this possible spinoff, which I guess is a year from now if all goes the way they would like it to?

Sarma: So I guess the answer to why they're doing this is the comment that they made on the call when they announced the transaction, which is the stock hasn't worked and they've changed their mind. And look our investors have been, are making this argument for the, to this company for years- Right that there should be two businesses, they should be split up. I guess that's the answer, is they finally recognized that. Now, having said that, and this goes all the way back to when we f- you know, we started this conversation and I said, "This is the outlier here." This is a company that has long argued that having both distribution and content together makes sense.

And they frankly, okay, up until recently with the stock they've actually made that work. But you g- have to go all the way back, and I'll rattle off a bunch of dates and transactions. They tried to buy Disney back in 2004. Yep. They bought NBC in a couple of transactions, but they announced that original transaction in 2011.

They tried to buy 21st Century Fox in 2018. They tried to buy Warner Brothers last year. So this is quite a sea change for this company a- goes against, what, 20 years of wanting to keep distribution and content together.

Reynolds: Is there, again, they both, you know, Brian Roberts, who's still going to be involved, and Mike Cavanaugh, who's going to head up NBCU, they both insist that the companies are good to go as they stand.

They want to operate and have the scale to operate as separate units. Others are arguing that this sets them both up perhaps for a sale. Where do you fall on on this view?

Sarma: Yeah, it depends on what Brian Roberts wants to do. These two companies plus Versant are all controlled companies.

And with, Class A and Class B shares and we're going to have to try to get into Mr. Roberts' head and understand exactly what he's trying to achieve. If it's simply to split these businesses apart and have them as separate units, and so they can get a step up in, in market value, I don't know if that's where he's going. Or if they want to do M&A then, he's going to have to explain that. Having said that, any transaction is going to require his blessing.

Reynolds: Yep. I gotcha. All right. You, we've just talked about this. Again, this was vertical integration. If this happens, this would be the end of it. It would be the end of that in the US.

AT&T was involved with Warner Brothers Discovery that way. Verizon in 2021 sold off its Verizon Media business to Apollo Global. Kind of end of an era. Your thoughts about that, Naveen?

Sarma: I don't even want to call it an era, because I think the only company that really pursued this strategy and did it well was Comcast. And like I just argued, Comcast is just, even, up through last month, their argument was it made sense to have the two together. What AT&T and Verizon were trying to achieve when they bought Warner's and AOL respectively is frankly beyond me. I think both of those strategies were flawed given how they were planning on using those assets.

And frankly, at least Brian Roberts ... Look the rationale years and years ago of doing something like that was because cable was essentially a video distribution model, and broadband came up later, but originally it was video distribution. And so there was at least an agreement that there was actually a relationship between media businesses and cable distribution, video distribution.

AT&T and Verizon are primarily, and have always been, telephone companies and trying to sell media made no sense. And I don't even want to suggest that their strategy was in the same level or, same bucket as Comcast's.

Reynolds: All right. Again, if we go across the water though Sky and ITV are getting together.

Again, NBCU would still have Sky in its thing. So vertical integration perhaps lives in, in Europe

Sarma: Yeah. It's interesting. I would've thought that Sky would be more interested in buying the studio. Again, back to the beginning comment about it's all about scale of content.

Reynolds: Yeah.

Sarma: But so I'm not really fully sure why they're buying linear television.

The UK is an interesting market because Sky has such a strong market share in pay TV distribution. But still, the UK is facing the same secular trends that the US is going through. Maybe they're a year or maybe two years behind, but they're facing the same exact problems. So I wonder about the mix of these two, It's really hard for me to try to explain why they're doing this. So I'm just not going to.

Reynolds: All right. Good. Fair enough. All right. We're getting toward the end here. Let's talk about a few would-be deals. Going back a few months ago iHeartRadio, which owns 860 radio stations and has a large podcast network, and SiriusXM, the largest satellite radio player they're not together in terms of content, but there seemed to be some overtures that they were looking to merge, and then radio silence.

Have you heard anything?

Sarma: Radio silence. It I, we don't think that kind of a transaction makes sense. A subscription company buying an advertising-based company. They both don't lack content, right? The music content they've got. The only thing that may be unique here is the podcast businesses between the two companies, at least the content that they have.

But outside of that, I don't see much of a rationale for doing a transaction like that.

Reynolds: All right. Going back to, I think it was last December EW Scripps' board rejected a takeover offer overture from Sinclair. Sinclair has been doing a number of smaller deals and, on their call said they're keeping a close eye on next-door Tegna.

Do you think Sinclair is ready to make a bigger move?

Sarma: I think one of the challenges here is the TV broadcasters are kind of missing the boat. This is their standard playbook, right? It's what they've done historically. And they, what they do is they go buy a peer, they cut costs, they get a step-up in retrans. That leads to a bit of de-leveraging. And this is the playbook that they've done for over 20 years. Scripps is an attractive asset for anybody because the retrans rates are lower than their peers. But again, they're playing by the same playbook.

Reynolds: Okay.

Sarma: The, the thing that these companies all need to really focus on is leverage is too high.

For every company except for Nexstar and TEGNA. So we went through a refi crisis a couple of years ago when the companies had a hard time refinancing maturing debt, because the markets were concerned about the NFL contracts. That's essentially passed and these, these companies have been able to go and, and refinance their debt.

But the leverage is still really high, and doing these transactions doesn't address that. Maybe marginally but it doesn't really address, the basic leverage problem that these companies all have.

Reynolds: All right. Let's finish up with Comcast. Does it split with NBCU? Does that happen? Or is it something akin to what happened with Warner Bros, which was going to divide the company into two, one with the studios, TV production, the libraries, HBO Max, and then the other was going to be the global networks group.

But then, obviously, interest from Netflix and Comcast. Does the split happen, or will someone step in and buy NBCU?

Sarma: I think, look, any time you announce a transaction like that, you saw that with the Warners, it's essentially a for sale sign. Or probably more accurately, a come and talk to us about it.

Reynolds: Okay, that's good.

Sarma:  Yeah. And so I think that's probably... Could you see a transaction where it gets sold? It could, but again, it all depends on what Brian Roberts wants to do.

Reynolds: All right.

Sarma: But I  guess they're open for business.

Reynolds: And what about on Brian Roberts and his father's business going back on the sheer distribution force? Some people are suggesting, if it was with Charter, that's a gigantic company. Maybe, maybe it's with Optimum, or maybe it's with Verizon. Do you see any of those kind of things happening?

Sarma: I think you raise a very important point, which is the legacy business, his father's legacy, is cable.

So if there's a business that he wants to keep, it would be the cable business. The problem with doing transactions with an Optimum or the other cable companies that are out there, they're small and they don't really move the needle. And so the only cable transaction that makes any sense from a scales point and, and actually synergies and are moving the needle on the industry would be Charter Comcast.

Reynolds: Sure. Okay. All right. That concludes this episode of “MediaTalk.” I wanted to thank our guest, Naveen, for sharing his views on an array of deals and potential deals in what is a very active media M&A marketplace. Naveen, thanks for being with us.

Sarma: Thank you very much for having me.

Reynolds: All right. And this is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon in the next installment of “MediaTalk.”