AMC Networks said its $1 billion purchase of Liberty Global’s content arm, Chellomedia, further solidifies its commitment to international expansion.
The parent of cable channels AMC, IFC, WE tv and Sundance Channel, AMC Networks agreed to pay 750 million euros (about $1.035 billion) for Chellomedia, which has 48 movie, sports and entertainment channels that reach about 390 million viewers in 138 countries. The programmer also has joint ventures with various groups for another 20 channels.
The acquisition, expected to close in the first quarter of 2014, will likely significantly increase AMC Networks’ global presence, as well as distribution of its hit series such as AMC’s The Walking Dead.
In a research note, Morgan Stanley media analyst Ben Swinburne wrote that currently, AMC Networks distributes its shows internationally through third parties — for example, The Walking Dead is distributed outside of the U.S. by Fox. The Chellomedia acquisition could change that dynamic.
GLOBAL INVASION
“To the extent AMC owns a show outright, or can show it is maximizing the value of a show to its partners and participants, AMC can distribute shows on the owned Chello platforms aimed at building long-term asset value,” Swinburne wrote.
Although AMC Networks is happy with its current Fox relationship, the deal solidifies the company’s desire to own its own programming, CEO Josh Sapan told analysts on a conference call discussing the transaction.
“We do think as we examine what to do with content over the long term, we will increase the bias we’ve had to own, which gives us the option to put the content where we choose,” Sapan said on the call. “This will have the effect of increasing our desire and preference to own, it will give us the option to determine the ultimate fate of future content.”
Some analysts worry that Chellomedia’s slowing growth — revenue was down 3.4% in 2012, to $514 million — could mean greater financial risk for AMC Networks. And the deal removes, at least temporarily, one of the bigger catalysts for AMC stock — the possibility it will be acquired.
Investors appeared to agree, driving AMC Networks shares down 1% (46 cents) to $69.90 per share after the deal was announced Oct. 28.
BTIG Research media analyst Rich Greenfield downgraded AMC to “neutral” after the deal, mainly because it at least delays a possible sale of the company.
In a research note issued earlier this year, Greenfield said he believed AMC Networks would be sold in 2013. And though he acknowledged the long-term benefit of the Chellomedia transaction, “not to mention making AMC [Networks] more attractive to buyers down the road if it can execute well on the acquisition and its new slate of domestic original programming,” Greenfield nevertheless slapped a neutral rating on the stock.
Chellomedia is a mix of sports, news, entertainment and movie channels with names like Odisseia (a documentary channel) and Canal Cocina (a Spanish cooking network). In addition, the programmer has joint ventures with CBS, A+E Networks and other networks for channels such as CBS Action, CBS Drama and Bio.
As part of the deal, Liberty will keep its Dutch premium channels — Film 1 and Sport 1.
DEAL FUEL FOR LIBERTY
The deal pumps an additional $1 billion into Liberty Global’s coffers, which it could use for share buybacks or other deals. The international cable giant already owns a 28% interest in Dutch cable company Ziggo and has expressed interest in owning more.
In addition, Belgian cable operator Telenet — of which LGI already owns almost 60% — could also be a target.
Either way, Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said the deal is a good one for Liberty Global.
“Selling your content assets at roughly 10 times EBITDA to buy cable assets and under 8 times — with synergies — is an intelligent move,” Wlodarczak said.
In a statement, Liberty Global CEO Mike Fries said the deal “simplifies our business and allows us to focus on our core markets and more strategic programming opportunities.”
TAKEAWAY
AMC Networks’ $1 billion purchase of Chellomedia gives the programmer a global outlet for its content but reduces the likelihood it will be sold.
Hello Chello
Chellomedia, Liberty Global’s content arm acquired by AMC Networks for $1 billion, at a glance:
Networks: Owns 48 networks in 14 countries in Latin America, Europe and Central Europe. Partners with CBS and A+E Networks on 20 channels including CBS Action, CBS Drama and Bio.
Combined Int’l Revenue: ISI Group estimates international revenue at AMC Networks could reach $550 million in 2014, as a result of the Chellomedia acquisition.
Combined Int’l Operating Cash Flow: ISI estimated international OCF at more than $110 million.
Source: Company reports, analysts estimates
