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Hollywood Is About To Be Reshaped By Giants For A New World Order

FORBES-Hollywood’s success has always depended on crowds: crowded theaters, crowded theme parks, crowded concert venues. It has always been its greatest strength, until now. The coronavirus preys on live audiences, and so to thwart the virus the world has eliminated the crowds.

Some entertainment companies will substantially thrive in this environment, some will be merely bruised, others will be seriously wounded (at least in the short-term), and some will be on life support.  How each reacts over the next 18 months will determine Hollywood’s new world order.

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An Amazon Prime delivery truck drives through the Port of Los Angeles and Long Beach April 22, 2020 … [+] AFP VIA GETTY IMAGES

Tier 1 companies will THRIVE in this environment. They are the ones that relied very little on the crowd, and instead, blossom in an environment in which audiences stay at home. These include Amazon AMZN  and Netflix NFLX .

Tier 2 includes companies that are merely BRUISED. They are not substantially hurt by the disappearing crowds, but they are damaged by the shutdown in the economy. Apple AAPL  falls into this group 

Tier 3 is comprised of WOUNDED companies. This tier includes organizations that have multiple revenue sources dependent on live audiences, though they are lifted by other businesses. This includes large media companies like Disney DIS  and Comcast CMCSA , owner of NBCUniversal. They are hurt by the sudden loss of revenue from theaters and theme parks, but still have inflows from broadcast, cable and current and future streaming possibilities.

Tier 4 includes those companies that may on be on LIFE SUPPORT by the end of 2020. They are more narrowly focused. This includes theater chains like AMC and narrowly focused studios like Lionsgate. 

Companies in higher tiers will seek to buy those in lower tiers, thus to enrich their arsenal of distribution and content in hopes that as conditions improve the value of the assets will rise. This will reshape the industry for decades. 

As a Tier 1 company, Amazon is in an enviable position to acquire. Its market cap as of April 24, 2020 is roughly $1.2 trillion and its revenue is expected to soar because its fundamental business, selling and delivering packages and entertainment to homes, fits today’s circumstance. Its stock price remains near its 52-week high. Amazon could pick up added content by purchasing a studio or expanding distribution by buying a theater chain. In comparison, Disney’s market cap is $183 billion and AMC’s market cap is a mere $318 million.

Netflix was built for this environment. It is in a perfect position to consider buying companies on life support. It gained 15.8 million subscribers in the first quarter alone. At an average monthly revenue per paying membership of $10.82 (according to its last annual report), Netflix just added $2 billion over the next 12 months on that alone, and membership is likely to grow further into the year. This may help to pay down debt that Netflix used to build content, to buy fresh content, or to make an acquisition like a theater chain. Its stock price is also near its 52-week high.

I put Apple in Tier 2 because it is bruised by the business shutdown which disrupted its supply chain in China and lowered demand for its products. But its sheer size dwarfs many contenders. As of April 24, 2020, Apple’s market cap was $1.24 trillion and it had a reported $207 billion of cash on hand at the beginning of the year. Its stock price is only down by about 14% from its 52-week high, giving it strength to pursue acquisitions. 

Importantly, Apple has played in the entertainment space for years and recently made a more robust effort to deliver high quality, original content via its new steaming service, Apple TV+. It made a splash with star power by developing shows featuring Jennifer Aniston and Oprah Winfrey, but its depth of content is weak compared to other streaming services. Given its financial strength, it is in a position to buy a Tier 3 or 4 company in order to gain the content and distribution it lacks. For many years Apple has been rumored to want Disney, and those rumors have risen again. This might be the time to strike, particularly since Disney’s stock has fallen considerably. 

Disney and NBCUniversal (owned by Comcast) are wounded due to their reliance on theater chains, theme parks, and declining advertising revenue. Their stock prices are off their 52-week highs by roughly 34% and 22%, respectively. Will they become hunters or the hunted? My guess is both, though there might be very little either can gain from acquiring a smaller company. When Disney bought the assets of 20th Century Fox, for example, it picked up prime distribution channels such as a greater share of Hulu along with content that included pieces of the Star Wars and Marvel franchises. It was the perfect fit. It is unclear how Disney or NBCUniversal would greatly benefit from acquiring smaller studios. 

AT&T T , the parent company of Warner Media, has a relatively healthy wireless business but has taken a hit in its entertainment segments. But with a market cap of $213 billion, it may prove too big to swallow, and would likely be a hunter. It could add to its portfolio of current brands that already include Warner Bros. film and television studios, HBO, soon to be launched HBO Max, Turner, and DC Comics. 

Which companies are targets? Almost every one of them, but Lionsgate for sure, and it has been rumored to be an acquisition target for years. Lionsgate’s stock price is down over 50% from its 52-week high. It is small enough to be swallowed whole while providing a library worth owning, such as The Hunger Games, Twilight, and La La Land, along with its most profitable unit, Starz. MGM is another possibility. It has one of the deepest libraries of classic films like Gone with the Wind and Rocky. ViacomCBS, which is controlled by National Amusements, has seen its stock price sink as well, and it has an abundance of very tasty brands in both the content and distribution including CBS Entertainment, Paramount Pictures, Nickelodeon, MTV, and Comedy Central. Those would be an outstanding addition to several portfolios if it can be pried from the fists of Shari Redstone, founder. Its market cap on April 24 was about $9.7 billion. 

As previously indicated, theater chains may be prime targets because they are at risk of catastrophic failure as I outlined in a previous article. Studios might buy them in order to safeguard their own share of the box office and to implement simultaneous theatrical and streaming releases, a long-sought aim of studios. The stock price of the largest chain, AMC Theaters, is off by 81% from its 52-week high. Others up for grabs might be Regal Cinemas (owned by Cineworld) and Cinemark, both of which have stock off their 52-week highs. 

And again, Disney and Comcast might even be targets as the industry descends into chaos and even bigger giants need to be fed. 

We cannot count out foreign investors to buy or sell. The Japanese conglomerate Sony Corporation could decide to rid itself of Sony Pictures which owns the rights to Spider-Man, Men in Black and Jumanji. That has been rumored in the past because the film unit isn’t the most reliable. Or it may double down and buy more content and distribution. The Chinese conglomerate, Wanda Group, owns a string of theaters and entertainment venues in China, Australia and New Zealand along with an ownership stake in AMC Theaters. It may double down, but I bet it is more likely to cash out of its AMC investment because it is overexposed in this segment. A wild card might be Alibaba BABA , the mammoth Chinese company specializing in e-commerce, retail, internet, and technology. Its online sales are often greater than that of Amazon, Walmart WMT , and eBay combined, and it is likely to weather the current lockdown. It has dabbled in the entertainment space and the falling stock prices of the U.S. entertainment companies may be too enticing to pass up. 

This analysis is merely speculation and there are various legal, business, and consumer issues that would need to be addressed. Companies will also move in and out of each tier as conditions change. But the next eighteen months will be telling. Hollywood will either keep its traditional configuration as companies rise slowly and painfully from the ashes of the coronavirus, or well-healed giants will seize an opportunity and create a new world order. There will never be a better time to strike.

We will witness it all: the drama, excitement, suspense, tragic failures, and amazing victories. Stay-tuned…

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