Industry Surveys Broadcasting, Cable & Satellite Tuna N. Amobi, CFA & CPA, Consumer Discretionary Sector Equity Analyst OCTOBER 2014 Current Environment ............................................................................................ 1 Industry Profile ...................................................................................................... 8 Industry Trends ................................................................................................... 10 How the Industry Operates ............................................................................... 18 Key Industry Ratios and Statistics ................................................................... 26 How to Analyze a Broadcasting, Cable, or Satellite Company ................... 28 Glossary ................................................................................................................ 34 Industry References ........................................................................................... 38 CONTACTS: Comparative Company Analysis ...................................................................... 39 INQUIRIES & CLIENT SUPPORT 800.523.4534 clientsupport@ This issue updates the one dated April 2014. standardandpoors.com SALES 877.219.1247 [email protected] MEDIA Michael Privitera 212.438.6679 [email protected] S&P CAPITAL IQ 55 Water Street New York, NY 10041 Please see General Disclaimers on the last page of this report. Topics Covered by Industry Surveys Aerospace & Defense Electric Utilities Metals: Industrial Airlines Environmental & Waste Management Movies & Entertainment Alcoholic Beverages & Tobacco Financial Services: Diversified Natural Gas Distribution Apparel & Footwear: Foods & Nonalcoholic Beverages Oil & Gas: Equipment & Services Retailers & Brands Healthcare: Facilities Oil & Gas: Production & Marketing Autos & Auto Parts Healthcare: Managed Care Paper & Forest Products Banking Healthcare: Pharmaceuticals Publishing & Advertising Biotechnology Healthcare: Products & Supplies Real Estate Investment Trusts Broadcasting, Cable & Satellite Heavy Equipment & Trucks Restaurants Chemicals Homebuilding Retailing: General Communications Equipment Household Durables Retailing: Specialty Computers: Commercial Services Household Nondurables Semiconductors & Equipment Computers: Consumer Services & Industrial Machinery Supermarkets & Drugstores the Internet Insurance: Life & Health Telecommunications Computers: Hardware Insurance: Property-Casualty Thrifts & Mortgage Finance Computers: Software Investment Services Transportation: Commercial Lodging & Gaming Global Industry Surveys Airlines: Asia Foods & Beverages: Europe Pharmaceuticals: Europe Autos & Auto Parts: Europe Media: Europe Telecommunications: Asia Banking: Europe Oil & Gas: Europe Telecommunications: Europe Food Retail: Europe S&P Capital IQ Industry Surveys 55 Water Street, New York, NY 10041 CLIENT SUPPORT: 1-800-523-4534 VISIT THE S&P CAPITAL IQ WEBSITE: www.spcapitaliq.com S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC. CURRENT ENVIRONMENT Megadeals rock the industry landscape Telecommunications giants are expanding their already vast reach in the media landscape. AT&T announced on May 18, 2014 that it would buy DIRECTV, the No. 1 satellite TV operator in the US, for $48.5 billion, as cellular growth slows down. AT&T is offering DIRECTV investors $95 per share, while the cash payment will be financed by asset sales, among others. We think this deal could further reshape the television industry, which has reached saturation and is being challenged by various video platforms that are increasingly taking up amid technological disruptions and shifting consumer preferences. With the planned merger, DIRECTV will deliver video to mobile, laptops, tablets, and other screens aside from television. Concerns over decreased competition and DIRECTV’s control over the distribution of information hound the announced merger, with regulatory authorities also expected to investigate its impact on consumer prices. AT&T provides more than 11 million customers with high-speed Internet (of which almost 6 million are television subscribers), while its competitor, DIRECTV, provides digital television service to more than 20 million customers in the US. With the planned merger, AT&T will offer benefits to its approximately 100 million mobile phone customers, who will have access to DIRECTV video on their smartphones. Critics fear that the merger will result in higher costs and less competition, and they have been scrutinizing how the consolidation could affect consumer cable television, broadband Internet, and wireless phone bills. Supporters of the deal, however, are positive on the potential outcome, amid a concurrent regulatory review of another historic pending merger between Comcast Corp. and Time Warner Cable—as further discussed below. In February 2014, Comcast Corp. agreed to acquire Time Warner Cable for $45.2 billion in stock, combining the two largest cable companies in the US. Investors of Time Warner will receive 2.875 Comcast stock for each of their shares. Subject to regulatory approvals, the transaction is expected to close by the first half of 2015. The parties expect approximately $1.5 billion in operating efficiencies from the combination, which will be tax-free to Time Warner Cable shareholders. Time Warner Cable, which has cable systems in areas such as New York, Southern California, Texas, the Carolinas, Ohio, and Wisconsin, will merge its products and services with Comcast Comcast will also acquire Time Warner Cable’s nearly 11 million managed subscribers through the merger, but Comcast will divest systems that serve about three million managed subscribers. Ultimately, Time Warner Cable will add a net total of approximately eight million managed subscribers, with Comcast ending up with a total of approximately 30 million managed subscribers. Comcast and Charter reach pact on divestitures To win approval from the US Justice Department and the US Federal Communications Commission (FCC) for its planned $45 billion merger with Time Warner Cable, Comcast agreed to a three-way deal—including a divestiture of about 3.9 million video customers—with Charter Communications, Inc. According to the deal, Charter will buy out 1.4 million Comcast subscribers for $7.3 billion, and Comcast will divest another 2.5 million subscribers into a new publicly traded company to be owned by Comcast shareholders (two- thirds) and Charter (one-third). In addition, Comcast and Charter would swap approximately 1.6 million subscribers in different areas. This transaction would make Charter, which lost a bid to acquire Timer Warner Cable, the second-largest cable provider in the US. The deal is subject to conditions, including the closing of the Comcast-Time Warner Cable merger, as well as regulatory approvals. M&A remains a major theme across the industry landscape According to Broadcasting & Cable (B&C), a trade publication, the first half of 2014 witnessed nine deals valued at more than $1 billion, twice the number of megadeals in the same period in 2013. On top of these announced deals are the AT&T-DIRECTV and the Comcast-Time Warner Cable transactions. INDUSTRY SURVEYS BROADCASTING, CABLE & SATELLITE / OCTOBER 2014 1 PricewaterhouseCoopers (PwC), cited in Multichannel News in August that vigorous subsector activity early in the year should help fuel a healthy second half of 2014. The consulting firm also expects companies that are more traditional in the industry to continue seeking merger and acquisition (M&A) opportunities in nontraditional areas, such as technology companies. Other relatively smaller deals could help sustain the pace of M&A activity across the industry. Aside from its deal with Comcast, Charter may also be exploring potential consolidation opportunities with smaller cable operators, such as Cable One, Mediacom Communications, and Suddenlink Communications. Meanwhile, a recent spate of broadcasting and publishing spin-offs could provide another