A Tale of 2 Acquisitions, With High Drama in Mergerland
When it comes to mergers and acquisitions, nothing is ever certain until the deal closes -- or sometimes, much later -- which means investors are always left to make their best guesses. And that uncertainty is key to both news items that broke recently on that score. Whether the deal to unite T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) would get a regulatory thumbs-up was looking like a coin toss. Now, with FCC Chairman Ajit Pai saying he'll give it his blessing, the odds seem a lot more favorable. And in a similar case of a major company that has fallen behind its peers and needs a boost, CBS (NYSE: CBS) (NYSE: CBS-A) is looking to add to its media fiefdom by purchasing Starz from Lions Gate Entertainment (NYSE: LGF-A) (NYSE: LGF-B).
In this MarketFoolery podcast, host Chris Hill and Motley Fool contributor Dan Kline reflect on the background behind these deals, and what they'll mean for the companies involved and their shareholders. They also discuss what the Fool's analysts think of the rebound at Cisco Systems, and what comes next for HBO now that Game of Thrones has concluded.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 20, 2019.
Chris Hill: It's Monday, May 20th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, back, first time in a while, it's Dan Kline. Thanks for being here!
Dan Kline: Hey there, Chris! Thanks for having me!
Hill: Thanks to everyone who hung in over the weekend for our Apropos of Nothing episode. I told you we'd be back Monday with the actual business news of the day. And we're here. We've got some media and entertainment news. We're going to dip into the Fool mailbag.
Let's start with, I think this technically counts as breaking news, the chairman of the FCC saying that he is going to recommend to the agency the approval of the merger between T-Mobile and Sprint. This is a $26.5 billion merger. I know the FCC still needs to formally approve this, and so does the Justice Department, but Wall Street is acting like both those approvals have gone through.
Kline: Well, because when you looked at this a few weeks ago, and I think we covered this on an Industry Focus not that long ago, they were putting it at 50-50. They weren't looking at the economics of it, they were basically very focused on, "But there's four, and it's going to go to three, and that's bad." And then Sprint came out and said, "Hey, look, we've been saying our numbers are pretty good." They came as close to saying they that they fudged the numbers as you can legally come. And what they were basically saying is, "Hey, we've added a million subscribers, but what we added is free lines." So they would say to you, "Hey, you're a Sprint customer. You think your dog wants a line? Could your iPad use a second line?" It was that level. If you went into a Sprint store, they were handing them out like gum.
Hill: This was not a Wells Fargo situation, where they weren't telling you?
Kline: No. They were telling you. And in general, it was a line you might want, like maybe for a kid or for a secondary device. But it wasn't a line you were going to purchase. So when T-Mobile says they've added a million postpaid customers, they're defining that as someone who signs up and joins and pays them money. Sprint was doing it in a more nefarious way. And they came out and said, "Hey, look, we're spending a lot of money." Even their regular customer acquisition was heavily discounted. So there was no real path to success for Sprint on its own. They probably could not afford the investment. I mean, obviously, they're owned by SoftBank, so technically, the parent company could put in all the money they wanted to. But there was every chance that if this deal wasn't allowed, that Sprint was going to be sold at a fire sale, and either T-Mobile was going to buy a lot of the assets anyway, or somebody like Comcast or Charter, who had already passed on operating Sprint as Sprint, would end up with just the customer base and the assets.
So all Sprint and T-Mobile really did -- and this kind of shows that Ajit Pai, the FCC chairman, was probably leaning toward this merger anyway -- all they did was committed to hitting 90% of the country with 5G within three years, which is something that they've talked about doing anyway. That's the logic of the merger, is to be the first to have a real 5G network all over the country. T-Mobile is banking on that because they have a television product they want you to buy.
Hill: So, when you see shares of T-Mobile up around 6%, 7% today, and shares of Sprint up north of 25%, that doesn't strike you as unreasonable? You think, "Yes, the approvals have to happen, but it's all over."
Kline: Obviously, pay attention to make sure Sprint shares don't go over the price that the deal is at, which does happen sometimes. But I am very in favor of T-Mobile. I'm bullish on T-Mobile even if the deal gets shot down. There is a bad history of mergers in this space. Sprint-Nextel is why Sprint is in this trial.
Hill: [groans] Oh, God, I forgot about one!
Kline: Beep beep! I'm referencing, for people who don't know, you used to be able to, on a Nextel phone, have a walkie-talkie feature, and it made a ridiculously annoying noise. It worked very well in a factory.
Hill: I was going to say, very popular in factories and construction sites.
Kline: Yes, which is where I used them, so it was a good product for me. But in this case, you have a dynamic CEO in John Legere, and they have a plan. So whether the Sprint brand goes away, they haven't told you that. But eventually, this is a company that has tremendous customer loyalty because they're straight with you. If you walk into a T-Mobile and lay out your problem -- I had an issue, I wanted to upgrade my iPhone, and I was part of their old upgrade program. And they explained it to me clearly why I had to pay more money than I thought I did. And they were very nice about it. And I didn't leave angry. And that's very hard. There is no possibility AT&T or Verizon can do that.
Hill: Let's move on to the entertainment industry. I suppose this ties in. CBS has made an offer to buy Starz from Lions Gate Entertainment. I was saying right before we started taping, I had to take a moment and think about, what does Starz bring to the table as a network other than movies that other people have made? The only thing I could come up with was American Gods --
Kline: And Power.
Hill: Yeah, the original series. What do you think of this deal? When I first saw this, what went through my head was, "Oh, the land grab continues. We're all moving to streaming." And by "we," I'm referring to the broadcast networks. "We're all moving to streaming, we're all looking to get as much original content as we can get our hands on. And if we have to pay maybe a little bit more for not-as-well-known content, we're going to do that."
Kline: This is kind of like asking someone to the prom an hour before the prom. All the good dates are gone. This almost goes back to Disney buys Pixar, then Disney buys Star Wars, then Disney buys Marvel; then Comcast goes, "Uh oh," and buys DreamWorks. We were comparing this, talking, saying that Starz is kind of the RC Cola, then we downgraded it to the Polar Soda of premium content channels. But this really is, in my opinion, a desperation move. You're going to pair this, if you're CBS, with its very weak two-show, or maybe three-show -- now that they've launched Twilight Zone -- CBS streaming service. Maybe they're going to pair that with some of the Viacom properties if they ever properly merge. They're sort of controlled by the same people, and they talk about merging, but it hasn't quite happened. So your streaming package is going to be a couple of old-people shows on CBS Interactive, Starz, which has young streaming shows, but I don't know anybody who's intentionally buying Starz to watch American Gods, and then, what? Reruns of The Real World? Maybe Comedy Central is an asset that will drive some subscriptions? But it feels like, if I'm going to pay for a package -- Disney is clearly building toward a Hulu, Disney+, ESPN+ package -- that's going to be more attractive. And then Comcast is going to be more attractive. And then, probably Sony, now that they're working with Microsoft, is going to be able to put something together. And then maybe Apple. And then this. It really seems to me like buying a very low-level asset for a lot of money.
Hill: I'm going to put, in your rank ordering, this above Apple, just because we don't know what's coming with Apple yet. They had the event earlier this year with Oprah Winfrey and Steven Spielberg. I get all that. At least with CBS, you have some known quantities. I think the best version of this scenario for CBS is, if this goes through, then three years from now, they have enough data -- I would argue, actually, even sooner. Maybe a year and a half, two years from now, they have enough data from their streaming app to know what to invest in. The one thing you can say about the Starz original content, at least in terms of the dramas, is you're not seeing those types of dramas on CBS. It really is a different category of drama. It's edgier, I would argue, in some ways it's more creative.
Kline: It's the 1985 HBO model, where there's going to be gratuitous nudity for absolutely no reason in every episode.
Hill: It's possible! But, just from a creative standpoint, it's less predictable. A show like American Gods is far less predictable than a formulaic... I know they don't own Law & Order, but that's the one that pops to mind. A procedural, where I know how it's going to play out. NCIS, I guess that's a CBS property.
Kline: I feel like this only makes sense if they're going to continue acquiring. But there's not much left out there. You start to get into buying one-offs and buying shows. If this is part of a roll-up strategy, and they need the subscriber base, and they come to you and they say, "Hey, do you have Starz? We're giving you CBS." The Disney pricing looks pretty attractive. I'm a Hulu Live subscriber. If they throw me Disney+ -- which I'm going to get anyway, it's going to have Star Wars shows -- and ESPN+ and it's only an extra $7.99 or $9.99, I'm probably going to do that. CBS's streaming service is very inexpensive. It's $4.99 a month. If all of a sudden, for $9.99 a month, I can get Starz, too, maybe. I mean, I had Starz when I used to have Sling TV when it was a small add-on price, and there was always some movie you wanted to watch. But it does seem to me like this is like, "Oh, God, we don't have a date for the prom. Let's buy something." I'd like to hope that maybe there's a bigger strategy to it.
Hill: Well, presumably, the people at CBS who are in charge of this initiative are watching how the pricing strategies of everyone else are playing out, and they're not going to have a self-inflicted wound where they say, "Let's charge $10 right out of the gate." No. Go low, get people in, addicted to your system, and then incrementally bump up over time.
Kline: They've been smart, because largely, you are buying their service because you want to watch The Good Fight or the Star Trek show. And maybe to a lesser extent, The Twilight Zone, but that hasn't been all that well reviewed. And in some markets, you can get NFL access. Depends where you live and how the deal works. So by keeping that point low, it is low enough that if I can just get it to watch like eight football games a year, I might do that. They do seem to know what they're doing. But I question... Merging with Viacom is almost certainly part of their eventual strategy. But the Viacom portfolio seems especially weak. We're at a low point for the MTV channels. So, yeah, this feels like you're cobbling together a lot of distressed assets, which doesn't necessarily give you one good asset.
Hill: I'm curious to see what the final price tag is, though.
Our email address is email@example.com. Question from Chandra Mundra, who writes, "In the past, you've never missed an opportunity to criticize or make fun of Cisco Systems." I would just pause right there to say, I've let plenty of opportunities go by, but I digress. "But now, when Cisco Systems is showing consistently good results, quarter after quarter, you never discuss their earnings. Cisco is a Fortune 100 company, a dividend payer. It's beating Wall Street's expectations quarter after quarter, and listeners need to know what your experts think of it." Thank you for the question, Chandra, and for listening!
You know what? That's fair. That's totally fair! I was a Cisco Systems shareholder for a long time. I'm sure I was not the only shareholder who was frustrated with what the company was doing under John Chambers' leadership, who was one of those great CEOs who probably should have left five years before he did. Before I get to what our experts think of it, Cisco Systems, this is a stock that's doubled over the past three years. I will point out, less than a year after John Chambers stepped down and Chuck Robbins became CEO. It's a little bit like a lesser version of what we saw play out with Microsoft and Steve Ballmer walking off into the sunset --
Kline: We actually write about Microsoft an awful lot less because it's a well-run company. It just becomes less sexy to talk about, which is a challenge.
Hill: To why we don't talk about it that much, there have actually been times where I've brought it up because, particularly during earnings seasons over the past couple of years, I've looked at Cisco and thought, "Boy, they're doing well here."
Our analysts, I'm just going to paint with a broad brush here, not that excited by Cisco Systems. Even despite the size, despite the stock performance over the last three years, and the fact that it pays a dividend, when I bring it up to our analysts, "Hey, do you want to talk about this?" A lot of them are just like, "Ah, I don't really cover it. I'm not that interested in it." It's not recommended in any of our services. So, there you go. But a fair point. I appreciate it.
For anyone who has had a conversation at the watercooler today at the office, or has seen social media, even if you don't watch Game of Thrones --
Kline: Which I don't.
Hill: I don't either, but you're probably aware of the fact that last night was the season finale. So, now, as a show that focuses on business, the question falls to us: Now what, HBO? Any entertainment industry that comes up with a hit that comes to an end, in the case of a television series, the question for the network is, now what are you going to do?
Kline: This is a really unique time for HBO. When you look at its past hits, they always had more than one going on. Sex and the City and Sopranos kind of overlapped. I mean, I might not be getting the timing right. But their old biggest hits were always like, "One's in the fall, one's in the spring. One's ending now, the other's ending in three years." There is no next big HBO hit already in production. If you look at their successes, it's Barry, which is kind of a niche comedy, supposedly a very good show, but it's like an eight-episodes-a-year, half-hour show. You have Last Week Tonight, which is -- again, one of my favorite shows, but it's a very small program. It's not a watercooler, 20 million people. So now, it comes down to, in the next six months, what is HBO going to introduce, and how many people are going to walk away because the only reason they subscribed was Game of Thrones?
Hill: I saw an article this morning that listed, "Here's what's coming." And it didn't include the next season of Barry, the next season of Silicon Valley, that kind of thing. It was essentially, "Here are new things that we have in the pipeline in the next 12 months." And for every one of them, I just saw the brief description, whether it was a movie or a limited series or the potential for an ongoing series, and with each one, I thought to myself, "Well, that looks like it's probably going to be pretty good." But there was nothing that I thought, "Oh, my gosh, that could be the next..." It wasn't like, to go back to Lions Gate Entertainment, by the way, like when Lions Gate got the rights to the Hunger Games series. Even before the first movie came out, and Jennifer Lawrence, and all of that, you could just look at the success of those books and say, "Boy, if Lions Gate does this correctly, this is going to be huge for them."
Kline: They had Westworld, but there's no obvious Grand Slam play. A lot of the HBO shows that became big hits were not set up to be big hits. Something like Six Feet Under was a very niche-y show that built and became a huge deal. So, some of these things might become something big. But I think if you're HBO, you're banking on that there's probably some other reason -- for me, I didn't watch Game of Thrones. I was a huge Six Feet Under guy. When that ended, well, they were doing a lot of comedy specials. So, for me, it used to be worth it to keep it just because that's where Chris Rock would be. That's where Amy Schumer would be. Now, for me, it's Last Week Tonight. When that's not on, I think about, "Do I not need HBO for three months?" But, probably, some people are using it for movies, they're watching some of the other programming. But they're going to take a hit here, because there is nothing that's Lord of the Rings level, "Oh, my God, I can't wait till HBO's new $150 million blockbuster comes out!" Those shots are getting taken by Netflix and Apple. And maybe they have something we don't know about. But I don't see the next hit. And that has to scare you as an investor.
Hill: If you were a Time Warner shareholder who was at all on the fence about the AT&T acquisition, it's probably working out now. Because now that HBO is under the AT&T umbrella, that's going to be better for them. The one comparison I came up with in the recent past was Breaking Bad. When that show wrapped up in the fall of 2013, I went back and looked, what was the stock performance of AMC Networks leading up to that, and what has it been since then? No surprise, huge hit show for AMC that did right by the stock leading up to that. When Breaking Bad ended, the stock was in the mid $60s. Now it's in the mid $50s. Think about the stock performance of the market in general over the last five and a half years. That really emphasizes the need for television networks who have hits have to follow it up.
Kline: The ownership scares me here. Being owned by a non-content company, they don't understand that while HBO has a tremendous track record, maybe a 50-50 track record of big swings hitting, you have to take big swings, and you're going to have huge losses. Disney's about a sure thing as anyone in terms of box office. Every now and then, they put out a John Carter, something that was $300 million that makes $0.80 at the box office. HBO had Deadwood. "Wow, we spent all this money, and it goes two and a half seasons, and people are mad." I wonder if AT&T's attitude is more "We can force HBO subscriptions to our wireless people at discounts," if they're playing more of a numbers game and less of a "We need to be the best content in order to justify it." HBO was always the premier place. They've ceded comedy to Netflix, because Netflix is willing to pay $20 million, whereas HBO used to say, "Here's $100,000 to do your comedy special, you're making your money on the road." I understand why you leave that. There's only so many A+ comedians. But why they're not competing with Netflix -- and in some cases, AMC, the broadcast networks are making bigger shows than you see HBO making. And I don't know that Barry sells a lot of subscriptions. It might keep people because they're already there. But I don't think I'm seeing the description of that and going, "Oh, he's in an acting class and he's also a murderer?" Like, I'm not sure that one's pulling me in.
Hill: He's not a murderer, he's a professional assassin.
Kline: Sorry, he's a hit man.
Hill: There's a difference, come on!
Kline: Chris knows this because he moonlights as hit man.
Hill: Shh, we don't talk about that. Dan Kline, always good talking to you!
Kline: Thanks for having me!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Chris Hill owns shares of Walt Disney. Daniel B. Kline owns shares of Apple and Microsoft. The Motley Fool owns shares of and recommends Apple, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, Microsoft, Netflix, and Walt Disney. The Motley Fool is short shares of CBS and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends AMC Networks, Comcast, Softbank Group, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.