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Media Stocks Need Catalyst, Look International

NEW YORK (TheStreet) -- It's already been a record year for media stocks, and if shares of the country's largest entertainment companies are to go any higher, they'll need a big push.

That push may come from the eagerness of media companies to expand internationally, where broadband offerings are growing and middle classes have more money and time to spend viewing and sharing television and online entertainment. Deals that combine media properties with international networks are likely to get increasing attention, says BernsteinResearch's Todd Juenger.

Media stocks have well outperformed the Standard & Poor's 500 Index (^GSPC) in 2013, with some names delivering returns more similar to high-growth start-ups. Viacom (VIA), for instance, has gained 50% this year compared to the S&P 500 at 25%. The S&P 500 Media Index has added 39% this year. AMC Networks (AMCX) has advanced 28% in 2013 after electing to use its sizable cash flow from Breaking Bad and Mad Men to buy Chellomedia, the international division of John Malone's Liberty Global (LBTYA) in a $1.035 billion deal that will give the company new and broad access to European and Latin American markets.

The bump that Scripps Networks (SNI - Get Report) has enjoyed, since Variety reported on Dec. 11 that the owner of HGTV and the Food Network was considering a merger with Discovery Communications (DISCA - Get Report) is proof of investor interests in deals that extend brands beyond the North American market, Juenger said. Scripps shares have gained more than 7%, and even Discovery, the would-be acquirer, has gained 1.7%.

To Juenger, the market's apparently sanguine view of the possible merger reflected investors' general approval for media companies looking to expand internationally as much as for a potential merger of Discovery and Scripps Networks. Investors are more apt to applaud a company for spending capital to acquire non-U.S. assets than staying at home to fish around for something that might appear easier to integrate.

Acquiring Scripps would give Discovery a wealth of popular programming likely to travel well abroad while the owner of the Food network would have access to markets throughout Europe. Discovery owns SBS Broadcasting Group, which operates in Denmark, Norway and Sweden, as well as Switchover Media Srl in Italy.

"The growth of non-U.S. markets is already visible, hiding in plain sight at DISCA and [21st Centruy Fox] (FOXA)," Juenger said in an investor report. "M&A will force investors to think hard about multiples paid relative to growth potential -- and it will be very hard to justify paying premium prices for slower growing, U.S.-centric assets."

--Written by Leon Lazaroff in New York.

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