Disney Merger With Fox: What Does It Mean?

I have been asked several times today by people who know that I have covered the Disney – Fox merger about what it means for the average person with a cable, satellite, or streaming services package subscription. The deal has also created a significant amount of understandable confusion regarding what Disney will end up controlling, and what assets from Fox are not part of the transaction.

The Disney acquisition of certain assets of the Fox media and entertainment empire has been in the works for several months. The driving forces behind both sides making this deal are different, but the transaction obviously helps both sides or else it would not have been completed.

In an earlier piece on this merger, I explained how Disney is looking to add content for the launch of their streaming app service to rival Netflix and Amazon, called “Disney+”. This acquisition of the 21st Century Fox assets, FX Network, National Geographic Network, and the Fox stake in the Hulu streaming service provides Disney with loads of content ownership.

Fox was looking to streamline their operations and cut themselves loose from the studio holdings that have high overhead costs associated with them. The move away from some of their more ancillary cable television holdings would allow them to focus on their core offerings of news, business news, and sports. These areas have higher profitability from the advertising sales perspective.

Many people are confused about this merger and think that Disney, which already owns ABC and ESPN, will now own Fox networks like their flagship channel, Fox News, Fox Business, and FS1. Those same people are curious as to how that would pass through the antitrust regulations of the federal government.
However, that is not the case. Fox will maintain ownership of their networks here in the U.S. and abroad as well as Fox News, Fox Business, and Fox Sports (FS1 and FS2 networks) in the newly created entity called Fox Corporation.

Disney will gain the outlying assets that I detailed earlier and will begin to seek what their CEO, Bob Iger, described in the press release as “cost synergies”; which translates into layoffs of people that they deem as redundant in the newly merged entities. Disney will also undoubtably look to expand upon the Marvel movies, and maximize merchandising opportunities by creating stand-alone movies on specific characters that were once the property of Fox.

Fox will look to expand the development of programming for their mainstream Fox network as well as gaining new rights agreements for live sports content on the Fox Sports networks. They will no longer be able to produce TV programs in their own studio which will impact their overall production costs, but they will save the overhead of maintaining 21st Century Fox and the Fox TV studio areas.

The Fox networks will be able to purchase productions made in the Disney/21st Century studios. Their sports division is heavily invested in soccer with a World Cup coming up in three years, and will continue to invest in soccer and other sports content namely the NFL package.

The merger is similar to the AT&T / Time Warner consolidation that I covered in multiple pieces over the course of that time frame through the process. It remains to be seen whether content will become limited by Disney to the other cable or satellite providers. I think the streaming content will certainly be limited, but Disney does not have a “horse in the race” like AT&T does with DirecTV on the distribution side of the business.

The deal was certainly a big win for Disney prior to the launch of their new streaming service. The media landscape has condensed and the content that is so valuable is landing in the hands of the few. The average consumer should prepare to pay a subscription fee for the Disney streaming service in addition to any other memberships they currently maintain.

The capabilities of Disney to produce outstanding content is well established, the acquisition today is going to make them even more formidable in the years to follow.

(Some background courtesy of CNN, CNBC, and The Financial Times)

Amazon Grocery Store Plan: Will It Help Or Hurt Retail?

Amazon recently announced a plan to expand into the retail grocery channel beyond their current presence resulting from their acquisition of Whole Foods. Many people know that the internet shopping giant bought Whole Foods for about $14 billion in June 2017, which provided them with a foothold into the grocery business.

The image of Whole Foods from the consumer standpoint is that it is an expensive, almost elitist place to shop for groceries that many in the general public feel they can get a better value at a mainstream grocery chain. Amazon attempted to alter this consumer sentiment around Whole Foods, but when those were unsuccessful, this could have at least contributed to their decision to enter into the retail grocery business in a way that will reach a wider gamut of consumer demographics.

The plan is to open stores in targeted U.S. markets with just a few outlets in each market to test out the concept. The first Amazon grocery store of this type will open in Los Angeles as soon as the end of 2019, if everything goes as planned.

Then, the concept would be rolled out to ten or twelve strategic geographic areas throughout the country. The new grocery brand would sell less expensive products than Whole Foods, would carry a large selection of Amazon’s private label brands, and would carry national brands that are precluded from the Whole Foods shelves based on the food product standards set by that chain.

The decision to carry those national brands would open up a pathway for Amazon to benefit from the huge amounts of money that those companies spend for shelf space and advertising at Point of Purchase type of campaigns. The new grocery brand would also provide Amazon with a way to enroll more people in Prime memberships with some sort of promotional incentive either at the point of enrollment, or for future shopping trips.

Currently, Amazon provides a 10% discount for Prime members when they shop at Whole Foods store locations. This will serve as a model for the new grocery brand in order to incentivize memberships to their Prime service. Amazon will also be able to cross-promote more items from their website during an in-store shopping experience.

Furthermore, Amazon announced in the plans for this new grocery brand that they will have a service that allows shoppers to select the items on the website and set it up for pick-up in the store location, creating what Amazon believes will be the new way that the consumer purchases groceries.

The decision will have a gigantic ripple effect on the grocery industry. The established retail grocery chains are going to have to lower their overhead costs prior to Amazon entering their industry space. That could translate into job cutbacks, layoffs, or restructuring the number of full-time workers or hours that are given out by the mainstream grocery players. The one controllable aspect of a low profit margin business such as the grocery channel is the labor cost.

The other significant component to this news by Amazon is that they are looking to lease spaces that also allow them to sell beauty and personal care products. Those types of products generally have a higher profit margin, and Amazon has their own private label brands which allow for excellent cost control.

My past writing on the food industry and the retail shopping changes that have taken place over the years have centered more on certain chains going bankrupt or discontinuing a product due to a recall or sluggish sales. This situation is rare: a new player actually joining the brick and mortar segment of the retail landscape.

The timing for Amazon is advantageous too because of the amount of large retail spaces that are vacant now with the end of Sears, Toys R Us, and a slew of regional grocery chains. The speculation is that Amazon could lease some of the former Sears locations for this new grocery store concept.

In the Northeast and Mid-Atlantic states, the amount of retail space left from the demise of regional grocery chains such as A&P and Pathmark, create a huge opportunity for Amazon to get an advantageous lease term. Then, they can reach a huge variety of demographics in that part of the country which is so densely populated.

The industry data on the grocery business in America is compelling and certainly has been on the radar screen for Amazon for a while now. The U.S. grocery business is estimated at $830 billion and between Whole Foods and Amazon’s other online business they have a 4% market share. Wal Mart has a 21% market share of the grocery business, and Amazon is looking to grow their share and get in front of mainstream consumers with their private label brands.

The competition will face some very difficult pricing pressures from Amazon entering this part of the industry, should the concept launch be successful. There are many people both in the consumer public and on Wall Street that believe that the competition will be good for the grocery industry.

Amazon entering that mainstream grocery retail space will force other grocery chains to innovate and provide new and better value propositions to their customers. The consumer stands to benefit from that standpoint.

The success of this venture will be evaluated by Amazon in the test markets that they have announced: LA, Chicago, Philadelphia, and others. The full rollout of a new grocery chain from Amazon would help solve for some of the unoccupied retail space in shopping centers around the country. It would bring brick and mortar business back within the context of a changing consumer landscape.

The outcome of this new venture is uncertain, but one thing is clear: all eyes are again on Amazon to see if they can put their stamp on a new way for consumers to shop for groceries.

(Some background information courtesy of Forbes and The Wall Street Journal)

Follow Up: Sears Begins Liquidation Process

The seemingly impending demise of the once dominant American retailer, Sears, took another significant step in that direction on Tuesday. The news media is filled with reports that Sears has rejected a proposal from CEO Eddie Lampert who was attempting to put together an investment proposal through his private equity company to salvage Sears.

The Sears Board of Directors informed the judge overseeing their bankruptcy case that they intend to move forward with the liquidation process. This is the final step taken before a company dissolves, and Sears will now take the necessary steps of liquidating inventory, shutting down stores, and laying off employees.

It is a very sad day for the American retail business landscape because Sears was a huge player for over 100 years (126 years to be exact) and the end of that company and some of the brands associated with it, is an end of an era in retail. The company consolidated with Kmart about 14 years ago and that proved to be one of the key factors in the demise of Sears.

In earlier coverage of this story, I shared how Sears was a store that my parents shopped in frequently for tools and appliances. It is unfortunate that many people thought of Sears for those products, and not for anything more. It also did not help that Sears did not connect with consumers that were not my parents age or older, they lost that next generation of families as well as their children who are now young adults.

The aggressive marketing of Wal-Mart, Target, and Amazon siphoned those customers away from Sears and Kmart ; and neither one could recover from that setback. My local area is a good representation of that effect, the Sears has been there for decades and the Target has been there for less than twenty years. The Target location is consistently crowded, jammed. The Sears has been so empty the last five years that I would drive by and wonder if it was closed.

I read a post on social media earlier that was effectively stating that Sears will cease to exist after 116 years, which is longer than Wal-Mart, Target, and Amazon have been in business combined. The “Amazon effect” is hurting several brick and mortar retailers that have failed to innovate. Sears missed the window to innovate their business model.

Sears should have built up their website and used their physical stores as essentially distribution centers where the customer could come and pick up items, especially expensive items that they would not want shipped. Sears owned so much of the real estate that their physical store locations are located upon that they controlled so much of the costs of not having to lease or rent space from a commercial real estate landlord, that they could have reaped so many benefits from the order online, pick up in store scenario. They did not capitalize on that in a forward-thinking way, by the time they went that direction it was already too late to recover the business.

However, even Jeff Bezos, the CEO of Amazon conceded recently that one day he expects even Amazon to perish, to cease operations. That seems unthinkable to so many, myself included, but his full quote explains further that essentially everything has a shelf life, and at some point Amazon will outlive its usefulness.

Sears managed to cobble together a pretty good run when all things are considered in the retail industry space today. It was such a huge part of Americana, the trips I remember as a kid to Sears to buy a TV, a dishwasher, or going with my Dad to buy tools for a home improvement job. I also recall before I left for college my Mom taking me there to get clothes and lamps to get my dorm room all set up.

Those memories will be all I have as well as others will have left of Sears, it will join the list of retailers and in a similar fashion to Toys R Us, who were crushed by a debt load that was unsustainable. In a similar fashion, an ex-CEO of Toys R Us attempted to save the chain from going under, and was rebuffed by the board and the court in charge of the proceedings.

Eddie Lampert put together a $4.4 billion package to try to save Sears, or at least part of it. The number was deemed to be not adequate enough to effectively salvage the company for a sustained period of time. Lampert will receive criticism for his handling of the last years of the Sears brand. His involvement with a private equity firm has already drawn scrutiny from industry analysts. His next venture remains to be seen, but this loss is going to follow him around for a long time.

My own personal last visit to my local Sears store, which is slated to close very soon, was in mid-November. I went to get work clothes and active wear at greatly reduced discounts. The store was a wreck, and it was sad walking through empty corridors and empty areas of this huge store. The memories came flooding back from my childhood one last time, of days that were easier, simpler times. That is where those memories will stay, like Sears did, frozen in time. A piece of America is gone and is never coming back.

Healthcare Mergers: The Impact On Patients

CVS and Aetna are just the latest in a list of healthcare M&A activity that is on the deck for the industry. The changing tide of the industry is alarming to some groups of people who see a future of less competition and patient choice. That can be a significant “red flag” for regulators, though so far it does not seem to have derailed any of these acquisitions from moving steadily forward.

The mega-merger that was long rumored between Cigna and Express Scripts was approved on Monday by the Department of Justice. This deal is set to pave the way for the CVS – Aetna proposed merger valued at $69 billion. The reports out of the financial media outlets are that CVS and Aetna would have to divest some holdings to satisfy anti-trust regulations.

Cigna – Express Scripts consolidating creates a combination of a major health insurer with a Pharmacy Benefit Manager (PBM) which they contend will make an environment to decrease costs for the patient. However, some feel that it will have the reverse effect.

Some feel that this deal and the corresponding proposed combination of CVS-Aetna will limit patient choice and force consumers into formularies where they will be faced with having to pay more for prescription drugs in the future.

This activity all comes amid the backdrop of Amazon making a concerted and deliberate push into the healthcare space with their partnership with Berkshire Hathaway and JP Morgan Chase to attempt to reinvent employer provided healthcare provisions. In a subsequent transaction, Amazon purchased the burgeoning mail order prescription provider, PillPack, for $1 billion over the summer.

Furthermore, Amazon announced a joint venture with Xealth which provides the internet shopping giant with a foothold into the healthcare services delivery system. The rest of the industry took notice, and in response Aetna entered into negotiations with CVS, Cigna began talking about synergies with Express Scripts, and Walgreens made certain deals of their own with national insurance carriers on a regional basis such as United Healthcare and Blue Cross & Blue Shield.

In my prior work in the M&A space, I have covered the premise of horizontal and vertical mergers. The vertical merger is one where the two companies may be in the same general industry space, but not in direct competition with one another. A good example of this type of merger was the AT&T – Time Warner deal. They both have business holdings in telecommunications and in television specifically (AT&T owns DirecTV and Time Warner owns multiple cable TV outlets) but they were viewed by the government as vertical in nature.

The example of a horizontal merger would be when Walgreens attempted to consolidate and merge with Rite Aid. I covered that with a series of articles and eventually, the federal regulators struck down that merger because it was between two businesses directly competing in the same industry space: retail drug store. The merger was seen, if approved, to have the effect of limiting consumer choice and potentially increasing costs to the consumer. It would have limited consumer choice in drug stores and the consolidation could have closed locations that were once part of Rite Aid, forcing people in rural areas to travel further to get to a pharmacy.

The CVS – Aetna deal hinges on the sale of Medicare Part D related plans that would most certainly need to be sold off to pass the regulatory standards in place. Some consumers feel that the deal would unfairly limit the choice of pharmacies because if they hold Aetna employer-based benefit plans, they would be funneled to CVS to fill their prescriptions. This could also be seen as giving CVS “a captive” group of consumers.

The Cigna – Express Scripts deal should help them compete against the Amazon healthcare joint venture that will continue to shape the landscape of the industry in the future. The potential impact of all of this M&A activity on the consumer has yet to be determined. Please check with your healthcare provider to make sure that you are aware of any changes this may have on your individual prescription plan coverage.

(Some background information courtesy of Bloomberg News, The Wall Street Journal, CNBC, and Reuters)

Merger News: P&G Gains Approval for Merck Germany

The formal merger announcement came as no surprise that Procter and Gamble received approval from the E.U. regulatory boards to obtain the Consumer Health business unit of Merck Germany. The acquisition has been in the works and approval was being rumored for about a month leading up to the official approval.

This is the largest acquisition for Procter & Gamble (P&G) since they obtained personal care giant, Gillette, in 2005. The consolidation of this business unit from Merck Germany will expand the reach of P&G into new markets in the European Union, Latin America, and Asia.

In accordance with this announcement today, P&G also formalized the end of their strategic joint venture with TEVA Pharmaceuticals in which they had worked for a number of years together on synergies in the Over The Counter (OTC) products space.
The growth of the OTC area is a core strategic direction for P&G within that industry. This move will allow them to grow that business and expand their existing product lines as well as determining new potential growth pathways within the OTC area.

Merck Germany is not affiliated with the U.S. based pharmaceutical company of the same name, it was essentially spun-off several years ago. The company is a big player in the industry with 900 products distributed in 44 countries. The estimates are for 3,000 employees to transfer from Merck Germany to become P&G employees should the merger gain approval.

The financial experts and Wall Street investment types view this move in a positive way for the retail channels it will impact, but have a more cautious view overall because the merged unit does not have synergy. The deal is not expected to close until the summer of 2019. The ramifications for monopolies in certain industry segments will most certainly be scrutinized by regulators in the European Union.

The potential impact on pricing for consumers on personal care products will be an area of significant concern for the anti-trust regulatory boards in the E.U. relative to this proposed merger. The combined entity will have a larger presence in muscle, joint, and back pain relief which will be a certain area of growth within the demographics of a population that is living longer overall.

Some analysts have speculated that P&G could use the technologies acquired in this transaction to bolster their existing product lines in the U.S. and North America. This is to meet increasingly sophisticated consumer demand for products that deliver more efficacy with no major side effects.

The proposal between P&G and Merck Germany also triggered the news that P&G will end their joint partnership with TEVA Pharmaceuticals. The statement from P&G called the partnership “highly successful” and it did last for seven years.

However, the partnership has always been focused on growing OTC business areas outside of the United States. The bid for Merck Germany creates a redundancy in this regard. The other official statement reads that the goals of the two companies are “no longer closely aligned”. Each side will retain their brands and will look to recalibrate their marketing strategies around those brands on an individual basis.

The merger will have more impact in other regions of the world, especially in Europe and Asia, but the North American consumer impact will be most noticeable in the potential for new or enhanced products in the respiratory, sleep, and cough/cold relief.

The other potential impact of this merger in the U.S. is the potential response by the competitors of P&G in the consumer health industry. How will Unilever, Colgate, or Johnson & Johnson respond to this merger? Pfizer is already moving through the early stages of a complete reorganization to be able to compete more effectively in a few key strategic business areas.

Then, the next area to watch is for the new competitors such as Amazon and Kroger and how they will respond to this move by P&G in the coming months. It is essentially like a big domino that could trigger a whole set of other M&A activity within consumer health.

The potential for P&G to grow in geographic areas where they have limited to no presence currently is an intriguing aspect of this proposed deal. The regulatory decision in the E.U. bears watching and the response by the competitors will shape consumer health/personal care products for the foreseeable future.

(Some background information and statistical info courtesy of Forbes, www.bizjournals.com, Pharmacy Times, and CNBC)

Disconnected: Rite Aid and Albertsons Merger Update

The proposed merger between Rite Aid and Albertsons faces a key crossroads type moment on Thursday, August 9th, when a pivotal vote will be made by the Rite Aid shareholders. The proposal on the table would give the shareholders of Rite Aid a reported 30% stake in the new company.

The prior piece on this merger focused on the transition of the pharmacy / drug store channel and the healthcare landscape. This landscape has adjusted further with the entry of Amazon into healthcare with their acquisition of Pillpack and their partnership with Xealth.

A report in Forbes describes a scenario where the Albertsons merger could be done just strictly out of fear of the impact of Amazon’s entry into the marketplace. The merger proposal is for $24 billion to bring the two companies together to compete against CVS (who is in the process of combining with Aetna), Walgreens (a giant company with Alliance Boots growing their presence in Europe), and Amazon.

A report by Bloomberg states that Rite Aid is set to announce a 2019 net loss of $125 million to $170 million, which far exceeds the numbers in the original guidance that they had reported earlier in the year. The speculation is that the people behind the scenes at Albertsons leaked this information ahead of the crucial vote on Thursday. The thought process being that the fear of the loss of value in Rite Aid will force the hand of their shareholders to vote in favor of the merger.

The Amazon partnership with Xealth provides them access into healthcare networks. The pharmacy side of Albertsons and Rite Aid also have clinics that they operate, which if the merger was approved would create a network of 319 clinics nationwide.

The detractors to the Rite Aid merger feel that the company could compete well on its own in the new landscape. The sentiment from some of the shareholders remains that the proposal from Albertsons does not place the proper valuation on the Envision Rx piece of the Rite Aid business model.

Envision Rx is the pharmacy benefit manager (PBM) piece of Rite Aid which has always been a sticking point in this proposed merger. This is a unique attribute of Rite Aid, which many maintain is an undervalued asset of the current proposal. This all comes at a time where two major investment consultant type groups have issued reports that caution the Rite Aid shareholders to consider rejecting the merger proposal.

There is a disconnection between factions of the Rite Aid shareholders over the Albertsons deal. The one side of the scenario is that Rite Aid is a much smaller company now that they have transferred so many store locations to Walgreens. The management of Rite Aid is stating that they feel that they are better positioned now because they will no longer be tied up with the sales of the locations to Walgreens and can focus on improving operations. The central message is that they can survive and compete as a smaller, leaner company without merging.

The other side of the scenario is the faction that feels that Rite Aid must “grow or die” with the “bigger fish” of CVS Caremark (Aetna), Walgreens, and Amazon. The merger with Albertsons will provide a combined company with 4,345 pharmacy locations, which will allow for a much more competitive company in the new landscape of the industry in the future.

Furthermore, there is the reality that Rite Aid stock has lost 77% of its value in the last two years. The Albertsons people are circulating a message that essentially is that Rite Aid will have no other interested parties for a potential merger if this falls through.

In truth, that is probably an accurate assessment because the government shutdown the Rite Aid merger proposal with Walgreens, CVS has no interest in acquiring Rite Aid, and there are not really any other suitors out there in the industry.

Another argument is one that is against the merger which in brief, is that Rite Aid and Albertsons are both struggling in low-margin businesses (pharmacy/drug store and grocery channel) and merging them together will not remedy those core issues related to being niche focused in industry channels that have low profitability.

The grocery channel could potentially provide a regional partner for Rite Aid that could be interested in buying their Northeast and Mid-Atlantic based locations such as Royal Ahold (parent company of Giant, Eagle, and Stop & Shop grocery chains). This is pure speculation on a potential future course for Rite Aid because so many within the financial industry believe that the Thursday vote is going to sink the merger with Albertsons.

This potential merger between Albertsons and Rite Aid has been a mess from the beginning. The path forward for both companies if this merger does not materialize is unclear. Albertsons could shift their focus to an acquisition within the grocery channel, a regional sort of consolidation move to grow the company.

Rite Aid could move forward alone and try to “keep swimming” in the industry without a larger merger partner. They could maximize their revenue streams by executing a strategy around their clinics and with marketing Envision Rx.

The harsh reality is that the pharmacy channel is running scared from the entry of Amazon into their market. The potential for Rite Aid to make it on their own while being squeezed by larger competitors could spell the end for the iconic American drug store chain.

The merger vote on Thursday will impact both the grocery and the drug store channels and could drastically alter the course of the strategic growth for two companies in the future. The consumer will be impacted by a lack of choice and a lack of competition in the industry which will force many consumers into a situation where they are facing increased out of pocket costs for pharmaceutical products in the years to come.

(Some background information and statistics courtesy of Forbes, Bloomberg, and Supermarket News)

Music Modernization Act: Fate Hinges on Amendment

The Music Modernization Act (MMA) had been on a fast-track pace through Congress with the next stop set to be vote on the Senate floor. The legislation seeks to redefine copyright laws for songwriters, song publishers, and song producers in the age of digital music content.

However, the fate of the bill is now in doubt because of an amendment that an interest group from within the industry seeks to attach to the legislation. This amendment has the aim of creating a “collective” of songwriters who would negotiate their fees as a group. This development throws a wrench into the process for this bill and could send it back to “square one”.

The original intent of the MMA was to have Apple Music, Spotify, Amazon, and other streaming music services work with publishers to manage the licensing process of music in a collaborative way. The main issue being that in the age of streaming music, songwriters are leaving the industry in droves because they make literally no money.

The antiquated laws around the licensing of songs resulted in songwriters being paid pennies for material that they produced. It has resulted in a situation in the music industry that is in dire circumstances and in need of reform. It is estimated that 80% of songwriters have left the industry. The royalty rates for streaming are drastically lower than the royalties made back when an artist recorded the song for placement on their respective album. The archaic laws prohibit songwriters from reconfiguring contracts or entering new arrangements with streaming services to potentially earn a higher royalty.

My own experiences in writing music reflect that, I chose to not pursue the industry after copyrighting several songs because the return on the investment was just not viable. The current conditions in the industry make it very hard for a new songwriter to gain traction because the income scale is completely imbalanced. The writer also has to pay self-employment taxes on the little income earned in the process of publishing the song and marketing it to be recorded.

This scenario also has spawned a feature length movie titled “The Last Songwriter” which was featured at the Nashville Film Festival winning several awards in the festival circuit. The film was produced by Netflix and sheds light on the current state of dysfunction within the music industry as it relates to paying the songwriter.

The argument can be made that the “big time” established songwriters will make out very well if the MMA is passed into law because they will receive larger royalties for their hit songs. The less established, or new entrants into songwriting will still face difficulties staying in the industry with bills to pay and families to support.

The emergence of this amendment, which some claim will help “level the playing field” and others claim will make the situation more acrimonious; in the end analysis could cause the Senate to vote the bill down. A week ago the MMA looked like a “sure thing”, that it was going to sail through passage and change the way the music industry operates with respect to the pay scale for the songwriters, publishers, and producers.

It is a sad state of affairs because the songwriter is the backbone of the industry, without the songwriter the artist has no material with which to work. The songwriter generates the material which then becomes a finished product. It is similar to eliminating the source of a key ingredient like wheat and expect a baker to make bread.

The music industry is struggling to adapt to the changing ways that people are listening to content, and the lack of legislation like the MMA only exacerbates those problems. The listener wants “on demand” and customizable approaches to music, nobody listens to the traditional radio for the most part, and the rights to songs cannot be scaled the way they were twenty or thirty years ago.

Please learn more about this legislation and contact your local Congressional representatives, contact your Senators. The fate of the music we all enjoy hangs in the balance.

(Some background information courtesy of Billboard.com, Rolling Stone, Digital Music News, and www.congress.gov)

Dr. Pepper Snapple Merger With Keurig – Impact on the Beverage Aisle

The merger of Dr. Pepper Snapple Group with Keurig Green Mountain, which was initially announced in January, was finalized recently. The deal creates the new publicly traded company known as Keurig Dr. Pepper, according to Bev Net is the 3rd largest beverage company in North America.

The merger is going to have a direct impact on the beverage aisle because the combined entity will be utilizing their respective strengths together to create unique delivery systems for the consumer in the future.

The beverage industry is another sector of the economy which is in a “grow or die” phase at this point. In my professional experience in the industry as well as my time covering mergers and acquisitions, the key factor in this segment of business is the distribution network.

That is the main determining factor behind why Coca-Cola and Pepsi dominate the beverage aisle at the grocery store: it is all driven by distribution and shelf space. The smaller brands have a very difficult time competing with the big players in this space because of the costs associated with distributing the product and gaining shelf space for the product.

The executives at the former Dr. Pepper Snapple Group were faced with having to grow in order to compete with the top two players in the industry. The deal with Keurig allows them to do precisely that, it grows their business and their market share.

The deal also includes Allied Brands which is a distribution network that will now be run by the combined Keurig Dr. Pepper which features 125 different brands. This collection of brands are a mix of beverage offerings that are either wholly owned, partially owned, or not owned at all by Keurig Dr. Pepper.

The news over the past five days is about which brands will be dropping out of the new Allied Brands distribution situation. The ripple effect left by these changes will have a definite impact on the beverage industry. Some brands will be promoted on a regional basis in a more visible way.

Conversely, some brands most notably Fiji bottled water will be leaving Allied Brands, according to CNBC, in order to start their own distribution network. The result of these changes will most certainly have a price impact on the consumer, especially if the new or spin-off brands from the Allied distribution network fold into smaller distribution agreements.

The combined strengths of Keurig Dr. Pepper could translate into lower prices or more advantageous bulk sale pricing for the consumer, but that remains to be seen. The single serve delivery system technology that Keurig has mastered could translate into some new concepts that integrate the Snapple iced tea beverage line or create some new innovations on the delivery of Dr. Pepper and its signature flavor.

The merger also helps both entities compete in a grocery channel that is being shaped by Wal-Mart and Amazon/Whole Foods. The persistent pursuit of low prices by Wal-Mart which they require of their suppliers can put the squeeze on profit margins. The combined Keurig Dr. Pepper now has the distribution and production capabilities to compete in a profitable way against the forces of Wal-Mart and Amazon.

It is in this perspective where the consumer will see enhanced value on their favorite soft drinks whether it is Dr. Pepper, 7UP, A&W Root Beer, or Snapple. The distribution of Keurig and their famous pods of all types and varieties and the Green Mountain Coffee products will all see a significant increase into the grocery channel. In addition, perhaps the drug store channel as well given the relationships that Dr. Pepper/Snapple/Allied Brands have developed over decades of time.

The other consideration here is that the combined Keurig Dr. Pepper company can now be an active player in acquisitions which will alter the landscape of the beverage industry. The combined publicly traded entity could target consolidations within the beverage industry, or could seek to enhance their delivery systems or packaging with a purchase of a smaller player in those industry sub-classes.

Keurig Dr. Pepper has a significant positive component working for them in the future: they have a very loyal base of consumers. The consumers in various survey data have identified as “fans” of Keurig and “fans” of Dr. Pepper. The new leadership team of the combined company will utilize new technologies through social media to build deeper relationships with those loyal consumers with cross-branding opportunities to grow revenue further.

The newly combined company features brands that are iconic in America: Dr. Pepper, Snapple, A&W, 7UP, and Sunkist. These brands have multiple products merchandised around them from tee shirts, cups, keychains, and more. They have an identity of their own and this merger promises that these brands will be relevant for a long time to come.

Keurig Dr. Pepper is the largest beverage merger in history and it will dynamically shape the future for the beverage aisle and provide new innovations to the delivery of beverages in an increasingly fast paced way of life for the consumer.

(some background information and industry data courtesy of Bev Net and CNBC)

Follow Up: Toys R Us Comeback / Mergers Roundup

In a follow up to a recent post, bankrupt Toys R Us may make a comeback under a new plan outlined by a former CEO of their company, Jerry Storch, who is working to revive the brand.

Mr. Storch, according to CNBC, has been in talks with Credit Suisse and Fairfax (the group which successfully bid for the Toys R Us Canada division) to put together financing and a strategic plan to bring back a “few hundred” Toys R Us stores. The chain had 800 locations in the U.S. that are all in the final stages of shutting down at this time.

The plan being formulated by Mr. Storch would include former executives from the company in a new leadership team. It would, according to reports, place Toys R Us and Babies R Us in the same physical retail space under one large floorplan. The original way that the company operated was with two separate physical retail locations for each of those brands.

This would streamline operations, shipping, and receiving. It would also streamline hiring and provide other cost controls which were lacking in the original version of the brand.

The former Toys R Us corporation will be holding the final piece of business before it fully dissolves: an auction for their intellectual property. That auction will be held next week, and Mr. Storch plans to win the auction so that he can utilize that intellectual property in the “reboot” of the brand.

This situation merits watching as the entire toy industry would benefit from some sort of presence from Toys R Us in the future. The impact of the revival of Babies R Us would be helpful to parents, particularly new parents, and toddlers throughout our country.

Mergers Roundup

In other mergers and acquisitions news, the rumor that Kraft Heinz was looking to purchase Campbell Soup sent the share price of Campbell up significantly on Tuesday. The analysts on Wall Street, for the most part, feel that this merger does not make sense for Kraft Heinz or Campbell to do at this point.

The view of “the Street” is that Kraft Heinz needs to grow internationally and should focus their next acquisition on expanding their global business presence. The expense needed to purchase and recalibrate Campbell would be better used on a different purchase in the view of many analysts.

My own perspective is very different, in my experience in the food industry and having worked for a supplier to both those major companies, Kraft Heinz has some definite synergies with Campbell that would help both parties to grow. The expertise of Kraft and their distribution system could absolutely take Campbell in a whole new direction and create some great new product innovations for the consumer.

Furthermore, I think that Kraft Heinz can do both: they could purchase Campbell and still obtain a Mondelez or another company with a large international footprint.

The other aspect to watch here is that there are powers within Campbell that may not want to sell off the entire company, it may sell a piece to Kraft instead. This rumor is worth paying attention to because then the whole other area involved is what do you call the company? Do they part ways with the Campbell name that has been around since just after the Civil War?

Campbell is in disarray and has no CEO, the company is in need of a major overhaul and Kraft Heinz could be the right fit for them to ensure their survival.

ConAgra and Pinnacle Foods merged today in a deal worth somewhere between $8 and $10 billion depending on what report you access. That proposal came up quickly to the public (no doubt the behind the scenes channels have been at work here for a while) and it became finalized relatively fast.

This merger represents an aggressive push from ConAgra to keep expanding into the frozen foods area. They have made other smaller consolidation moves to support this new strategic growth area, but this Pinnacle move is a major gain by ConAgra.

I have watched ConAgra closely the last several months as they look to recalibrate their brand portfolio. They are chasing Nestle in the frozen food space, and this supports demographic trend data that reflects that millennial consumers are more likely to purchase frozen products.

Pinnacle has some other brands that make this move interesting from shelf stable products, and gluten free options because they purchased Boulder Foods recently who is a big producer of bread for those seeking gluten free alternatives.

The final merger rumor in the roundup today is the news of CBS and Amazon potentially joining forces. The news comes as a surprise to some, as no surprise to others, and as a “long shot” to still others with knowledge of that situation.

The “face value” of the proposal makes sense, Amazon needs more video content it is losing out to competitors for that reason. CBS has some of the most watched TV content in the mainstream broadcast categories, and would be the most cost effective merger target. CBS wants to merge with someone in “new media” to survive in the new TV landscape.

The acquisition of CBS would be the largest deal Amazon would have done to this point, if it does indeed ever come to fruition. The roadblock is the court activity surrounding the lawsuit between CBS and their parent company, National Amusements, (which I have covered previously on Frank’s Forum) over the Viacom merger.

The general industry sentiment is that CBS is going to have a hard time winning that suit to get out from under National Amusements in order to negotiate their own deal for acquisition.

The alternative way this could go is that the situation gets so acrimonious between CBS and their parent company (we are basically there now) that National Amusements may choose to sell off CBS. They would then take that money and invest it either into Viacom and their other holdings or make a series of other smaller moves to restructure their holdings.

The CBS – Amazon potential, in my view, has some merit to it. I still maintain though as I have for a while now that CBS is still more likely to become part of Verizon. That could be a very good merger for both parties involved.

These and other mergers will be covered as the summer rolls on. I can express one sentiment most will agree with me on: I am rooting for Toys R Us to come back for the next generation of kids.

Follow Up: Court Allows AT&T – Time Warner Merger

The merger proposal seeking to join AT&T and Time Warner has been surrounded by controversy almost from the time it was first announced. This proposed merger of a telecommunications and media distribution giant and one of the largest media content creation companies in the world has been the subject of several prior pieces on Frank’s Forum.

The blockbuster $85 billion merger was being held up by a lawsuit brought by the Department of Justice over anti-trust concerns. The government was very concerned about AT&T’s ownership of DirecTV and the impact that the merger with Time Warner would have on the costs for rival cable companies to carry channels such as HBO, CNN, TNT, and TBS.

The government was pushing for certain conditions such as having any disputes over high cable prices in light of the AT&T – DirecTV connection be directed to 3rd party arbitration to determine a fair judgement on price. The other condition centered upon blackout rights.

However, the judge in the case, Judge Leon, approved the merger without any conditions attached. The judge viewed the case strictly in terms of a vertical merger between two companies with different core strengths.

The precedent in anti-trust suits very often favors vertical mergers versus horizontal mergers. Some recent examples of horizontal mergers of two entities in the same type of industry are Office Depot and Staples and Walgreens and Rite Aid, both of those mergers failed due to anti-trust concerns over pricing of office supplies or pharmaceuticals, respectively.

The next steps for the government are unclear. The judge, Judge Leon, asked the Department of Justice to not appeal or seek a stay on the decision. His basis for this request is that both sides have spent an exorbitant amount in the case in legal fees and court fees in the “tens of millions”. The view of the court is that AT&T and Time Warner do not compete with one another currently and that the same opinion will be found by another court proceeding.

Some feel that the judge is right on point with this decision on this case. The other sentiment is that the conditions should have been attached to the decision to protect the consumer from hiked cable prices.

In my view, I maintain that the judge neglected to recognize the connection with DirecTV and the potential for the Time Warner properties in the cable television realm could be manipulated to make an unfair advantage for DirecTV. This becomes a bigger issue when certain customers cannot have a satellite dish where they reside. It could result in them paying more for cable or premium channels such as HBO.

The domino effect from this merger will impact potential merger opportunities in the works right now which have been featured on this blog in the past. The big story of the day on Wednesday is the impact this merger decision will have on the Comcast proposal for the assets of 21st Century Fox.

Comcast had stated publicly that they would not get involved in the bid for Fox unless the court gave the green light to AT&T in this case. Comcast was seeking to avoid a protracted lawsuit. The wild card here is that should Comcast make a bid for Fox, the government could get involved because they are both in the same business. The court could see a case for the government because it will be viewed as a horizontal merger, which could become a long slog in the courts for Comcast.

Disney and their bid for Fox has a slightly different perception because they view Disney as a content creator and entertainment company which does not have any expertise in delivering telecommunications services or with cable equipment. They are seen as having a potentially easier path to potentially obtaining Fox.

The stock price outlook for Comcast has been slashed by major investment banks and fell to about $30 per share this morning. This signals that if they do make a play for Fox and get in a bidding war with Disney, they will eventually have to buy back shares. The maneuvers have a direct impact on the valuation of the company.

This merger also brings new traction for CBS and Verizon as a potential opportunity to join forces in the future. CVS also gained from this decision because they are seeking to buy Aetna and this court decision on Time Warner proves that CVS has some viable evidence that this play for Aetna can be seen as a vertical merger opportunity.

This mega merger will make AT&T a much larger player in the media landscape which also brings to the forefront the battle between “old media” versus “new media”. The reality is that if old media outlets do not join together they will be destroyed by the new media giants such as Amazon, Google, Netflix, and Facebook.

The other reality is that the court looked at this merger with the perspective that cable television services will have to drop prices in order to compete with new media so they are going to allow it to move forward.

The next big prospective M&A prospects are Fox and CBS. The Viacom scenario was a disaster and CBS is looking to move forward to partner with someone else to gain competitive traction as other entities are getting larger.
The effects of this merger will be felt for a long time to come. The way that AT&T handles the marketing and promotion of the former Time Warner channels when they are provided to other cable TV providers such as Fios, Comcast, and Dish.

The domino effect on the other mergers in play right now will also create conditions where the precedent could be difficult for the government to try to protect against the anti-trust implications involved.

In the end, this merger sets the stage between old media versus new media and how that will play out will have a definite impact on the American consumer.