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Time Warner Reports Best Global Box-Office Year, Record HBO U.S. Sub Gain

 

Courtesy of Warner Bros. Entertainment Inc. and Ratpac-Dune Entertainment LLC ‘Wonder Woman’ —

The company, which AT&T is looking to acquire for $85.4 billion, posts improved quarterly earnings.

Time Warner, the entertainment conglomerate that telecom giant AT&T is looking to acquire for $85.4 billion, on Thursday reported higher fourth-quarter earnings and touted some full-year records for key divisions.

Chairman and CEO Jeff Bewkes lauded Warner Bros. for having had “its best year ever at the global box office,” grossing more than $5 billion, led by Wonder WomanIt and Dunkirk.

He also emphasized the continued success of HBO. “Led by its great content, Home Box Office delivered its highest increase in domestic subscribers ever in 2017 and its best subscription revenue growth in over 20 years,” he said about the more than 5 million U.S. subscribers it added across its HBO and Cinemax services.

Time Warner reported adjusted operating income of $1.92 billion for the period ended on Dec. 31, or adjusted earnings of $2.66 per share, compared with $1.76 billion in the year-ago period, or $1.25 per share. Without adjustments in the latest quarter, earnings came to $1.75 per share, up from 40 cents. The Wall Street consensus forecast was for adjusted earnings of $1.44 per share.

Warner Bros.’ quarterly earnings were down, with adjusted operating income falling 12 percent to $514 million as higher revenue was more than offset by higher costs of revenue, as well as higher restructuring and severance costs. “Theatrical revenues decreased as lower home entertainment revenues related to the comparison to last year’s release of Suicide Squad were partly offset by higher television licensing revenues of theatrical product.,” the company said.

Time Warner’s Turner cable networks unit grew fourth-quarter adjusted operating income by 20 percent to $1.0 billion. Subscription revenues rose 14 percent, content and other revenue 32 percent and advertising revenue 2 percent, which was partially offset by higher expenses, including increased programming costs.

HBO’s adjusted operating income in the fourth quarter increased 12 percent to $483 million thanks to a 16 percent gain in subscription revenue, partially offset by a 7 percent decrease in content and other revenue and higher expenses, including for programming and marketing.

Time Warner won’t hold an earnings call due to its planned takeover by AT&T.

MKM Partners analyst Eric Handler in a preview report said quarterly earnings were less in focus for Wall Street right now, emphasizing that “March 19 is a more important date. On that day, the U.S. District Court for the District of Columbia will begin hearing the Department of Justice’s lawsuit to block AT&T’s proposed acquisition of Time Warner.

“One concern we have with the upcoming suit is the presiding judge Richard Leon was also overseeing the settlement between the DOJ and Comcast/NBCUniversal back in 2011,” Handler wrote. “Judge Leon expressed some concerns about the consent decree and Comcast’s willingness to abide by the terms of the settlement. However, judge Leon has also demonstrated he is not always going to side with the government, which could help level the playing field for AT&T.”

MoffettNathanson analyst Michael Nathanson on Wednesday upgraded his ratings on Time Warner’s stock to “buy” from “neutral,” citing “the belief that the risk/reward, given the standalone value of Time Warner if the deal breaks, is massively to the upside.”

He added: “To be clear, we are not claiming to have any ground-breaking insight into who will emerge victorious from the upcoming trial, which starts in the middle of March. Let’s call it 50/50. Our Time Warner upgrade is simply based on our observation that Time Warner should trade, at least, at current levels if the AT&T deal is blocked.”

Jon Feltheimer has for years been a buyer, most recently of Starz, but as Disney and AT&T bulk up and potential suitors swirl, his mini-studio could prove irresistible for a giant like Verizon or even the Murdochs.

Will the M&A brushfire raging through Hollywood soon engulf Lionsgate? Deal chatter grew louder Jan. 24 when the mini-studio’s vice chairman Michael Burns said on CNBC that he’s “very interested” in consolidation. So is the company predator or prey in 2018?

So far, Wall Street observers haven’t quite made up their minds. “His point is Lionsgate has preserved its agility — they can be a buyer and seller,” says Macquarie analyst Amy Yong. Still, a large pool of potential suitors circle, led by Verizon, Amazon and Comcast, plus a likely combined version of CBS and Viacom and even the Murdochs’ pared-down 21st Century Fox, looking to rebuild after selling most of itself to The Walt Disney Co.

Certainly, Disney’s potential $52.4 billion deal for the Fox assets and AT&T’s $85.4 billion bid for Time Warner are weighing on Lionsgate CEO Jon Feltheimer as scale becomes a priority for traditional media players to compete with such giants as Amazon, Netflix and Apple. “It almost makes you realize that urgency has dawned on them,” notes CFRA Research analyst Tuna Amobi.

But this isn’t the first time Lionsgate has been touted as a takeover target, only to be left at the altar. In 2017, toy giant Hasbro looked at buying Lionsgate, but the companies couldn’t agree on a price. That left Feltheimer, 66, looking longingly at the landscape, say sources. Since taking over the Vancouver- and Santa Monica-based company in 2000, he has cobbled together a diversified film and TV studio, spending more than $5 billion on acquisitions — $4.4 billion for Starz, $413 million for Summit Entertainment, $220 million for Artisan, $50 million for Trimark and $27 million for Debmar-Mercury. The studio even made a recent play for The Weinstein Co. assets (though it’s not said to be in the final mix).

But now Feltheimer and media mogul John Malone, whose companies own a stake in Lionsgate, appear more receptive to pulling the trigger on an outright sale. Malone already sold shares of the studio’s surging stock in late December. “I have always thought that Lionsgate is a fund sweeping up loose, smaller film and TV assets that would eventually find it impossible to find enough targets to grow significantly larger via this strategy — at which time it would itself be willingly acquired,” says Hal Vogel, former entertainment industry analyst and now CEO of Vogel Capital Management. “They might have now reached that point.”

And a recent hot streak in film and TV could grease the wheels. As major studios have focused on big-budget franchise tentpoles, Lionsgate, which concluded its Hunger Games series in 2015, has rebounded with several midbudget hits, including La La Land ($446 million worldwide on a $30 million budget), the Julia Roberts drama Wonder ($265 million on a $20 million budget) and the John Wick movies.

Lionsgate’s TV arm, led by chairman Kevin Beggs, has seen scripted programming revenue skyrocket in recent years on the strength of the shows it produces, including Orange Is the New BlackNashvilleGreenleaf and Dear White People.

Such a prolific output could be appealing to Shari Redstone, whose Viacom networks have struggled to create hits, or to the Murdochs, who are selling their 20th TV studio to Disney. In addition, Starz, which Lionsgate picked up in December 2016, gave the company a premium cable channel with 25 million paid subscribers and a 1 million-sub streaming service.

With Netflix and Hulu only getting bigger in the streaming space, and Apple and Facebook muscling into TV and film, the market now sees Lionsgate as a hot takeout candidate. “Also, do not forget that John Malone is a key player here,” notes Vogel, “and he may have some financial engineering ideas in mind.”

Besides sitting in Feltheimer’s boardroom, Malone, 76, holds voting control of Liberty Media and Liberty Global and has big stakes in Discovery Communications as well as Lionsgate. He could move to consolidate his TV holdings in the face of fast-growing competition from the streamers. “You really need scale and reach today as well as production capacity,” says Piper Jaffray analyst Stan Meyers. “If they [Lionsgate] don’t get acquired, their natural move is to grow themselves.”

Lionsgate, with a current market cap of about $7 billion, would still be a relatively small content play for companies like Verizon, Comcast or Amazon. Which could make it even more attractive. As Burns said on CNBC, “We’re a pint-sized bite for some of these giant market cap companies … so we would talk to anybody at any time and see if a deal makes sense.”

 

 


This story first appeared in the Jan. 31 issue of The Hollywood Reporter magazine.


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