Fox jumping into a $22 billion acquisition reminds us that in a consolidating media industry, the next surprise is just around the corner. (Although anyone who’s been reading The Ledger over the last few weeks already had Roku on the radar.)
For an investor, M&A activity can trigger sudden bonanzas for investors who are on the right side of a deal.
But not all deals are created equally. If you were a Roku stockholder, the proposed acquisition by Fox is a big boon on top of an already strong stock run. It was the opposite for Fox shareholders who invested in what had been a financially conservative company.
Which media company will be next to be acquired? Maybe it will be Lionsgate, whose shares went on a rollercoaster ride on Tuesday amid a report that Netflix was interested in the studio — which TheWrap found out wasn’t the case.
You can see why dealmakers are looking to act now. The Trump administration’s Justice Department approved Paramount Skydance’s plan to swallow Warner Bros. Discovery, despite objections from the department’s legal staff, so there appears to be little resistance on the federal regulatory front (particularly if you have the cozy relationship that the Ellison family appears to have with Trump).
But the state attorneys general remain an X factor, and the midterm elections could shake things up if the Democrats retake Congress and put a check on Trump’s powers.
Thanks for reading.
Jon Lafayette
P.S.: Send your tips and pitches to jon.lafayette@thewrap.com
THE DEEP DIVE
Despite Stock Pullback, Wall Street Likes Fox’s Bet on Streaming With Roku
When Fox emerged as the buyer for Roku, Fox Corp. shares dropped. Wall Street analysts were mostly positive about the proposed $22 billion cash and stock deal, but the reaction by shareholders didn’t reflect that.
Fox’s shares had been steadily rising since February and hit $63.36 on June 11 just before rumors of the deal began to surface. After the deal was formally announced, shares dropped during the week, closing at $46.95 on Thursday.
This dip might create a buying opportunity, if you listen to the Wall Street pros who dismissed the pullback as something that happens when a conservative company makes a bold move.
Michael Piccolo, who follows special situations at Wedbush Securities, called the drop in Fox shares “a classic acquirer reaction to a large cash-and-stock deal.”
- With a bigger footprint in streaming, analysts expect Fox to grow faster than if it continued to heavily rely on traditional broadcast and cable assets.
- Analysts said the price Fox is paying for Roku is “reasonable” and provides an opportunity for accelerated growth
- Fox execs said the company will continue to buy back stock and pay dividends. The company will also maintain its investment grade credit rating after borrowing $9 billion to fund the cash portion of the deal.
- Roku founder Anthony Woods, who controls 55% of Roku’s voting shares, has pledged to vote for the transaction, making a higher bid unlikely.
“Fox has repeatedly talked about using its financial strength to make acquisitions and was routinely criticized for being underlevered, but Roku is a far larger acquisition than any Fox investor expected,” added Rich Greenfield of Lightshed Partners.
In the past, Fox has been roundly praised for not pouring billions of dollars into competing in the streaming wars like other TV network companies. But many analysts said this might be the right time for Fox to put more chips into the streaming pot.
“Fox has been one of the least acquisitive companies in the media sector,” said Bryan Kraft of Deutsche Bank. “We believe the company’s discipline in capital allocation is something investors should bear in mind in evaluating the Roku acquisition.”
Kraft called the price Fox is paying for Roku “reasonable,” and said the financial benefits to Fox include accelerated growth and valuable deferred tax assets like net operating losses worth about $2 billion.
Before the deal was announced, Roku stock was being recommended by analysts including those at Oppenheimer. Its stock was already up more than 20% for the year because analysts believed the company had gotten better at controlling costs and posted a strong first-quarter earnings report. It jumped another 20% once the takeover speculation erupted.
On a call with analysts, Fox execs aimed to reassure shareholders the company was still a sound investment. “We have a world-class best-in-class balance sheet that we were and have been looking at leverage for the right acquisition to take the company forward,” said CEO Lachlan Murdoch.
He noted that Fox was an early investor in Roku, which originally spun out of Netflix, and a long-time commercial partner and that the acquisition would create “a next-generation Fox Corporation that is uniquely positioned with even greater reach and a more complete product offering.”
Murdoch added that the deal “continues our disciplined approach to use of capital,” and that the Fox-Roku combination would be a “growth company.”
Fox CFO Steven Tomsic said Fox is funding that cash part of the deal with about $8 billion in new debt and $9 billion in cash. He added that Fox expected to keep its mid-BBB investment-grade credit rating and would continue to return capital to shareholders through stock buyback and dividend payments.
Analysts liked what they heard.
“While Fox remains in a strong position to monetize its existing portfolio within the evolving Pay TV ecosystem, we see this Roku deal as a way to ensure the company’s future as streaming overtakes traditional distribution in the years ahead,” said Robert Fishman of MoffettNathanson. “Both companies will receive an immediate boost to reposition their future outlooks; namely more scale for Fox in a faster growing part of the media ecosystem and more premium content and advertising capabilities for Roku – both of which should help Fox better compete for future premium sports rights.”
Kraft at Deutshe Bank rates Fox stock a buy with a target price of $79 a share.
“The addition of Roku will accelerate Fox’s growth rate over the next several years and create more terminal value. Roku is a company with clear secular tailwinds in advertising and subscription revenues, whereas Fox’s business is more mature despite out-operating secular headwinds in linear TV,” Kraft said.
Another Bidder Doubtful
All of this would change if another bidder for Roku emerged, but analysts doubted that would happen. Wedbush analyst Alicia Reese lowered her recommendation on Roku from buy to hold because the upside on Roku’s stock price had narrowed by Fox’s bid.
Roku founder and CEO Anthony Wood and his affiliated trusts, which control 55% of Roku’s voting rights, has signed an agreement obliging them to vote in favor of the Fox transactions, Reese added, making it less likely another bidder would try to woo Roku.
On the break-up fee front, Fox Corporation would pay Roku $1.24 billion if the deal falls through, and Roku would owe Fox $866.1 million if it accepts a superior offer.
“He appears comfortable with Fox’s political bent, something that he might not find with other buyers,” said Greenfield. “While other bidders are possible, we are quite skeptical. This feels like a done deal for Fox and Roku.”
Roku closed up 0.6% to $138.07 on Thursday.
DEAL SHEET
- Lionsgate stock jumped 14% to $16.36 a share Tuesday on a Semafor report that Netflix was looking to buy the independent studio. After a Netflix spokesperson told TheWrap that the company is “not interested and not pursuing Lionsgate,” Lionsgate’s shares dropped back to $15.35 on Wednesday and closed at $15.49 on Thursday. Lionsgate stock has been climbing since starting the year at $9.30 as it seeks a potential buyer.
- Carlyle Global Credit said it made a deal that will provide Content Partners with more capital to invest in movies and television shows. Founded by Steven Blume and Steven Kram, Content Partners manages a portfolio of more than 800 motion pictures and 3,000 hours of TV content. “This transaction will help us further strengthen our position as the leading independent owner of premium studio film and television assets,” said Kram, Blume and company president John Mass. “We’re eager to build on this momentum by continuing to pursue compelling film and television opportunities that will expand our market-leading library and deliver outstanding long-term value.”
- Hightouch, an ad tech startup, offered $1.2 billion to buy LiveRamp’s identity business from ad agency holding company Publicis, according to Axios. Publicis acquired LiveRamp in May for $2.2 billion. Hightouch says it will withdraw its proposal if it doesn’t receive a response from Publicis by June 26.
WRAP 20 INDEX
It was another down week as our Wrap 20 Index took a hit amid the merger news.
FINANCIAL ROUNDUP
More Paramount-WBD Drama
Staff lawyers at the U.S. Department of Justice were leaning toward recommending a lawsuit aimed at halting Paramount Skydance’s acquisition of Warner Bros. Discovery when senior officials announced that they had approved the transaction, according to the Wall Street Journal. The staffers believed that the combination of two movie studios would reduce competition, but they were unable to register their objections. The Ellison family, which controls Paramount Skydance, supported President Trump. The deal was also cleared by regulators in China.
AMC’s New CFO
AMC Global Media named Hozefa Lokhandwala as chief financial officer, succeeding Patrick O’Connell, who announced plans to leave in January. Lokhandwala had been a director for MSG Networks, which like AMC, is controlled by the Dolan family. He also served as co-CEO of Vice Media Group. Earlier in his career, he was a managing director in the media investment banking group at J.P. Morgan.
FROM THEWRAP
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