Digital disruption driving deals

BY Richard Summerfield

2017 is likely to see increased mergers and acquisitions (M&A) activity in the media and entertainment (M&E) sector, according to EY’s latest Media & Entertainment Capital Confidence Barometer, released earlier this week.

Much of the dealmaking activity in the M&E space in the coming year will be likely be driven, in part, by digital disruption and convergence. The emergence of digital disruption and sector blurring in particular has proved a key driver of recent dealmaking in the M&E space, with 31 percent of the executives surveyed by EY citing convergence as the biggest disrupter in the industry of late. Increasingly, companies are expanding into previously uncharted territory. Sixty-seven percent saw digital disruption as the main catalyst for deal aking in the coming year.

In a statement announcing the report, John Harrison, EY's Global Media & Entertainment Leader, Transaction Advisory Services, said, “Unprecedented, unrelenting advances in technology and the swift emergence of new platforms and services are driving change in consumer behaviours, upending long-standing media ecosystems and blurring sector lines. Companies are aggressively seeking the innovation needed to position for future success and are looking to acquisitions, alliances and joint ventures to catalyse transformation.”

Despite the political and economic uncertainty permeating the globe, there is an underlying confidence in the M&E industry, particularly when it comes to dealmaking. In spite of persistent macroeconomic challenges, 73 percent of respondents perceived the global economy as stable or improving.

From a dealmaking perspective, 85 percent of respondents expressed confidence in the quality of acquisition opportunities available to M&E companies in the year to come. Furthermore, 94 percent of respondents claimed they had stable to positive confidence in the likelihood of closing a deal in 2017. More than half of respondents (56 percent) claimed that they expect their company to actively pursue an acquisition in the next 12 months, up from 46 percent in July 2016. Forty-eight percent said they have five or more deals in the pipeline.

Cross-border dealmaking is likely to be particularly prevalent in 2017, with 42 percent of executives claiming that their companies will be targeting a cross-border acquisition in the coming year. The US, France, the UK, Germany and China are the top five most likely destinations. The UK was the most sought after investment destination in EY’s previous report.

Report: Media & Entertainment Capital Confidence Barometer

Global growth bolstered by US

BY Richard Summerfield

Donald’s Trump ascent to the presidency in the US caught many off guard, and though a number of the president-elect’s policies caused concern during the bruising race to the White House, his planned tax cuts and public spending increases will see global growth pick up faster than previously expected in the coming months, according to the Organisation for Economic Co-operation and Development’s (OECD) twice yearly Economic Outlook.

The OECD’s outlook suggests that the US is expected to be the best performing large advanced economy in 2017, growing 2.3 percent, with the eurozone growing 1.6 percent, and the UK just 1.2 percent. Only 1 percent growth is predicted in Japan. Furthermore, US growth is forecast to improve to 3 percent in 2018, the highest rate since 2005, as tax cuts on businesses and households come into effect and the administration’s infrastructure investment programme begins in earnest.

During his presidential campaign, Mr Trump pledged to boost infrastructure investment in the US by as much as $1 trillion. Though the new administration’s willingness to invest in infrastructure development has won the approval of the Paris-based think-tank, the OECD has distanced itself from another of Mr Trump’s often repeated policy positions: withdrawing from international trade agreements. It is these agreements, the OECD argues, that will help return strong growth to the global economy.

Fiscal initiatives, though, will play a key role in delivering greater global growth. “The global economy has the prospect of modestly higher growth, after five years of disappointingly weak outcomes,” said OECD secretary-general Angel Gurría, while launching the Outlook. “In light of the current context of low interest rates, policymakers have a unique window of opportunity to make more active use of fiscal levers to boost growth and reduce inequality without compromising debt levels. We urge them to do so.”

An extraordinarily accommodating monetary policy, will, according to the OECD, be the primary means by which the global economy will be boosted, although the think-tanks’s endorsement does not provide governments with a “blank cheque”, said Mr Gurria. Amid persistently low interest rates, policymakers have the opportunity to boost growth by utilising expansionary fiscal initiatives. According to the OECD, fiscal measures such as “high-quality infrastructure investment, innovation, education and skills” may lead to higher growth by 2018.

Report: Economic Outlook

Trump wins election, markets fluctuate

BY Richard Summerfield

The political outsider, Republican Donald Trump, has claimed a historic and stunning victory in the US presidential election, bringing an end to eight years of Democratic rule. The result initially plunged the global markets into chaos and stunned Wall Street.

As Mr Trump’s supporters celebrated his victory, along with Republican successes in both the Senate and House of Representatives, the dollar and US stocks endured a mixed day, falling sharply before recovering somewhat throughout Wednesday’s trading.

European shares initially followed suit. Though many news agencies predicted losses of around 4 percent, the FTSE 100 fell around 1.4 percent initially before recovering throughout Wednesday. In the first hours of trading on Thursday morning, the FTSE continued its gains, climbing a further 1.06 percent, nearing the 7000 mark.

The Mexican peso, however, dropped 13 percent against the dollar at one point, marking the currencies biggest daily move in nearly 20 years. The peso did rebound 4 percent on Wednesday, though it was still down 8.5 percent.

Asian shares rallied in trading on Thursday with the Nikkei climbing 7 percent at one point, following of 5 percent drop in the previous day’s trading. Gains were also seen elsewhere as Australian stocks soared 3.3 percent in the largest daily gain since late 2011 . Shanghai rose 1.3 percent.

Wall Street, which had lent its considerable support to Ms Clinton during the bruising and historic election campaign, was initially left reeling by the result as investors fled some of their riskier assets. Yet US stocks actually closed up on Wednesday, with investors jumping headlong into sectors which could benefit from Mr Trump's election. Oil & gas producers, energy companies and construction firm sand pipeline operators were all seen as attractive investment destinations, given Mr Trump’s preference for oil & gas investment. The fact that the GOP has indicated that it would invest at least $500m in infrastructure development over the next five years can be seen as one of the driving forces behind these gains.

Mr Trump’s views on the Dodd-Frank reform act, implemented in the wake of the financial crisis, as well as other notable Democrat legislation including the Affordable Care Act, have also affected stocks; healthcare companies fell as the markets anticipated the end of Obamacare.

Oil markets, which have steadied in recent months following two years of uncertainty, fell temporarily below $45 a barrel on Wednesday morning, as the wider global commodities market reacted to the election result with some concern. The global benchmark, Brent Crude, fell to its lowest point since August, down 2.3 percent to $44.98. However, oil prices rebounded on Thursday; at the time of writing, Brent Crude futures were up 1.14 percent, or 53 cents, at $46.89 per barrel. Though the outlook for the commodities market still appears contentious, there is hope that a recovery in the oil & gas sector in 2017 may be relatively rapid.

News: US stocks, bond yields jump after Trump shock, Mexican peso falls

PwC calls for change

BY Richard Summerfield

The oil & gas industry has endured a turbulent and troubled couple of years and, according to a new report from PwC, there may be more pain on the way unless radical and urgent changes are made within the industry, most notably in the North Sea basin.

PwC’s report 'A Sea Change: The future of the North Sea Oil & Gas' has called on those companies operating in the North Sea to implement a comprehensive programme of reform in the basin in order to meet short term energy needs. For the industry to undergo the necessary changes, however, it will require both government intervention as well as the input of industry organisations.

Given the deficiencies displayed by the industry it is unsurprising that there is a dearth of optimism permeating the oil & gas space; the report found that less than three in five senior executives interviewed by PwC were positive about the industry's future. A fifth of all respondents were pessimistic about the future.

Regardless of the gloomy outlook for the industry, there is a willingness within the space to change, according to Alison Baker, PwC’s UK and EMEA oil and gas leader. When interviewing respondents, PwC “picked up a real sense of urgency to create one last cycle of success that will retain and generate jobs, stimulate growth and ensure security of energy supply. But this was matched by a level of frustration at the fundamental issues that need tackling to avert the risk of rapid and premature decline. Part of the solution is for government agendas across Treasury, DECC and the OGA to be much better aligned to the needs of the whole industry, from super majors to smaller oil field services firms. The majority of respondents also want government to take a lesson from Norway and Saudi Arabia and be bold in setting out their blueprint for the future. This must incorporate onshore activity as well as defining how the North Sea basin will evolve in the short to medium term and, crucially, how the end game - and subsequent transition to a low carbon landscape – will be managed.”

One of the key measures proposed by PwC is the creation of a “super joint venture” comprised of a number of offshore operators which would not only share the risk of operating in the space. They would also split the returns. By combining their efforts under one joint venture banner, it would be easier for organisations to create greater cost efficiencies; indeed, a joint venture approach could see costs fall by around 15 percent, according to PwC’s projections. By pooling their efforts, they would also be in a better position to negotiate with suppliers in the long-term.

Such is the state of the sector, industry leaders have also proposed the transfer of certain assets, including pipeline infrastructure to a third-party company to ensure cooperation. The nationalisation of certain assets has also been mooted.

Report: A Sea Change: The future of the North Sea Oil & Gas

World’s top 40 mining companies hit by $27bn collective net loss

BY Fraser Tennant

The mining sector experienced a challenging 2015 with its 40 largest companies hit by a collective net loss of US $27bn, according to a PwC report published this week.

In ‘Mine 2016: Slower, lower, weaker... but not defeated’ – the 13th in a series of PwC reports which analyse financial performance and global trends – it is also revealed that market capitalisation fell by 37 percent (in a number of cases below net book value), a development which PwC says "effectively wipes out all the gains made during the commodity super cycle".

The aggregated results found in the PwC report were sourced from the latest publicly available information, primarily annual reports, with all figures reported in US dollars.

“Last year was undoubtedly challenging for the mining sector,” said Jason Burkitt, PwC’s UK mining leader. “A 25 percent year-on-year decline in commodity prices meant mining companies had to ratchet up their productivity efforts, while some found themselves in a fight for survival, with asset disposals and closures to follow.

“We’re also seeing shareholders persist with a short term focus, impacting the capital available for investment and, as a result, constraining options for growth. But this is a hardy industry, and while miners may be down now they are certainly not out.”

The PwC report also found that: (i) investors punished the top 40 mining companies for poor investment and capital management decisions and, in some cases, for squandering the benefits of the boom; (ii) concerns over the 'spot mentality' from shareholders focused on fluctuating commodities prices and short term returns rather than the long term investment horizon required in mining; and (iii) there was a focus in 2015 on maximising value from shedding assets as well as mothballing marginal projects or curtailing capacity.  

Although Mr Burkitt concedes that the mining sector will continue to face significant market challenges and constraints, he is also confident that there is a still a long-term positive outlook. “In the first five months of the year, we’ve been encouraged by some recoveries in market capitalisations and commodity prices – but with high volatility still in play, hopes of a sustained rebound are tempered.

“Many of the top 40 mining companies appreciate what is required for the marathon of mining and have their eyes firmly fixed on the long term rewards," he concluded.

The PwC analysis of the mining sector was published to coincide with this week’s London School of Mines conference on 8 June.

Report: Mine 2016 Slower, lower, weaker... but not defeated - review of global trends in the mining industry