February 15, 2012 / 5:05 PM / 8 years ago

New TV shows make it an ideal time for AMC sale

(Reuters) - Now could be the perfect time for the sale of AMC Networks, one of the few pure-play cable television networks left in the United States.

AMC, the biggest and most recognizable of the four cable networks in the company’s stable, is coming off Sunday’s mid-season premiere of the zombie series “The Walking Dead,” which pulled in 8.1 million total viewers, setting basic cable ratings records in the critical 18-49 and 25-54 year old demographics.

Critical darling “Mad Men” returns to AMC for a highly anticipated fifth season on March 25. A week later, on April Fool’s Day, the second season of “The Killing” crime drama premieres, and in the summer, Emmy favorite “Breaking Bad” returns.

With such ratings momentum behind AMC Networks - which also houses cable channels IFC, WE and Sundance Channel - analysts suggest it is now an ideal time for the company to canvass around for buyers.

“AMC is in the process of reaching a ratings peak,” said BTIG analyst Richard Greenfield, who put a potential acquisition of the company as one of his top 12 things to look out for in 2012. “Right now everything is working for them, and usually you want to sell when everything is working.”

A representative for AMC Networks, which has a market capitalization of just over $3 billion, declined to comment.

According to Miller Tabak analyst David Joyce, investors have already baked a takeover premium into AMC’s stock, which has risen 45 percent since an August 2011 low.

AMC currently trades at more than 12 times Joyce’s estimated 2012 operating income of $432 million, despite being the smallest company in its peer group.

By comparison, Joyce has Discovery Communications trading at 10.8 times and Scripps Networks Interactive trading at 7.7 times his operating income estimates for those companies this year.

NO CURRENT DISCUSSIONS

AMC was spun out from Cablevision System Corp as an independent company last summer. It opened trading on July 1 at $39.75. Its shares were trading at $42.87 on the Nasdaq at midday on Wednesday.

Joyce also noted that Cablevision’s Dolan family controls AMC Networks with more than 70 percent of the voting stock, meaning that no deal can be consummated without their blessing.

A Cablevision representative referred calls for comment to AMC Networks.

Sources close to AMC and Cablevision say that there are no current discussions about a potential acquisition of AMC taking place.

They further added that if the Dolan family was looking to sell assets to raise cash, they would most likely sell Cablevision which has long been eyed by Time Warner Cable and Comcast Corp, and not AMC Networks or its Madison Square Garden unit.

Still, cable networks are highly valued by both media companies and their investors because the revenue stream from carriage fees paid by cable operators and satellite television service providers serve as a hedge during an economic downturn or ratings dip that could adversely impact advertising sales.

CABLE NETWORK VALUE

For years, cable networks have driven growth at media conglomerates, who have made no secret about their desire to further grow their cable network portfolios through acquisitions.

Shows like “The Walking Dead” and “Mad Men” create a ratings bonanza for AMC, leading analysts such as Barclays Capital’s Anthony DiClemente to predict the company will show advertising growth of around 18 percent when it reports fourth-quarter earnings on March 15.

By comparison, Viacom two weeks ago reported a 3 percent drop in advertising revenue for its fiscal first quarter, leading to a lower quarterly profit for the home of MTV, Comedy Central and Nickelodeon.

BTIG’s Greenfield speculated that if AMC Networks did pursue a sale, it could potentially fetch more than $50 per share, which would be about 16 percent over its current price.

In addition to cable networks’ attractive business model, another reason media conglomerates are interested in acquiring more channels is because escalating programming costs have led cable distributors to renew talk of allowing customers to subscribe to channels on an individual, or a la carte, basis.

Right now, networks are licensed to distributors in packages, or bundles, and scale will give network owners leverage over distributors to keep that ecosystem intact. The more networks a company has to bundle together, the harder it will be for distributors to disaggregate them.

Taken together, these factors combined with the ratings momentum of AMC proper and the upside potential of the other networks in its stable, led Greenfield to conclude that, “Now is the right time to be selling cable networks.”

Reporting By Peter Lauria; Editing by Tim Dobbyn

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