Print Edition
August 2010 
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M&A In The Entertainment And Media Industry |
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Muazzin Mehrban, June 2009 |
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In contrast with many other industries, the entertainment and media (E&M) sector delivered record deal activity levels in 2008 – the highest seen for over seven years. An undeniably positive result on the surface of things but, in reality, the challenging market conditions and deepening economic uncertainty have created an unpredictable market for deal making. This realisation meant that subsequent forecasts for deal activity in 2009 have been much less generous than in previous years, bearing in mind that several sub-sectors may require extensive restructuring. Nonetheless, it is thought that M&A levels will remain comparatively high, and could surpass analysts’ expectations in the years to come.
The struggle of adaptation
Although typically buoyant, global M&A activity in the entertainment and media sector has fallen away over the last 12 months. Last year began positively, with a steady flow of deals that did not require debt financing agreed throughout the first half of 2008.
But activity in the second half of the year fell significantly, affected by uncertain valuations and the pullback of strategic, private equity and venture capital buyers. “All investors, including private investors, that calculated potential deals on a leveraged basis had to face the drying out of the credit market,” explains Andreas Pense, a partner at Unverzagt von Have. Of course, this is not to say that deal making has ceased. “A couple of private financiers and banks knowledgeable and experienced in the industry remained active in co-financing M&A transactions in niche areas of the entertainment & media sector,” he adds. As such, those with strong industry knowledge should still be able to create value.
Nonetheless, recent Dealogic figures clearly illustrate that the E&M sector is in the midst of a downturn. The last two quarters have seen deal value more than halve from the $11.2bn recorded in Q3 2008. The situation looks even more severe when looking further back. The blockbuster spin-off of Time Warner Cable for $35.8bn in May 2008 ensured that total deal value for that quarter reached almost $50bn. Back in Q2 2007, deal value was just shy of $75bn due to a run of large deals. In addition, the number of deals conducted in the past six months has also taken a hit, with quarterly volumes falling below 300 for the first time since the start of 2007. However, there are some large deals in the pipeline. For example, the pending deal between Liberty Entertainment Group and buyer DIRECTV Group is worth $14bn, and will significantly boost quarterly deal value when completed.
Of course, the nature of the E&M industry means that it is used to pressure. The release of new technology is a constant challenge, so the sector has to be adaptable. For example, the recent digitalisation of all forms of media and the new ways of broadcasting content that have arisen in its wake, are good indicators of how much the industry has changed in recent years. But for many businesses in the sector, the pressures of the current climate have also had an effect on things like subscription services, points out Matt Dennis, an M&A partner and joint head of the International Media Group at Bird & Bird. As such, even the most flexible companies are feeling the pinch. “Declining marketing and advertising spend is hitting media across the board, and downward pressure on the value of premium sports TV rights is reducing margins for rights holders,” he says. Furthermore, content buyers are demanding more for their money. “Buyers are not only looking to reduce what they pay but are looking to minimise or eliminate any risk for FM type events like SARS and terrorism,” he adds. Despite these setbacks, it is important to remain positive. Companies in this sector are mostly medium-sized and conservatively financed, so they may still be able to take advantage of investment opportunities in niche products. This could allow them to increase and diversify their market share while prices are depressed.
Of course, deal drivers within the E&M industry vary depending on geographic location, and there is a noticeable difference between the makeup of buyers from emerging markets and those from developed economies. For instance, Mr Pense highlights that investment in the sector from Middle East and some Asian countries tends to come from governments, via their sovereign wealth funds. “But this has not been the case in developed markets such as the US and UK. There, the investment has come from within the industry itself, from studios and broadcasters, as well as specialist financiers. In Germany, activity has been driven by a wider range of companies, including telecoms giants and cable operators, as well as broadcasters,” he says. So in developed markets, buyers are mostly professional players with knowledge of the industry, such as broadcasters and studios, seeking direct access to content via an acquisition. However, India will play an interesting role in the coming years as it has a developed E&M sector and the top class of its entrepreneurs are now reaching out for opportunities in the developed markets in the US and Europe.
Doing the deal
A vital part of any successful transaction is the due diligence process, and deals in the E&M sector are no exception. However, the varied nature of the E&M industry means there will be a number of different points to consider, depending on what section of the industry a company is looking to enter. “For example, for event owners or rights owners you would need to look at the terms of their insurance, especially with regards to event cancellations,” says Mr Dennis, who adds that force majeure terms in existing media content supply and sponsorship deals for should be checked for event cancellation. “In addition, termination provisions dealing with insolvency should be identified, as should payment and performance guarantees,” he says. This will be particularly relevant in the current market.
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