Investors eyeing the ongoing transformation of the telecom-media-technology (TMT) landscape are likely gearing up for Goldman Sachs’ annual Communacopia Conference later this week.

The TMT-focused event, which runs from September 12-14, falls against significant changes in the sector, including mega-mergers, such as AT&T’s (T) US$85.4bn purchase of Time Warner, as well as intensified competition between traditional media and streaming video services, including Netflix (NFLX) and Amazon Prime (AMZN).

Moreover, global trade concerns, notably between the U.S. and China, have spurred fears that further escalation may harm the Hollywood industry.

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Uncertainties over whether China will decide to cease ongoing negotiations to increase the number of revenue-sharing foreign film imports as a retaliatory response against further U.S.-imposed tariffs, for example, has generally made Hollywood executives somewhat nervous.

Against this backdrop, while Viacom’s (VIA) Paramount Pictures’ domestic theatrical revenues grew 58% in the latest quarter, international theatrical revenues fell by an equal amount. Also, the studio’s filmed entertainment revenues declined by 9% in the quarter, driven mainly by a steep fall in international sales.

Gimme Credit analyst Dave Novosel recently noted that while Paramount’s film segment has produced positive operating income for the last two quarters, and may be profitable for the full year, the contribution will probably be quite meager to Viacom’s overall bottom line.

M&A burst as OTT threat intensifies

Meanwhile, consolidations across the TMT sector have ramped up recently, supported by intensified competition, the need for growth, as well as the still ultra-low cost of U.S. dollar-denominated debt financing.

T-TWX

Telco giant T, for example, priced a mammoth US$22.5bn bond in seven parts in late July 2017 to help fund its purchase of communications icon TWX.

By combining with TWX, T received a stake of around 10% in Hulu, as well as HBO's premium content base, Turner networks’ TNT, TBS, and CNN, and the TV and film production studio Warner Bros.

The TWX transaction followed the completion of T’s DirecTV purchase for US$48.5bn a little over a year prior.

The acquisitions have enabled T to capitalize on trends for mobile video and over-the-top (OTT) video delivery, along with other benefits, including the diversification of its revenue stream, and additional financial flexibility owing to TWX’s strong free cash flow.

DIS-FOXA

More recently, The Walt Disney Co. (DIS) agreed in mid- June 2018 to acquire 21st Century Fox (FOXA) for US$38 per share – a whopping US$71.3bn – to be financed with an even split of cash and stock. DIS will also assume US$13.8bn of FOXA debt.

Through the deal, DIS will expand its international footprint, as well as content and distribution for its direct-to-consumer (DTC) offerings, which include ESPN+. To help it better compete with the likes of NFLX and AMZN, the transaction will also give DIS a company-branded, streaming video-on-demand (VOD) service launching in late 2019, as well as a controlling stake in Hulu.

For its part, while NFLX ramps up on original programming, and expects its off-network business with DIS and FOXA to eventually dwindle to nil over time, they anticipate that in the short-to-medium term it will still be licensing content for them. 

In its Q2’18 earnings call, NFLX chief content officer Theodore Sarandos said that in the long-term “our competitors will want that content on their own services. That was a bet we'd made a long time ago when we got into original programming. And every year since that, we've been doing less and less off-net business with Disney and Fox.” However, he added that in the short to medium term, we're still licensing content off net from them, and they're also producing original content for us, like Nurse Ratched from Fox or the Marvel series from Disney.”

NFLX’s membership growth also remained static in Q2’18 from the same year-ago quarter at 5.2m, and disappointed expectations for 6.2m.

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Audiences continue to fill seats

Despite the disruption from OTT players such as NFLX, as well as jitters about any adverse impact from a potential fall-out in China’s role in Hollywood film releases, it appears moviegoers generally continue to flock to the theaters, with year-to-date revenues across the industry up more than 10% over the same year-ago period.

The triumph of traditional theatrical film exhibition appears to depend, in large part, on increasingly enticing content.

FOXA’s fiscal fourth quarter revenue rose 17% year-on-year to nearly US$8bn, driven primarily by a 27% sales surge in its filmed entertainment division, which the company attributed in part to higher theatrical revenues – led by the release of Deadpool 2 – as well as the home entertainment release of The Greatest Showman, combined with lower theatrical releasing costs.

At DIS, studio entertainment revenues for its latest quarter rose 20% year-on-year to almost US$3bn, with segment operating income up 11% to US$708m. DIS said its operating income growth was partly due to higher domestic theatrical distribution, including Avengers: Infinity War and Incredibles 2. Also, the continuing performance of Black Panther and the release of Solo: A Star Wars Story contributed to the boost.

However, while some studios have benefitted by upbeat box office receipts, not all companies have fared as well.

Warner Media’s Warner Brothers studios, for example, said that while its revenues jumped 11% in the latest quarter, theatrical revenues were essentially flat given a more favorable mix of home entertainment and theatrical releases in the prior year, and while its operating income increased by a healthy margin, it had been offset by US$81m in costs related to its tie-up with T.

Credit profiles improve

Overall, the operational and financial results of several major U.S.-based media companies have helped instill increased confidence about the firms’ creditworthiness.

Although stock performance in the sector has been somewhat mixed, there has been improvement in the perceptions in the companies’ abilities to repay their debt obligations.

Over the past three months, several firm’s five-year credit default swap (CDS) spreads have tightened, and many bonds, including from TWX and DIS, have come off their 52-week lows.

Recent quotes on some TMT companies’ CDS spreads showed a narrowing of anywhere between less than 1bp and more than 50bps.

Also, since late June, the yield on TWX’s 3.8% notes due February 2027 has fallen nearly 4.1% from its 52-week high, DIS’s 3.0% bonds due February 2026 have experienced a drop in yield of almost 8.15%, and FOXA’s 3.375% November 2026s have declined almost 5%.

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