In a report issued Wednesday, Stifel analysts Kevin Lee Hon Siong and Benjamin Mogil explained the downgrade: Given their thoughts on “the evolution of the MVPD environment,” they expect the soon-to-be-spun-off MSG Networks to be “particularly vulnerable with peak margins likely behind us and likely declining aggregate EBITDA going forward.”
The Spin Element
They highlighted, however, that concerns surrounding the spin seem somewhat overblown to them. Moreover, they “view the MVPD environment as one of cord shaving from the full all genre MVPD package.”Expectations For MSG Network
Still, they expect MSGN to show high vulnerability in this environment as it tackles “the headwinds both from a share of the market which has no interest in sports, and then on top of that the share of the addressable market because of competition (three RSNs in the market).”The value proposition, they explained, is further hurt by the absence of live sports that take place all around the year.
The Bottom Line
So, while the analysts think these dynamics could possibly trigger M&A between SNY and MSGN, they believe the nature of the merger would be defensive rather than offensive, thus limiting valuation. They also pointed out that this is just a hypothesis, as they have no knowledge of merger discussions going on.
Additionally, as mentioned above, given affiliate renewals starting in the second half of 2017, Stifel experts believe margins hit a peak in 2015. Going forward, they envision margin compression and, probably, declining aggregate EBITDA.
Disclosure: Javier Hasse holds no stakes in any of the securities mentioned.
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